tv Janet Yellen Testimony on U.S. Monetary Policy and the Economy CSPAN June 24, 2016 7:32am-10:01am EDT
that better disclosure and strategy could actually bolster independence. earlier this year a group of economists including three nobel prize winners agreed in a statement that, and i quote publicly reporting a strategy helps present policymakers from bending under pressure and sacrificing independence. the fed continues to resist resist calls to discuss monetary rules even though it uses such ruse regularly. they have appeared further away from data driven analysis toward the axis exercise of more discussion. for example, rather than adhering precisely to the stated goals of inflation and employment, the federal open market committee appears to be a certain decision on factors such as financial and international developments that cannot be
derived from quantitative analysis. similarly, the fed's regulatory conduct is becoming opaque and complicated. this is demonstrated by the inherence complexity and overlap in the capital and liquidity rules, stress testing and resolution of recovery planning. two weeks ago, a panel of experts testified before the committee that complex regulations might actually increase rather than decrease risk in the banking system. they also criticized the lack of analysis and transparency in the rulemaking process. true of the rules established by international committee and imposed by domestic regulators on institutions. the fed did not even do its own quantitative study as it did madame chair for basel one and two. it instead relied on the
analysis that included data from only 13 u.s. banks out of the 249 banks that were studied. such an approach is concerning. the fed should perform rigorous analysis not only for each rule but also on a cumulative impact of capital and liquidity regulations. if our baking regulators are unable or unable to conduct such analysis, then we should consider mandating it. even the european commission analyzes these factors in its regulatory framework. in a recent call for evidence, it's listed feedback from the public to evaluate the interaction between financial regulations and assess their cuban would have impact. we should expect no less from our own regulators. chair lady yet yellin, i look
forward to your testimony and your thoughts on these important matters. >> we have made only modest gains. inflation is low and job creation has slowed. the economies are trading partners are struggling. uncertainty with the britons exit to the european union uncertainty remains high. the face of these had -- headwinds you would think we would do everything we can to promote our economy. many of them seem intent on doing just the opposite. my colleagues on the other side of the aisle are failing to invest in infrastructure and public works in research and development in education and training, the very building blocks of our economic success. if that were not enough they're
trying their level best to undermine the safeguards that dampen the economic crisis and were directed to prevent the next one. they would like to repeal dodd frank and return our country to the casino capitalism that caused so much room for families and communities across our country. they're trying to politicize and undermine the federal reserve despite the key actions that it has taken to help the recovery. congress rated its reserves and reduced dividend payments in order to pay for transportation bill. this committee is yet to hold a hearing on the nomination of the board of governors of the federal reserve and if bad legislation ideas continue to multiply. it's a factory of bad ideas. moody's analytics recently released a report report that said if adopted, these economic proposals would leave our
economy significantly weaker. they suggest we replace the current fed chair based on political considerations. that's a bad idea. you might argue someone is failing to pursue the right course and monitory regulatory communication but that should never be part of that discourse. he suggested he would renegotiate on our debt and is comfortable in the belief that the united states can never default because you print the money. in his opinion he understands that better than probably anyone he also thinks along with the runner-up that this country should return to the gold standard. when ron paul was promoting this idea a few years ago the wall street journal reported on a poll of a panel of economists and whether a gold standard return would include improve
stability and unemployment. their response was split between those who disagreed and those who strongly disagreed. not one person thought it would help. we don't know if it's just a bad idea or a really, really bad idea, but as one university of chicago professor put it, love of the gold standard requires macroeconomic illiteracy. if your own brain as your tough consultant i suppose the unanimous opinion of a diverse group of economists doesn't count. for those of us in the evidence-based world, the prospect of this nominee trading for authority gives added significance to what we do in the banking committee and what we do in congress. that's two in general and particularly true with maintaining the independence of the federal reserve and the other regulators of the financial services industry. mme. chair i think you have shown your commitment to an independent data driven federal
reserve. i commend you for that. we are grateful for that and i hope we can work together to maintain it. >> mme. chair your written testimony in its entirety will be part of the hearing records. we welcome you here to day. you are no stranger to this committee and you may proceed. >> thank you. chairman sheltie ranking member brown and other members of the committee, i am pleased to present the federal reserve semi annual monetary policy report to congress. in my remarks today i will briefly discuss the current economic system in outlook before turning to monetary policy. since my last appearance before this committee in february the economy has made further progress toward the federal reserve's objective of maximum employment. while inflation has continued to run below our 2% objective, the federal open market committee expects inflation to rise to that level over the medium-term. however, the pace pace of
improvement appears to have slowed more recently suggesting that our cautious approach to adjusting monetary policy remains appropriate. in the labor market, the cumulative increase in jobs since early 2010 has now topped 14 million. the unemployment rate has fallen more than five percentage points from its peak. in addition, as as we detail in the monetary policy report jobless rates have declined for all major credit groups including african-americans and hispanics. despite these declines, however, it's troubling that unemployment rates to these minority groups remain higher than to the nation overall. the annual income of the median household is still well below the median income of other u.s.
households. during the first quarter of this year job gains averaged 200,000 per month. just a bit slower than last year's base. while it held steady at 5%, the, the labor force participation moved up noticeably. in april and may, the average pace of job gains slowed to only 80000 per month or about 100,000 per month after adjustment to the effects of the strike. the unemployment rate fell to 4.7% in 7% in may but that the claim mainly occurred because fewer people reported they were actively seeking work. a broader measure of labor market includes workers marginally attached to the workforce and those working part-time who would prefer full-time work was unchanged in
may. of course it's important not to over react to one or two reports several other timely indicators of labor condition still look favorable. one notable development is that there are some that wage growth may finally be picking up. the fed will be watching the job market carefully to see if the recent slowing and unemployment growth is what we think it is. >> economic growth has been uneven uneven over quarters. gdp has increased at an annual rate of only three quarters% in the first quarter of this year. subdued foreign growth in the appreciation of the dollar while
the energy sector was hard-hit by the steep drop in oil prices since mid- 2014. in addition, business investment was surprisingly weak. the available indicators point to a step up in gdp growth in the second quarter. in particular, consumer spending has picked up smartly in recent months, supported by solid growth in real disposable income in the ongoing effects of the increases in household wealth. housing has continued to recover gradually. it is by income gains in the very low level of mortgage rates the recent pickup in household spending together with underlying conditions that are favorable for growth lead me to be optimistic that we will see further improvement in the labor market and the economy more
broadly over the next few years. monetary policy remains accommodative. low oil prices and ongoing job gains should continue to support the growth of incomes and therefore consumer spendings. fiscal policy is now a small positive for growth and global economic growth should pick up overtime supported by accommodative monetary policies abroad. as a result, the they expect that with gradual increases in the federal funds rate, economic activity would continue to expand at a moderate pace and labor market indicators will strengthen further. turning to inflation, overall consumer prices as measured by the price index for personal consumption expenditures increased just 1% over the past 12 months ending in april. that is up noticeably from its
pace from much of last year but still short of the committee's 2% objective. much of the shortfall continues to reflect earlier declines in energy prices and lower prices for imports. insulation which excludes food prices and energy has been running close to one and a half percent. the transitory influences holding down inflation fade in the labor market spreads further, the committee expect expects inflation to rise over the median term. nonetheless, in considering future policy decisions we will continue to carefully monitor actual and expected progress toward our inflation goal. of course, considerable uncertainty about the economic outlook remains. the latest readings on the labor market in the week pace of
investment illustrate one downside risk. the domestic commands might falter. in addition, although i'm optimistic about the longer run prospects for the u.s. economy we cannot rule out the possibility expressed by some prominent economists that the slow productivity growth seen in recent years will continue into the future. vulnerabilities in the global economy also remain although concerns about slowing growth in china and falling commodity prices appear to have eased from earlier this year, china continues to face considerable challenges as it re- balances its economy toward domestic demand and consumption and away from export growth. more generally, in the current environment of sluggish growth low inflation and monetary policy, in many advanced
economies investor perceptions have been the type for risk and they can change abruptly. one development that could shift investor sentiment is the upcoming reprimand him in the united kingdom. this could have significant repercussions. for all these reasons the committee is closely monitoring financial development and their implications for their domestic economic activity, labor markets and inflation. i will turn next to monetary policy. they seek to promote maximum employment. given the economics situation i just described monetary policy has remained accommodative over the past last year to support further improvements in the labor market in a return of inflation to our 2% objective.
specifically, they have maintained the target range for the federal funds rate at one quarter - 1 half percent. they've kept the holdings at an elevated level. the committee's actions reflect the careful assessment of the appropriate setting for monetary policy, taking into account continuing below target inflation and the mixed reading on the labor market and economic growth seen this year. proceeding cautiously and raising the federal funds rate will allow us to keep the monetary policy to economic growth in place while we assess whether growth is returning to a moderate pace and whether the labor market will strengthen further and whether inflation will continue to make progress toward our 2% objective.
