from bloomberg world headquarters in new york, good morning, i'm betty liu and here is what we're watching. we are half an hour into the ring session and stocks are sharply lower joining those global selloff have