those are factors that support taking a cautious approach in raising the federal funds rate for this is the federal funds rate which is still not near the lower effective pounds. if inflation were to remain persistently low or the labor market were to weekend, the committee would only have limited room to reduce the target range for the federal funds rate. however if the economy were to overheat and inflation seems likely to move significantly or persistently above 2%, it could readily increase the target range for the funds rate. they continue to anticipate the economic conditions will improve further and that the economy will evolve in a manner that will warrant only gradual increases in the federal funds rate. in addition the committee expects that the federal funds rate is likely to remain, for
some time, below the levels that are expected to prevail in the longer run because u.s. activity from economic and financial developments abroad for household formation and meager productivity growth mean thatthe interest rate needed to keep the economy operating near its potential is low by historical standards. if these headwinds slowly fade over time as the committee expects, then gradual increases in the rate are likely to be needed. in line with that view most participants, based on the projections prepared for the june meeting anticipate the values for the federal funds rate of less than 1% at the end of this year in less than 2% at the end of next year will be consistent with their assessment of appropriate monetary policy.
of course the economic outlook is uncertain to monetary policy and its by no means on a preset course and fomc participant projections for the federal funds rate are not a predetermined plan for future policy. the actual federal funds rate will depend on economic and financial development and their implications for their outlook and associated risks. stronger growth or a more rapid increase in inflation than the committee currents currently anticipates would likely make it appropriate to raise the federal funds rate more quickly. conversely, if the economy were to disappoint a lower path of the fund rate would be appropriate. we are committed to our dual objectives and we will of address policy as appropriate to foster financial condition conditions.
the committee is continuing its policy of reinvesting maturing treasury securities and principal payments from agency debt and mortgage-backed securities. it's highlighted in a statement released after the june meeting that we anticipate continuing this policy until normalization of the level of federal funds rate is well underway. maintaining our holdings of long-term securities should help maintain accommodative financial conditions and should reduce the risk that we might have to lower the federal funds rate to the effective lower bounds in the event of a future large adverse shot. thank you. i would be pleased to take your questions. >> madam chair, in recent years the fed has increasingly used forward guidance to shape market expectations.
how do the feds frequently incorrect predictions of increases and that has caused it to lose credibility among some. how would you rate the utility of your forward guidance over the past several months? >> so in the past several months , we have used forward guidance less than we did in the aftermath of the financial crisis win we named calendar dates or gave explicit economic conditions that we wouldn't need to see prevailing in the economy before considering an increase in the federal funds rate. we used that forward guidance in the aftermath of the crisis in order to help market participants understand how
serious the crisis was and how long we thought we would maintain the federal funds rate. >> are you saying you're not using forward guidance now or are you not relying on it as much. >> we are not relying very much on forward guidance. we do publish, every three months, participants projections for paths of the federal funds rate that they believe will be appropriate in light of their expectations about the performance of the economy and sometimes those paths that participants discuss in their remarks are thought to constitute forward guidance about policy. i do believe those projections are helpful to the public in understanding path of the economy that participants think
is likely and how if those conditions prevail would see monetary policy as evolving, but as i always emphasize on every occasion, including in my prepared remarks, those paths, while i think they are helpful are not in any way a commitment. we are constantly trying to evaluate in light of incoming information the outlook and risks and you see those paths change over time as we update our evaluation of the economic outlook and i think that's a critical part of monetary policy. >> has the slowing of the economy in certain areas caused you to hold back a little bit at times, information that you see? >> so for quite some time we have seen mixed development in
the economy. some sectors slowing because of declining energy prices, strong dollar informed growth and others providing an offset. throughout, until the last couple of months progress in the labor market has held up extremely well. now for the last few months, as i mentioned, job gains averaged 100,000 on an adjusted basis which is in the substantial slowdown from the first quarter and from last year. it is important for us to see ongoing progress in the labor market so that is something we want to carefully evaluate and is a focus of our attention but economic growth has picked up from a weak pace and if that
slowdown is a reflection of weak growth earlier in the year, i am hopeful we will see stronger job gains going forward and while it is an important report, i would also emphasize that it's important never to overflow the significance of a single report or a small amount of data. other information about the labor market continues to perform well. >> do you see a clear path ahead as far as your trajectory on the economy picking up or are you not sure yet? >> it is our expectation that is what you see in all of the projections that were provided in connection last week with our meeting but of course there is uncertainty about that and given
that inflation remains low, we have the ability to watch economic development and try to make sure the economy is on a favorable path before raising rates. >> the target for the fed fund rate has been at one half percent or lower since december 2008. a report last year from the bank of international sediments found that the prolonged period of low interest rates may be damaging the u.s. economy resulting in too much debt and too little growth. in addition, the report states that low rates may impart have contributed to costly financial booms and busts. do you agree that persistently low interest rates can have negative long-term effects on the u.s. economy and could you explain?
>> i believe that persistent low interest rates that we have had have been essential from keeping the progress but of course low rates can induce household or bank or firms to reach for yield and can stoke financial instability. we are very attentive to that possibility and i would not at this time say that the threat for loan rates to moderate to financial stability are elevated. i do not think they are elevated at this time, but it is of course something that we need to watch because it can have bad impact. you mentioned that, i don't think we are seeing an undue buildup of debt throughout the economy, leverage remains at moderate levels well below where
it was prior to the crisis. we are looking at credit growth which has picked up but is not at worrisome levels so we are monitoring for potential impacts of low rates on financial stability which i think is appropriate. >> in an interview earlier this week the governor stated that the fed is reviewing the application of stress test to regional banks and to use the word probably will exempt from the qualitative c car, but the taylor he turned out to be just a re- statement of existing policy. what assurances can you give that this current review is a meaningful effort to tailor c car in a way that recognizes the different risk profiles of the
banks and if so, when do you expect those changes? >> we are engages for various review that has been formed by consultation with both financial sector participants and outside economists and i do think that you will see meaningful changes and suggestions that the governor made that banks between 50 and $250 billion that are subject to the stress test and that made be left out of the qualitative portions but still it would be applied but the whole qualitative part of c car relates to capital landing might be exempt from that, i think that's very likely. we will look at other changes as
well that as you said are designed to appropriately tailor it so that its impact is most significant for the largest and most systemic firms. there will be a very meaningful review and i believe we will be proceeding on a shortly. >> my last observation has to do with the fact that you alluded to the fact that come thursday there's a referendum in the united kingdom onto whether to stay in the european union or start leaving. what is the real implication or can you tell at this point if the british were to leave the common market on us? there could be implications for the common market and the rest of us. >> it is a very important relationship and it would be significant for the united kingdom and for europe as a whole.
i think it would usher in a period of uncertainty and it is very hard to predict but there could be a period of financial market volatility that would negatively affect financial conditions in the u.s. economic outlook that by no means is certain but it is something that we will be carefully monitoring. >> thank you. >> senator brown. >> thank you mr. chairman. mdm. chair i think you for your work on the recent insurance roles. i am please they put out proposed rulemaking templates for the two large insurance companies i appreciate how quickly you have moved on this and your constructive dialogue with stakeholders. i think your response to our efforts here made a huge difference in doing this right. this week the banking committee will have a hearing on a
quiddity rules. please discuss for us the approach to capital and liquidity rules the nation's largest banks, specifically if these new rules have made our financial system stronger. >> so i do believe that the enhancements that we have put in place to capital and liquidity requirements that are tailored by firm size and systemic importance have made an enormous difference to the safety and soundness of the u.s. financial system. the quantity of capital is the largest in the organization that has essentially doubled from before the crisis and the quality of that capital is very much higher. in addition to imposing higher static risk-based capital and leverage requirements our
stress testing in capital planning exercises are very detailed, forward-looking exercises that are working to ensure that the largest firms in extremely stressful conditions would be able to go on supporting the credit needs of the u.s. economy of households and businesses and i think this has been a very significant exercise and has resulted in far superior understanding by the firms themselves of the risks they face in improved management of that risk. often liquidity is what disappears in a financial crisis and we have put in place especially for the largest banking organizations enhancements to liquidity through the liquidity coverage
ratio and proposed net stable funding ratio and so, i think this will also work to enhance financial stability so i think we have a much safer and sounder crisis prone system because of the enhancements that were put in place. >> thank you. we have talked in the past about how the current labor market data does not reflect what's happened to minorities whose rates of unemployment are still much higher than the average. in your testimony today, for the first time, and thank you for that, you talked about minority unemployment rates and included a new section in the semi annual report with this data and a discussion of whether the gains of economic expansion have been widely enough shared. discuss why the fed made this addition to the report. >> the federal reserve's job is
to try to achieve maximum employment and broad gains in the labor market that are widely distributed as possible. i believe it's very important for us to monitor how different groups in the labor market are doing to see if what we perceive as broad-based labor market improvement is being widely shared and there are very significant differences in success in the labor market across demographic groups. i think it's important for us to be aware of those differences and to focus on them as we think about monetary policy and the work that the federal reserve does in the area of community development in trying to make sure that financial services are widely available to those
including low and moderate income. >> that brings to mind a meeting i had just a few minutes ago with three people from my hometown of cleveland. three community leaders, about the lack of diversity in terms of gender and ethnicity and race and the lack of diversity in terms of ideas that are the classy directors in many of your federal reserve's, your 12 your 12 federal reserve's around the country including in cleveland. i would like to see, and i think many of us on this panel would like to see a more diverse federal reserve system and the 12 advisory committees and employees discuss what you have done as chair of the fed. what more can you do to better address the financial needs of all americans as you reach into the community better. i know you've had a goal of doing that. you said that it may be our
first hearing, certainly at one of our first meeting serving those unserved and underserved by the financial system. >> so, i am personally committed in the federal reserve as an organization is committed to achieving diversity within our workforce and within our leadership at absolutely all levels. i believe we have made progress and i'm committed to seeing us make further progress and in order to make sure that we are taking all of the steps that we possibly can to promote diversity and economic inclusion, i have have launched an interdisciplinary effort within the federal reserve to focus on all of our diversity initiatives both in terms of our own hiring, hiring throughout the federal reserve system and
working to provide access to credit to foster and earn faster payments that can promote financial inclusion. i do believe we are making some progress but i want us to make greater progress. if the board minorities currently represent 18% and women represent 37% of senior leadership, that is relatively common throughout the federal reserve system that you would see similar numbers and we have worked very hard to increase diversity among bank directors and directors on the branch board who have made quite a lot of progress. at this point minority representation stands at about 24% of reserve board bank
directors. about 37% of women. it's. it's a matter that the board focuses on annually in its oversight of the reserve banks. we regularly track our progress in increasing diversity in the boards of directors and it is something we will continue to focus on. diversity is an extremely important goal. >> thank you, i want you to share with us in a continual way the progress you are making, especially in the classy directors that they represent the community, not just in diversity of look and background last question, there currently are a record number of job openings, almost 6 million but the job status show that workers
are not being hired for these jobs. what do we do to get americans in these jobs to do better? >> there are an enormous amount of job openings and there is a certain degree of mismatch of workers who are looking for work with the job openings that are available within the federal reserve and i personally have been looking at workforce development programs, job training programs some of which are doing a good job of trying to build the skills to fill available jobs and work to match workers with jobs. i was recently in philadelphia and visited a very impressive program that placed workers who were having trouble in the job market into real jobs that can
lead to upward mobility in a career in some of the philadelphia hospitals. i have seen such programs around the country that i think have been effective, but obviously our job is to make sure we have the strong job market and that there are enough jobs that are being created, helping that matching process and looking at training programs and educational opportunities, i think that's a piece of the puzzle as well. >> as you have from time to time mentioned, congress needs to do a better job in terms of investment in public works and infrastructure. also you had made comments from time to time about job training. you can you give us more instruction and could you give
us more instruction on what we should do here? >> i'm not going to give you detailed instruction. i think this is up to congress to decide but when one looks at either inclusion or inequality or more broadly the fact that we are suffering as a country from very low productivity growth disappointingly low productivity growth and we think about what the factors are that overtime influence productivity growth, the things that have been long identified as important are investments, both private and public and we have had private investment really since the financial crisis has been very weak. private and public investments education and workforce development and the pace of technological progress which is influenced by the environment
that contributes to innovation the startup of new firms and research and development in a basic support. i think all of those areas should be on congress list to focus. >> thank you. >> mdm. chairman, we thank we thank you for being here and thank you for your service. i had numerous conversations in this settings and other with your predecessor about qe2 and e3. i know the fed announced the normalization process and it was announced in 2014. it stated that the securities that we had built up on the balance sheet would be held to maturity. then they would run off the balance sheet. you have basically announced today that we are embarking on a qe for by reinvesting the proceeds.
and new securities. is that not a major change from where they have been by allowing them to run off. maybe i'm misunderstanding what you're saying but i thought i heard you say that the fed is now, when we reach maturity on the securities going to reinvest them which is a pretty big policy change, is it not? >> it is not the policy change. >> ever since we qe three ended we make clear that we would continue to reinvest maturing proceeds and we've been doing that ever since. we did say that as the economy recovers and as the fed fund rates rises to a somewhat higher level than it is, a day would come when based on economic and financial conditions the committee would begin the process you just described of
gradually allowing securities to run off our balance sheet so that we reduce our holdings to a more normal level and we fully intend to do that but i can't give you a precise timetable for when that policy will begin. it's going to depend on how the economy evolves, but a long time ago we put out a set of normalization principles where we made clear that was how we would perceive and continue reinvestment until after we had begun the process of raising the federal funds rate and achieve significant progress there and that remains our intention. >> thank you for clearing that up. i appreciate that. i know last time you were here we and looted to negative rates and i know that's what happened in japan and the eu. you were looking into the
legality of whether the staff that you have the legal basis to pursue negative rights. have you come to conclusion relative to that? >> i believe we do have the legal basis to pursue negative rates but i want to emphasize that it is not something we are considering. this is not the matter that we are actively looking at or considering or looked at that in the past, we have identified significant shortcomings with that type of approach and we don't think we're going to have to provide accommodation and if we do it's not something that is on our list. >> very good. i appreciate you clearing that up. obviously japan and the eu have not had good benefits or at least not a benefit that we can see has been good for them. i appreciate you clearing that up. we look at the data roll from
time to time and i know the fed has not adopted that rule. if you look at it, there's a chart that tracks it and basically fed rates have been within a range. recently, the biggest dichotomy that we have seen in years and years between fed funds rate and what they would be if the taylor rule was employed. today it's 25 to 50 basis points. under the taylor rule we would be at 3.7%. that's a big range difference. is that because of the headwinds that you have been alluding to and what you're generally seeing in the market? >> i believe it is because of the headwinds. one of the numbers in the taylor rule reflects professor taylor's estimate of what we sometime refer to as a neutral level of
the fed fund rate. it's a level of the fed's fund rate that is consistent with the economy operating at full employment. that is something that by our estimate has been very depressed in the aftermath of the financial crisis. discussions about secular stagnation are very much about what is the level of interest rate that is consistent with the economy operating at full employment. i am hopefully that rate will rise over time although i'm uncertain. at the moment most of the divergence between our settings and what would be the higher-level that would be called for really reflect the headwinds that have been facing the economy. >> the labor, the employment rate really is misleading
relative to where we are on the labor market today. meaning that there's a lot of excess capacity and i know ranking member brown was alluding to that. that equation is a little bit off just because you're not feeling the employment levels even though the rates that we show are there or the involvement by the labor market is not where we would like it to be. let me ask you must thing briefly. living wills. i know under section 165 of dodd frank, the larger institutions are supposed to present living wills. you all are supposed to ensure that they can be resolved in bankruptcy. i know were going through hopefully the final iteration in the next few months. i was confused in that the governor recently mentioned that if the fed keeps raising capital level these institutions will on their own downsize or become less complex.
i'm confused by that. if the federal reserve or if these institutions can't be resolved in bankruptcy, is it going to do what section 165 of dodd frank tells them to do or are you going to rely on raising capital to cause the banks to do it themselves? >> we are insisting that the firms have deficiencies or shortcomings that we have found enumerated in the living wills in the last mission and there is a timetable for doing that. if the firms failed to address the deficiencies or if later on by the summer of 2017 they failed to address the shortcomings we have identified and we find some sufficient, dodd frank can impose higher capital requirements or liquidity requirements or
ultimately structural changes we don't expect to have to go there but we are insisting that the firms address the deficiencies and shortcomings that we have carefully identified. >> thank you madam chairman and mr. chairman. >> thank you very much mr. chairman and thank you madam chair. over the last several years you have had a very difficult challenge, we all have but we have been operating in some respects with one hand tied behind our back which is that you've been pursuing expansion policy and reluctant to raise rates what we have not had a complementary fiscal policy that invests in infrastructure and other things and allows you the room to raise rates if necessary or to complement your activity with what we are doing.
the point that you just made in response to senactivity which which is very troubling, some of that is related to the infrastructure. if it takes two hours to get someplace, that's too lost hours versus someone delivering a package, if it takes ten minutes on a superhighway, that's productivity increase. you are in a position where you are doing all you can but it's not enough and we have to step up. is that something you would tend tend to sympathize with. >> i think in the united states and many other advanced nations where interest rates are at very low levels, it's common to say that monetary policies have been carrying the load in many parts of the world, fiscal policy is a cause of concern about large debt or deficits.
i think we have achieved a lot in the united states. we have created over 14 million jobs in the unemployment rate has come down to 4.7%. inflation is still under 2% and i believe moving up. i think we are making good progress but if there were to be a negative shock to the economy, and i mention this in my testimony starting with very low levels of interest rates, we don't have a lot of room using our traditional tried and true method to respond if fiscal policy were more expansionary this neutral level of interest rates, that's one of the factors of civil ups substantial policy that affects what's neutral for the economy and keeps it on an even keel that it would be higher with a different fiscal policy.
>> we have made progress, i agree, but i think not only could we have made more progress but were at a point now where you have exhausted most of your leverage in a non- financial sense but your leverage, and if there was a shock then you have very little to respond with. >> we have the same tools that we used earlier, forward guidance and the maturity distribution and duration of our portfolios. those are the tools we would rely on. >> very quickly, the other part of this dilemma is the defense that in some places because interest rates have been so low were in the process of driving people into equities because there's no return and the prices driven up because that's where they can get some money fast.
are you concerned about that? >> yes, i said earlier i don't see signs of extreme threats to financial stability at this time this is something we monitor very closely but it is something that can happen in a low interest rate environment. i don't think that i see any broad-based evidence of those financial stability concerns but it is something that is possible. >> i have less than a minute but let me just, we had a discussion last time i was here, it is an increasing problem and they report that you have been breached in some respect, but just getting to the point, do you have the authority to require your regulator companies to put people on their boards that have cyber security expertise and also to publicly disclose what their cyber security general parameters are
or something to indicate to the public that they are taking this seriously? >> it is a focus of our supervision. we do have standards that we expect financial institutions to meet and just what's expected depends on the complexity and importance of the firm. so this is, we do regardless is a very significant thread. on your question about the boards of directors, i don't know that we have looked at that. i need to get back to you on that, but we are certainly supervising financial institutions ability to address other threats. >> thank you. >> thank you madam chair for being here and for your service. >> madam chair, in april the fed
released the results of the 2015 resolution plans of eight systemically important domestic banking institutions and five of the nation's largest thanks failed that exercise including j.p. morgan chase and bank of america. three questions related to that. first the new york times in april described this release as suggesting that if there was another crisis today the government would need to prop up the largest banks if it wanted to avoid financial chaos. question one is you agree with that. question two is what are these five banks need to do october 1 to fully remediate their deficiencies and question three is, if they don't by october 1 will the fed take more systemic
action by raising capital levels ? so those banks, over the span of the last several years in which they have been preparing living wills have greatly increased their ability to be resolved in the event of trouble by bankruptcy or alternatively, title ii. i couldn't guarantee at this point, it depends just what the circumstances are in which a bank fails that bankruptcy would work at this point as the means to resolve one of these firms we have identified for five of the firms deficiencies. we have been extremely careful
in spelling out in detail what those deficiencies are that we want to see remedied by october october 1. in addition, we have listed jointly with the fdic, a large number of specific shortcomings that the firms have until december of 2017 to remedy. we will be monitoring very carefully and evaluating whether that is done and as i said, if if the deficiencies are not remedied or if the short comings are not remedied they could turn into deficiencies that would provoke us and lead us to impose higher capital standards or other remedies on these firms if that isn't done. i think we have learned a lot in the course of the years we have been evaluating these living
wills about what it takes to actually resolve the firm in bankruptcy. the firms have learned in this process and i do think we have made substantial advances in terms of being able to do that. >> let me go back to my three questions. first in terms of the new york times quote needing to prop up the largest banks, you would not categorically refute that possibility? >> well, i would not say at this point that all of them are prepared for resolution under bankruptcy. >> again, if it doesn't get there for october 1, would you very soon thereafter consider something more systemic? >> yes. >> okay, mdm. chair my second
and last question about the puerto rican crisis. you have said said you don't think the fed should be involved and i appreciate that and agree with that, however my concern is the fed has authority to be involved. do you think the fed has authority to issue, as a last resort, resort, emergency loans to puerto rican institutions or not? >> i think our authority is extremely limited and it wouldn't be appropriate for us to give loans to puerto rico. we have very limited authority to buy municipal debt and the authority we have, if we were to buy eligible debt, i don't think it would be helpful to puerto rico and beyond that we have no ability to make emergency loans.
we could not use emergency powers of that type to extend the loan to puerto rico and don't think it would be inherently a matter for congress and it's not something that is appropriate for the federal reserve. >> thank you madam chair. >> senator hernandez. >> thank you mr. chairman, thank you madam chair for your service and your insight. >> recently in the national public discourse, there are those who propose reducing the national debt by persuading creditors to take a haircut on their investment. in my opinion policies like that would drive our economy off a cliff and endanger working families in our country. i really don't know of anyone more qualified to answer this question than you. in your opinion, what would be the consequences if the president of the united states were propose holders of u.s. treasury bonds accept less than the face value of their
investment? >> so this is a topic that i have spoken on many times when congress was facing debt ceiling type situations. i feel the consequences for the united states in the global economy and defaulting on treasury debt would be very severe. u.s. treasury securities are the safest and most liquid benchmark security in the global financial system. they play a critical role in financial markets and the consequence is such a default while it's uncertain, i think there could be no doubt that it would be in the long run harmful to the u.s. interest and at a
minimum result in much higher borrowing costs for american households and businesses. >> saying that you should take a haircut actually means a default because you're not paying the full amount that you're obligated to on the security. just for clarification purposes, am i right, my understanding that u.s. citizens and american entities such as state and local governments, pension funds mutual funds and the federal reserve's have floated the vast majority of debt estimated at approximately 85.5 million%. >> u.s. entities and foreign entities. >> u.s. entities and foreign entities okay my understanding is that u.s. citizens and state and local governments, pension funds, funds, 4o1 kays, federal reserve's own the majority of u.s. debt. that would be about 67.5%.
for the record if you could submit that i appreciate it. that means the majority would be taking a haircut as proposed by mr. trump and that would mean that u.s. citizens, and that's pretty outrageous. in the nearly eight years since the start, we've endured signs of growth and progress but many data points indicate that we are far from the full recovery in the labor market. in the past you've advocated for a metric of the index. that pulls information from 14 different sources and workers that are part-time for economic reasons and so forth has fallen nearly 15 points over the last five months. in fact the index has fallen to its lowest level since 2010. my understanding is is that every other time the index has turned negative for five months
or longer over the past 25 years, years, the fed has moved to ease monetary policy, not tighten it. i'm concerned that given the path the fed has laid out for potential rate increases later this year and next the fed will neither have the ability nor the will to temper the impact of the slowdown in the labor market. shouldn't we wait to consider additional rate hikes until we see indications of growth in the labor market? >> so the numbers that are released on the labor market conditions index don't refer to the level of the index but rather the change and the move that you have mentioned in the index suggests not that the labor market is operating at a good level, according to the level of that index which we don't publish, but there is a loss of momentum and that's what those negative numbers show.
we see the same thing and recent job reports that i referred to my testimony so without a doubt, the last several months the number of different metrics suggest a loss of momentum, not in deterioration of the labor market, but a loss of momentum in terms of the pace of improvement. that is an important consideration, as i mentioned we believe that will turn around and we expected to turn around but we are taking a cautious approach and watching very carefully to make sure that expectation is borne out before we decide to raise interest rate >> one final point. i want to echo what senator brown has said and in the letter that we sent to you would reference to improving the representation of regional banks
83% of federal reserve board members are white. 92% of regional bank presidents are white. there is not a single president whose either african-american or someone like me, latino. that is fundamentally wrong and i would hope that you would share some diversity efforts because leadership on this issue always comes from the top regardless of the institution. with your own experiences as a woman, in that regard we seem to be doing better in the system but we are not doing that much better with people of color and i hope that you will seriously consider such an effort. >> i agree with you that it's extremely important and i will do everything i can to see that our performance improves. >> thank you mr. chairman and thank you chair yellen. chair yellen, your predecessor
bernanke in columns that he has written discuss the limits of monetary policies of what it's capable of and what it's not capable of. one of the things he said, i'm paraphrasing but i think he said this on numerous occasion is that accommodative policy has the ability to bring economic activity forward in time. it doesn't create new wealth goods or services but it shifts the timing of economic activity. you agree with the chairman in that perspective? >> it sometimes does shift the timing of economic activity and brings forward a decision that might have been made later, but i think policy has repercussions that have more longer-lasting impact on the state of demands. it's not only a matter of
shifting purchases early by having more accommodative financial conditions, there are repercussions that can be longer-lasting than that. >> you may disagree but my sense of the consensus is that the main effect of this policy is to introduce economic activity that was going to occur later at an earlier time and that that is the principal activity. you are acknowledging there is some of that phenomenon. >> there is some of that but it's not the only thing. >> to what extent is this unprecedented monetary policy for this many years part of the reason that we've had relatively anemic growth today? is in it very likely that some of the economic activity that would be occurring today was dragged forward in years gone by and it's already occurred in the
past? >> so, it's very hard to know how large that effect is but i continue to think that our accommodative assistance of policy, for example low mortgage rates is continuing to boost activity in the housing sector. it hasn't only pulled activity for the suppressive now. i believe it has. >> the private sector has still not recovered its previous high. >> it's undergone very substantial shocks. >> have you attempted to quantify how much of the economic growth that would be occurring in 2017 and 2018 and 2019 is happening now because of this ongoing activity of having these extremely low, unnaturally low interest rates? >> we have, in the past looked at whether or not rates have had
less impact on spurring economic activity, namely whether or not there might be some continuation in the impact of policy, but in the past our analysis suggested that it is not only a matter of defining economic activity, but also spending decisions. >> even if that is so, my guess is that the principal effect is shifting the timing and you may disagree with that. i got the impression from your predecessor but that they were actually shifting the timing. it was certainly in effect and i think it's something the fed ought to be looking at because to the extent that that is a significant effect, what you are doing is damaging growth going forward to some extent. let me touch on another concern.
it's taken from the many, from what you and others have said there has been a great focus on the demand side of the effect of monetary policy. not so much on the supply side. one of the concerns that i have is the danger that first of all you've been missing the estimates on the supply side as well as economic growth overall. we are now 12 consecutive years in which the fed has overestimated economic growth. they been overly optimistic about the supply side such as workers returning to the workforce, inc. proving productivity levels and that has not been happening to the extent that the fed has helped. one of my concerns is that the inducement to expand capacity, the unnatural excess that comes from low interest rates could get the fed into a vicious cycle were all that excess capacity creates excess commodity and
others pressure on prices and makes it harder to hit 2% inflation go and creates this dilemma that's hard to get out of. is there a danger that the ultra low interest are contributing to that? >> i think investment has been running at a very slow pace. we have really not have the creation of a lot of excess capacity. >> for reasons that productivity growth has been so slow and has been disappointingly slow is that we have had very weak investment in the aftermath to fight this and more recently, in recent months it has turned negative and extremely low where we have this substantial drilling activity. i don't think the impact of low interest rates has been to stimulate an investment boom or
booming capacity. >> i think that's largely true in the united states, but globally where this experiment has been going on since everybody is in this business of ultralow interest rates, certainly if you talk to people in the steel industry they would say there is massive overcapacity in not to steal but other commodities as well. i do worry that we've encourage companies to take on massive amounts of debt to take on and i think it's just a distortion but i think you for your time. >> thank you for being here. i have a couple questions that i've asked before and quite frankly i will do it again. i am continually concerned about community banks and the level of regulation to match the risk that they posed to the economy and to their depositors and borrowers.
we are seeing consolidation in montana or probably seeing it across the country with small banks. that's not good for capitalism and i don't think it's good for rule america as we see small banks combining with bigger banks combining with bigger banks. my question is, do you see any problem with the process right now of regulation on our small banks and if so what are we doing about it? >> we are very heavily focused on trying to find ways to relieve community banks of undue burden and tailoring of our regulatory system and supervision system to suit the risks that it entails is a core principle for us of proper supervision so we have done very
meaningful efforts to reduce the burdens of our examinations on community banks, to reduce the complexity of the capital requirements that they face and we are taking very seriously and i believe we will come out with meaningful proposals for relief and we are looking at something that might be of significant implications for the capital raising gene for those community read banks. >> i think simplification is important. are you happy with where we are. >> i think we've made progress but we continue to focus on it. >> do you believe consolidation in the banking industry is not a good thing? >> do you think the regulatory
issues have contributed to the consolidation? >> i think there have been a number of factors that have contributed to it. this is a challenging environment to banks and low interest rate environment and the possibility is also been important. >> in some cases some of these small banks are putting out millions of dollars to meet the regulatory issues that are brought up. i just want to get your commitment to continue to work. >> absolutely. >> that forces us to the big guys. i don't necessarily think that's good for the consumer. i think it should be their choice if they want to go that direction. >> international insurance rules , the fed's proposed rules for two nonbanks and i'm pleased that the fed is moving forward
with the international insurance rules. can you give me an idea when you think these might be complete? >> i think there are some ways to go in terms of the international work that is ongoing. we put out a a few weeks ago for the framework that we intend to take care in the united states. we are in discussions internationally and advancing these ideas, but i think we are ahead of that process here in the united states. >> take one more run at it. do you have any idea when they will be done? >> no. >> will be done in this administration? >> i will have to get back to. i don't know what the timetable is. >> you're talking about the international. >> right and how those are going to impact, i'm just curious to figure out how that's going to
come down the pipe. >> we already published our rule it's not insurance. >> what happens to those guys? does this have no impact on them? what happens to those guys moving forward? >> there not an insurance company. >> i know but they've divested their financial banking part of their business. so what happens to them moving forward? >> that will be something they took up. >> thank you. >> thank you, i want to take you to what you were just talking about the advance notice of proposed rulemaking for insurance industry. i'm speaking on behalf of large illinois employers who would say that senator collins and i have been working very hard to make sure that the fed recognizes the great difference between the
business of banking and insurance. they want to make sure heads in the right direction. i would ask that as we look forward to this, as i look look at the essence of this, it seems like the key consequence, the 90 day window of our liquidity, that that if i look at the details, i would say 90 days, if you look at somebody like state farm, that affects 80 million american families, you would say the stress, given the 2008 in various products, do you have enough money to sustain the enterprise? i wanted to explore this with you in a commonsense way of letting people know this is the route we should go. what i would urge you to follow in the direction of senator collins and i that making sure the normal fed culture of a bank
regulation does not infringe upon the insurance industry. >> we have tried to do that very much in developing this proposal we have put forward some conceptual framework and are going to be looking very carefully before we proceed with more detailed rules and the collins fix was very helpful to us in having the flexibility to design something that is appropriate for insurance and not bank centric. >> thank you. i think we have 60 days to, and i will, on that. i will be encouraging members of this committee to also provide that comment. i want to make sure we have a robust and strong insurance sector. >> yes sir, we will look at those very carefully. we are trying to proceed in a very thoughtful and careful way based on a great deal of
confrontation with other regulators, the naic, the industry who has taken, and i look forward. >> from what we have heard they have been pretty well-received reflecting the collins fix nicely. >> great. >> thank you mr. chairman. >> thank you mr. chairman and chairman yellen it's great to see you. i'm going to try and get three questions in with respect to the five minute rule. i will make sure all our colleagues get a chance to ask question. at our last cyber caucus, i think this will be a challenge for every institution, the question is about underregulation we can make sure that bank boards and others have cyber expertise. i would hope you would move forward with that. i would move slightly to my
question around what happened at the new york fed. obviously the system is, by evidence of the cyber attack had some challenges that were important to the international banking regime. does the new york federal the overall fed, do you feel like you have enough ability to work with swift to increase their cyber protections? >> we are part of an oversight group for swift. it is led by the national bank of belgium and many supervisors for different countries participate in that group and we also participate in that group. swift and the new york fed are working with bangladesh to try to handle. >> i would just urge you that this is going to be an area that
will exponentially grow in importance in both in terms of the fed's internal expertise and ensuring that we are working more closely with the overall banking industry to up our game. i think it's critically important. >> let me make sure i get the others in. a number of us have made sure we talk about how we can generate additional job growth. one of the concerns i have is that particularly inside the public markets, we've seen an enormous rush over the last decade starting in the nine days and in the more few years toward long-term value creation and this is underlying american capital as they choose to invest in financial instruments rather than investing in lending to
business institutions but as a matter fact i've seen data that's as low as 15% of financial institutions activities are actually geared toward making investments in communities. we seen amongst public companies a shift from 80% in the 1980s where 50% of profits were reinvested back into plant and equipment and employees and r&d and now we are staying 95% of corporate profits used for stock buybacks and dividends. we've seen some of america's largest iconic tech firms with huge balance sheets still go into the markets with borrow billions of dollars not for r&d but to share buybacks. i think there's an increasing incentive among ceos and in more sophisticated investors that this is long-term, destructive to real value in business and consequently to job growth.
has the fed had any views on this challenge about this short-term growth and is there a movement public companies away from investing back into their business back towards stock buybacks and dividends? >> we have looked very closely at investment spending and try to understand why it has been so very depressed in the aftermath of the crisis. :
with the tools to be productive but others already in the workforce has, slowing workforce has also played a role, but beyond that, i would -- >> i would simply add investors coming to say the first thing we shut down our your worker training programs, your investment in infrastructure. and i believe that it is a negative long-term. i will adhere to mi5 a request although i would ask for the public record that you come back. i am concerned on section 165 on the living wills. we've got to move this process along. i'm concerned by the level of disagreement between event and the fdic but i will take that for the record so other members can get their questions. >> thank you. >> mr. chairman, thank you. thanks for taking time. i we find these to be very informative. i want to go back to brexit for
just a minute. you mentioned it in your opening comments. you said each of the to exit the european union would have significant economic repercussions. can you go more into detail of what that means and perhaps what the plan of attack by the feds are if, in fact, it would past two days from now? >> i said it could. i don't know that it would but i think they could have significant economic consequences by launching a period of uncertainty both the united kingdom and possibly the future of european economic integration. most analyses suggest it would have negative economic consequences for the uk and spillovers to europe more broadly speaking. i think the financial market reaction to the uncertainties that would be unleashed by that
decision could result in a kind of risk off sentiment that we would see impact on financial markets, that we might see flight to safety flows that could push up the dollar or other so called safe haven currencies. i don't want to overblow the likely impacts, but we are aware of them. we will watch them and consider those impacts as we make future decisions on monetary policy. >> is there any reason to believe that this brexit were to pass that it would have effect on the us economy to the point we would go back into a recession? >> i don't think that's the most likely case, but we just don't really know what will happen and we will have to watch very
carefully. >> was the chance of the economy being in recession by the end of year? >> i think it is quite low. i think the u.s. economy is doing well. and although i indicated that we are watching this recent slowdown in the job market carefully, my expectation is that the us economy will continue to grow. we have seen a pickup, a strong pickup in consumer spending and growth in the economy. is a weakness in the labor markets the last couple of months was a reaction to earlier slowdown in growth, that looks to be reversing. i remain quite optimistic in the kinds of conditions data been associated in the past with u.s. recession. often that occurs when inflation economy is overheated, inflation has been quite high, the fed has
had to tighten monetary policy. we don't have any such conditions in play now. households are a much improved shape, and while there aren't negative influences in the economy, particularly on manufacturing stemming from slow growth, the low dollar, commodity prices very seriously depressing hiring causing job loss in the energy sector, and slowing investment and growing in mining. still over all the u.s. economy has been progressing even with those negatives that i think the odds of recession our little. certainly not what i expect. >> thanks for your answer. a week ago friday i think the 10 year yield on japanese bonds and also german bonds were negative. what impact does that have on our treasury yields with these investors? looking for any kind of return
coming in, buying up our treasury bonds, the kind of impact is that going to have on our yield? >> does tend to increase capital inflows into the united states which pushed down our treasury yields which cars are conserving higher but in absolute terms that are really quite low. differentials in the stance of monetary policy also put impacts on the value of the dollar. the dollar has gone up around 20% against a broad basket of currencies since mid-2014, and i've had a negative effect on our trade with the rest of the world and put downward pressure on corporate profits and hiring in manufacturing. >> are you concerned if the feds raise rate that bond traders will ignore that, reversing exact which are trying to achieve by raising rates?
>> i think one of the factors that those influence of bond pricing is if this is what you're referring to is the interest they path of rates, and there's some further increases built into market expectations and often the response of bond markets to what we do depends on how our actual actions compare with those expectations. >> thank you. >> senator warren. >> thank you, mr. chairman. it's good to see you again chair yellen. i want to follow up on questions raised by senator corker and senator vitter. as you know dodd-frank requires giant financial institutions to submit living wills, documents that describe how these giants could be liquidated in an orderly and rapid way in bankruptcy with either bring down the economy or requiring a taxpayer bailout. a few months ago the fed and the fdic jointly determined the
living was submitted by five of the biggest banks in the country were not credible. those banks must resolve the problem by october 1, 14 weeks from now. if the banks fail to do that, the fed in the fdic have the power to reduce the risk posed by these giant banks by, for example, raising higher capital standards for stricter leverage ratios. these changes are critically important to avoiding another 2008 crisis but the banks are unlikely to make them unless they believe that the fed and the fdic are serious about enforcing dodd-frank. i know by law you must consider increasing capital and higher leverage ratios. what i want to do is to ask, can you commit that if any of these giant banks fail to resolve the problems in their living wills by october 1, that the fed will
use the tools that congress gave you to reduce the risks posed by these too big to fail banks? >> we've been very serious in this review of the living wills and we have clearly stated a set of while identify changes that we want to see by october 1. the decision about what we do if those deadlines are not met those are decisions that my colleagues and i wanted to look at very carefully, what is the appropriate sanction for doing that. but clearly we are very serious about wanting to see these deficiencies remedied, and well aware that we have at our disposal the tools that you listed your so i can't pretend it today to tell you precisely
what our response will be be. and we will work closely with the fdic as we have been all along, but we are extremely serious about wanting to see progress and certainly we will consider using those tools. >> what i'm asking for is a commitment. i have to say i don't fully understand why you would not make that commitment. these banks have known this was coming since dodd-frank was passed in 2010. that is six years ago, and they been sunbathing linton wells since 2013. there is no provision in the law for all of the extensions that you have given them so far. if any of these banks fail the credibility test on their fifth trod, they need to face some real consequences. otherwise why would they ever make changes if there are no consequences?
>> there will be consequences. >> i very much hope so. when you found that these five banks submitting living wills were not credible, you were saying quite explicitly that each of these banks remains too big to fail and that if anyone of them crashed they would risk taking down the whole economy and less makeup to cover bailout. the entire goal of the linton wells process is to push the biggest bank to fix the fundamental problem. and i'm glad that the fed finally, finally determined that some of these living wills were not credible. is not leaving anything if you're not willing to use the tools that congress gave you to force these banks to reduce the risk that are pushing off onto the taxpayers. taxpayers. i have a second issue i just want to cover if i can briefly. i want to follow up on senator brown and senator menendez is questions about diversity. i think diversity is very important. there is a growing body of
research showing that gender diversity in leadership makes her stronger institutions. perhaps it is not a coincidence that there is a stunning lack of diversity at our biggest financial this additions. not a single one is led by a woman. while the fed to leadership is somewhat more diverse, it's not a whole lot better. up to 12 regional fed presidents, than are men. as you know congressman conyers and the along with 120 of our colleagues sent you a letter a few weeks ago about the lack of diversity among the fed's leadership. i appreciate the response that you sent us last week in which he acknowledged that great diversity can help improve the fed decision-making and that it is to work to be done to improve diversity among the fed leadership. let me start by asking does the lack of diversity among the regional fed presidents concern
you've? >> yes. i believe it's important to have a diverse group of policymakers who can bring different perspectives to bear. as you know it's the responsibility of the regional banks class b. and c. directors to conduct a search, and to identify candidates. the board reviews of those candidates and we insist that the search the national and that every attempt be made to identify a diverse pool of candidates. we monitor those searches while there are ongoing to make sure that's been done. >> but then let me just ask you can about the outcome. because just as you say, under the law with any regional that president is elected by the regional fed board, that person
must be approved by you and others on the board of governors before taking office. the fed board recently reappointed each and every one of these presidents without any public debate or any public discussion. the question i have is if you're concerned about this diversity issue, why didn't you use either of these opportunities to say enough is enough? let's go back and see if we can find qualified regional presidents who also contribute to the overall diversity of the fed's leadership? >> we did undertake a thorough review of the reappointed of the performance of the presidents. that's the board of governors has oversight of the reserve bank's. their annual meetings between the boards bank affairs committee and the leadership of
those banks to review the performance of the presidents, and there were thorough reviews of -- >> but you are telling the diversity is important and yet he just signed off on all these folks without any public discussion about it. i appreciate your commitment to diversity and i've no doubt about it. i don't question it. it just showed me that the selection process for regional fed presidents is broken because the current process has not allowed you and the rest of board to address the persistent lack of diversity among the regional fed presidents. i think congress should take a hard look at reforming the regional fed selection process so that we can all benefit from a fed leadership that reflects a broader array of both backgrounds and interests. thank you, madam chair. >> thank you, mr. chairman.
chair yellen, thank you for being rigid and i think rigid and i thank you for your work on behalf of all of america and frankly, of the difficult task and one that will not get any easier before the year is out from my perspective. i did find it quite interesting the opening comments on my good friend, ranking member, mr. brown from ohio, as he seems to suggest perhaps the third of the cumbersome arrests rest on the shoulders of my party. i thought to myself the american people are not really looking to a signed length white economy is so anemic, and the so-called recovery has until he reached into those folks living a check to paycheck. it would be easy for them to remember that at the beginning of the so-called recovery, that the democrats, my good friends to the left controlled the white house, the senate and the house until early january 2011. what did they do with that trifecta? actually they created the most
onerous regulatory state and history of our country. they continued until the last year when the administration proposed 80,000 plus pages of new regulations, according to the competitive enterprise institute, with an economic impact of cost to the economy of $1.85 trillion. said differently, this anemic recovery perhaps this anemic because of the regulatory burden created through the first couple of years. i would suggest to you people in my home state of south carolina who are living paycheck to paycheck cannot believe that we are actually having a strong recovery, and the numbers seem to bear that out. first-time homebuyers down for the third consecutive year and that disproportionately impacts african-americans who have homeownership around 45%. so the challenge seems to
continue. our economy through the first quarter by 1.1%. we saw real income since 2007 decline by 6.5%. americans eligible for food stamps is up 40%. americans using food stamps is up over 20%. last month we saw 38,000 jobs created and our labor force participation rate in 2007 66.4%. 2010 64.8%. in 2014, 62.9%. in may of this year, 62.6%. i would suggest the numbers
themselves bear out the fact that perhaps the anemic recovery is not a recovery for those folks working paycheck to paycheck. i don't know who to blame but i can tell you the american people want solutions more than blame. my question to you is if you look for the rest of this year do you anticipate more months with the job creation numbers 38,000 the same month or we see job creation at 30,000, we celebrated 4.7% on upon a great only because 458,000 people stopped looking for work? when you take a real unemployment number based on the 2007 labor force but this patiently we would be at 9%. >> said we expect further improvement in the coming year? the unemployment rate fell substantially over the last year and there were jobs
created in 2015 at about 225 or 30,000 a month. perhaps we will not see job creation now that the economy is getting closer to estimates of normal longer run rate of unemployment. we may not see job creation at quite the pace, but i expect continued improvement bringing down broader measures of unemployment which as you noted are much higher. some include involuntary part-time employment. i expect further improvement in the labor market continues to strengthen. the last jobs report in the last couple of months of labor market performance were quite disappointing. my hope and expectation is that that's something that is temporary and we will see that turned around in the coming months. clearly it's something we'll be
watching very carefully. my expectation is that we will see improvement, but we will watch it very carefully. >> i less ocean has to do with full employment and now they reach that wonderful goal of unemployment -- my last question. winner look at the numbers that are coming out of the need for skilled workers as well as state workers, it appears by 2020 we could have a shortfall of 3 million or 4 million folks in the skilled labor force, and about 5 million in the skilled labor force. my solution have to do with the german model of apprenticeship programs. i would love to hear if have any solutions that you will be recommended as we look at the labor force participation rate, the number of skilled jobs will be available and they need to get our workforce trained in that direction. >> so going back probably to the mid '80s, we have seen a
persistent shift in employment patterns from unskilled and people with mental skills, but doing jobs that can be offshore outsourced, this fueled demand for skilled labor. and a consequence of that has been rising inequality, i return to education, and downward pressure on the wages of those who are less skilled and middle income. and i completely agree with you that education and training, perhaps apprenticeships of the type that are used in some european and other countries these are ideas that would have to be considered if we are going to address what comes out of that which is, that even when you have enough jobs, you have downward pressure on the wages
and incomes of people in the middle and the bottom of the skilled distribution. >> i would just suggest some point we will have to have a national conversation about the quality of education in our country and the necessity of a dual-track. back to my days we get shop which was an important part of her education apparatus that perhaps we need to have that conversation again. thank you chair yellen. >> senator donnelly. >> thank you, mr. chairman. thank you chair yellen. when you hear in favor of we talked about corporate offshore in a devastating impact it's had on family and my home state of indiana and manufacturing towns across the country. the frustration remains. the decline in manufacturing employment is one of the factors that has led to a shrinking middle class. we have two economies in this country. the overall economy might be doing well enough, the wealthy are richer than ever. the middle and working class families are feeling the
recovery. wages have been stagnant for years. a recent pew report said since 1971 each decade has ended with a smaller share of adults living in middle income households and at the beginning of the decade. what's the state of the economy for working families? >> i would agree with you that for decades now, we were just discussing, there has been downward pressure on the incomes of less skilled individuals of the kinds of jobs that once upon a time were pretty readily available, save for high school aged man in manufacturing has gradually diminished. there's been a long-term trend. part of it is due to just the technological change that's consistently raised the demands for skilled workers and reduced
the demands for less skilled workers. i think globalization has also played some role. more recently slow growth in foreign economies, the strength of the dollar which really is reflective of the u.s. doing better on balance than other countries speak i understand all these reasons but these are real people as you well know. there was an article not too long ago in the paper here about making $17 an hour at the plant and got fired because they shipped his job to mexico for $3 an hour. but the ongoing ripple of that was that his daughter who had applied indiana university got excepted. found out that her dad was going to lose his job, and she said i don't think the family can
afford for me to go to college like this. that's a devastating. that's the future of america. that's what the real impact of all this stuff is. just in the past few months. these are not because of the companies are not doing well. they are doing really well, but in the town next to my hometown, elkhart, 200 jobs shipped overseas. 700 jobs huntington indiana not the biggest county in the state shipped to mexico for $3 an hour wages. 1400 out of indianapolis. very profitable companies, and these folks are making 13, 14 17 an hour. so as long as we have a mousetrap like this, how do we ever get the middle class up if even $13 an hour is too much in these companies mind?
>> so i mean, these are very sad situations for -- >> they are wrong situations is what they are. >> i mean, that kind of thing you're describing imposes terrible burdens on all too many american families. >> how do we make america work for them? >> part of it is trying to make jobs which we can't stop all shifts occurring across sectors of the economy. i think we have -- >> do you consider that a shift? when a company is doing really well and somebody is making 13 bucks an hour, not much above minimum wage, but lose their job because our laws allow them to ship them to mexico for $3 an hour. is that a shift?
that's not a shift in technology. that's just a cold-blooded decision that americans don't count as much as their profits. >> those forces have been in play for quite some time. for our part at the fed we are trying to create the job market would are enough, they can see an opportunity that people who lose jobs in one sector are able to find them in the sectors of our economy that are expanding. sometimes to make the transition is difficult and may require retraining or other forms of help to connect with available job opportunities. and sometimes we know that kind of job loss, does cause long lasting impact on wages. >> it seems like gaming the system to want to make your
product somewhere else in the hope you can sell them back here to the united states, because few are hoping that other people will be happy to pay $13 an hour, $14 an hour wages so you'll have enough customers. you are just going to gain fat so you can pay for three bucks and future products back into your tickets like you did on one hand and he did on the other end. that just seems incredibly irresponsible to me. thank you, madam chair. >> senator rounds. >> thank you, mr. chairman. madam chair, welcome. as i listened to your monetary policy report, it strikes me that as the ranking member had indicated earlier that when we talk about productivity growth and the need for both public and private investment that requires the dollars come from someplace. i did like your thoughts, just in terms on the basis of what the joint economic committee had
reported earlier this year, and delay that out in support of stark terms. the indicated that 99 -- let me put it this way. 10 years from now in the year 2026 which by the weight is a 250th birthday of our country, we can look forward under current conditions 99% of all the revenue come into the federal government, highway taxes, corporate taxes personal taxes, personal income tax at the 99% will go back out into categories, interest on the federal debt and mandatory payments on entitlements. that doesn't leave a lot for public investment, and clearly it does not drive private investment. you are working on short-term activity right now and you are monitoring closely, you are on a day-to-day basis following the economy right now which as you suggest is doing very well and yet i think of lot of us would disagree. three quarters of 1% of growth
one quarter hardly seems appropriate. i know you're optimistic about the second being better but even if it is doubled or tripled we will not grow our way out of this crisis which is coming upon us. i'd like your thoughts because right now we're looking at areas in which every want those jobs to come back and if we want individuals or wages to rise will have to be in position a position to where we grow this economy once again. tax policy, regulatory reform, actually managing our entitlements all of which seem critical and get today we haven't talked about that title. we don't seem to have a place where we can. can you as an impartial individual in this process who watches our economy grow or folder on a daily basis, can you talk to us about the need to do something now to avoid the crisis in 10 years? >> well, i think we all know and we have known for a long time
that with an aging population and with health care costs that have by and large risen more rapidly than inflation, that we faced a situation where we would have an unsustainable debt path, and that this would require reforms. as you say, medicare, medicaid social security, those three programs will -- >> using the affordable care act needs to be reformed. that's part one. >> i didn't say anything about the affordable care act. i am saying that the entitlement programs need to be considered how to put those on a sustainable basis. >> would it be fair to say they need to be managed? >> within each of congress look at both revenues and the structure of expenditures to
ensure that those programs remain sustainable in the overall federal budget and debt associate with that remained on a sustainable course, because as you go out for the with an aging population, as you said, the debt to gdp ratio is rising simply unsustainably and that requires changes. >> is it fair to say right now over the long term basis every time the interest rate that we have to pay at the federal level goes up by a quarter point it's estimated $50 billion a year additional increase in our costs being paid out. looks to me like simply addressing and beginning the process of slowing down the increasing federal debt and recognizing that we can't simply say overall won the greater than or today pretty time we've got all the answers. certainly will have to grow our way out of this as well as
reducing some of the ongoing expenditures, fair to say? >> it certainly would be desirable if the u.s. economy were growing at a faster rate. you cited a very depressed number for fourth quarter growth over the last four quarters, the average growth has been about 2%, and over eight quarters it's been about 2.5% your so smoothing through the ups and downs, we've been experiencing growth of two or 2.5% speedup we would not grow our way out based on that number, i we? >> we would have to do better than that, and that's a matter of productivity growth essentially being quite depressed relative, for example, to the levels that we enjoyed in the second half of the '90s. so it's not certain what's responsible for that but many
factors come into play. we've had depressed levels of investment. we seem to have a depressed rate of business formation. this sort of technological change as it shows up in output gains seems to have fallen brother killed to those better times. and through a range of policies -- >> madam chair, my time is up but it looks to me like what you're giving up -- giving us as a wakeup call. >> it is a very serious matter that productivity growth is so slow. yes, i want to highlight that spent thank you, madam chair. thank you, mr. chairman. >> chair yellen, thank you. senator donnelly was concerned about manufacturing jobs in america. indeed, our trade policy has given full access to our market to goods manufactured by companies in countries that do
not have to abide by the same labor laws, the same wage rules from the same of our mental rules are the same enforcement. this is a very a level playing field for american manufacturers have a devastating impact. the loss is extensive, and is that really fair to the american worker to american companies having to compete against companies that are allowed a completely different set of standards that lower their costs dramatically? >> i guess i would just say in the view of most economists, more open trade creates net benefits, but that doesn't mean benefits for everyone. there are dangers but there are also losers, and that certainly -- >> the losers of the manufacturing -- is that fair to the manufacturing workers? >> it's important to have policies that address the
losses. losses. >> since the mid '70s, 1975 through now we've had for decades in which virtually -- virtually 100% of the new income has gone to the top 10% of americans leaving nine out of 10 americans in our economy out in the cold. this is substantially a reflection of the shifting manufacturing overseas. we've had a series of june strategic decisions. we wanted to nurture the recovery of japan. we wanted to pull chinatown of the sino-soviet blog. never want to pull the rest of asia away from china. is there an understanding within the that have the cost of these geostrategic decisions upon the welfare of american families through living wage jobs, the loss of living wage jobs? >> we certainly looked at this question of wage inequality of income inequality. we collect data. our survey of consumer finance is just one of the key data sets
that gives us insight into what's happening. academic work on this topic while it has focused to some extent on trade more broadly also looks at the importance of a phenomenon called tactical change which the nature of technological change in recent decades has continually shifted demand away from less skilled workers to a more skilled -- >> technological change has occurred. however, a lot of the shift overseas has been due to lower wages not to technological change. they have been rooting of our factory machines and shipping them overseas so it's the same factories that pays less. that is not technological change. that is an issue of trade policy. technological change does have an impact. in a situation where, as you
pointed out, there is more higher skilled demand, demand for higher skilled jobs, education becomes very important to but as compared to other developed economies, higher education, higher skilled training or college, it's far more expensive it is the single factor, more than health care that has gone up faster than inflation in our economy. such that not only is it daunting to our students who in blue-collar communities like the one i live in are getting the message that there is not an affordable path to fulfill their goals in life. and statistically we see our students to pursue their education burdened with debt that is having a profound impact both on delaying marriage and on delayed homeownership which is the major come has been a major engine of wealth for the middle class. we see this high cost of college and it seems to me like the type of structural concern in our economy that the feds should be using its economic expertise to
highlight the long-term devastating impacts of failing providing the opportunity for the skills needed for the economy of the future. but i don't hear the fed talking about that. >> we are looking at trends in student debt, and believe we will be hosting a conference this fall on student debt and looking particularly at what it means for low and moderate income households. >> over these last few years i've asked some equation which the response is always that something we are looking at. it would be nice to have a muscular representation of the big challenges to our economy because the fed has the expertise to put its hands around and be able to project that into the policy debate. i will just close since my time is expiring i sang one of those issues i've raised multiple times is the feds power of the comfort of interest in commodity.
the billy of large financial institutions to on pipelines tee-one ships full of oil, to own energies generation, and each time i hear we are looking at that. augusta looking at that or are we going to do something about that? >> we will come out with a proposal on that, but some of it reflects decisions that congress made and not fed policy. spearing that's true. there are some restrictions but this their -- are still considerable power resting with it. thank you. >> madam chairwoman to thank you for joining us. i would tell you in my conversations with kansans, very few, they see their economic future by the. they see it more disillusioned no one feels more secure in their job. no one feels like the children are going to have a brighter future. parents are concerned about their children's opportunities
when they graduate from school. the ability to pay back student loans, worried about saving for their own retirement. people are worried about having enough income and savings to pay for health care in emergencies. so the sense of an economic recovery is far from being felt universally with kansans i visited with across our state. i want to raise two questions. one, in part circumstantially to lower agricultural commodity prices. significantly lowered prices in oil production, natural gas production, and part of that is the consequence of ice and the value of our dollar in comparison to other currencies, and our ability to promote exports, both of those early of agricultural commodities although the law now allows the export of oil as well. where are we in the value of our
dollar, which the intermediate expectations for us to be able to jumpstart the sale of wheat cattle, corn and other products from airplanes that are manufactured in our state that seemingly are not able to access those markets in part because of the value of our currency? >> so the value of the dollar has increased significantly since say mid-2014. partly that reflects the fact that the u.s. has enjoyed a stronger recovery than many other advanced nations, and that's created an expectation that in the u.s. interest rates will rise at a more rapid pace than in other parts of the world. and that has been disclosed and are assets that is pushed up the dollar. more broadly the trends using in commodity prices, i think reflect a larger set of global
forces. in some cases we've seen increases, significant increases in the supply of commodities, in the case of oil. the rapid growth of u.s. ability to supply oil markets has been a factor. and then there's been a slowdown in global growth, and particularly in china which has been an important consumer of so many commodities. china is on the that and is understood to be, this will continue a path of slowing growth. the plummet you seem commodity prices plummet for many commodity prices, just because of basic supply and demand considerations, the dollar makes some difference to that as well. >> we often talk about, when we talk about export, trade agreements, has the fed weighed in or have you expressed the
opinion previously about other countries and their ability to manipulate currencies to our disadvantage of exports? >> the responsibility for currency policy rests with the secretary of the treasury, and we don't weigh in on that. >> madam chairwoman, let me ask you about something in your testimony. you indicate business investment outside the energy sector was surprisingly weak. would you indicate to me to elaborate on the factors that lead you to that statement. when you exclude the energy sector is that just because of definition or something happening in the energy sector that indicates investment? >> drilling activity has been very important and it's counted as part of investment activity. so with a huge plunge in oil prices, even though there's been some recovery, we have seen a number of rigs in operation just
plummet. and that's part of what aggregate investment spending has been so weak. wewe understand that an expected to cost, it reflects the decline in oil prices. but even when we go outside the energy sector or other sectors that are directly related to energy and supplying inputs to come investment spending recently, and this is just a report on the data, i don't have a store to offer you on why this has happened, it is been surprisingly weak over the last several months. it hasn't been very strong investment spending generally. we talked about this earlier. during the recovery, but it has been and we think we understand some reasons why it's generally been week, mainly slow growth and less rapid increase in the labor force. but it has been surprisingly weak in recent months and it's
something we're watching and i can't tell you just what that is due to. >> i wouldn't expect you to say this but in my view, in part the lack of investment or the reduction investment is related to an array of circumstances one would be the debt and deficit, the uncertainty of our economy, lack of economic growth. generally the economic indicators are downtrending, not attending sufficient number of times to instill a sense of confidence. the next regulation that may come their way as a businessperson, just decisions to make investments. people are deciding it's more risky to invest and to not. >> those things are certainly mentioned by business people. in recent quarters for earnings have also been under downward pressure for a variety of reasons. >> i would conclude my remarks by indicating one of the place of what to focus our attention
on his innovation startup businesses, new entrepreneurs and the uncertainty that they face is even more of a dramatic, has more of a dramatic consequence that a large of this is that can better internalize and handle the uncertainty. >> senator cardin. >> thank you and thank you chair, for being divorced again. i know these are always to either of the year for you. i want to return to some of the earlier discussion of the so-called brexit, the referendum that what will occur in obtained on whether great britain should remain or leave the eu. your testimony says one developer that could shift in investor sentiment as the upcoming referendum in the united kingdom. uk but to exit could have significant economic we percussions. could which he stressed to the senator heller in his comments. that sounds to me like the usual prudence and caution you used in all other public statements.
you also stated to senator heller quote, i don't want to overblow the likely impacts. that reminds me of yogi berra's predictions are hard, especially about the future. >> that's absolutely true. i couldn't agree with that more. >> yet in the last few minutes here's how the guardian of london reports your testimony to the committee. janet yellen boards on brexit. not exactly what you said, is it? >> i said that we were monitoring it and it could have consequences. >> you wouldn't characterize your testimony as a warning on the brexit? >> i have, if that means that i am warning uk residents, i am not attending to take a stand. they are going to go to the polls. they had an active debate on the
issues, and i'm not providing advice in that sense. >> good, think you. i sympathized with headlines don't exactly capture the exact meaning of what once was but to be fair to the guardian do not the only outlet this report your test along those lines. others have as well. so to be crystal clear, you take no position on whether uk citizens should vote to admit or leave the eu and the federal reserve takes no position? >> that's correct. it's for them to decide. i'm simply saying the decision could have economic consequences that would be relevant to the u.s. economic outlook and we need to monitor carefully. >> thank you for that. i think that we all in america should respect the british people's sovereign right to govern their own affairs. one point you made in your earlier comments about brexit, about the potential source of
the economic repercussions is quote a period of uncertainty it as something i hear frequently in commentary about the brexit. is there any time when the global economy on the us economy does not operate in a condition of uncertainty? >> there is uncertainty but this is a unique event that has no close parallel. it's hard to know what the consequences would be. of course, there is always uncertainty domestically and globally. we operate in an uncertain environment. >> many other counterparts and the continent, many of my collective counterparts of the continent have not treated the matter so evenhandedly. they have opine on what british citizen should you. they've also been responsible for of the things that caused uncertainties in recent years like the greek debt crisis or other debt crises in europe or
the suspension of the schengen zone privileges because of the flow of migrants into europe. antiterrorist not infiltrating that flow and launching attacks in paris just a few blocks away from the heart of the european union. those also could potentially cause periods of uncertainty in the european global economy? >> absolutely. >> is there a risk some of the dire predictions about brexit could become of the reaction to the brexit to could become a self-fulfilling prophecy and economy are some british politicians have promised or perhaps i should say threatened tax increases or budget cuts if the uk citizens vote to leave. some leaders have threatened punitive and retaliatory action if the uk votes to leave. our own president has said the united kingdom would have to quote go to the back of the queue for a new trade agreement. to the statements have the potential to great a self-fulfilling prophecy that would lead to increased
uncertainty, whatever the outcome on thursday? >> i don't want to comment on what participants in this debate have said or the advice they have given the british people. there is an active debate. it's not inappropriate within the decision of this sort for many parties to wait in about the consequences. as i said, i'm not trying to offer advice myself to the uk residents about going to the polls. >> thank you. nor am i. one final point. your counterpart at the ecb has said that bcb is quote but for all contingencies following the uk's eu referendum, and quote. can you say the same thing about the federal reserve, you are ready for all contingencies following the vote on thursday? >> in the sense that we will closely monitor what the economic consequences would be and are prepared to act in light of that assessment.
>> and should uk vote to leave the eu, the training government and the federal reserve in particular will handle that contingency in the spirit of magnanimity, generosity and friendship among nations? >> it would certainly be by inclination to do so. >> thank you for that. >> thank you. madam chair, i want to shift the conversation a little bit to custody banks which are very important. i think banks like state street, new york melanne and i'm sure others. it's been reported that custody banks have turned away deposits or are charging fees on deposits because of the enhanced supplementary leverage ratio your you receive public comment stating that the rule to limit the ability of custody banks to accept deposits, particularly during periods of stress.
is the fed currently examining how this rule is impacting custody banks the ability to accept deposits? could this rule increase systemic risk during times of stress. and just for the audience that probably know, what is a custody bank as opposed to an ordinary retail bank? >> a custody bank is one that handles transactions for other customers. >> very important. important to the banking system, is it not? >> yes, they are. >> we certainly are a winner that they are concerned about the supplementary leverage ratio impacting their profitability
the balance sheet assets, for safe assets in banks large quantities of safe assets. it can be a burden and it is something that we will monitor but this is the way leverage ratios have always been imposed against all of the assets based on the overall size of the organization. >> thank you mdm. chair, thank you for your participation. i know it's been long, but thank you for appearing before the committee. the committee is adjourned.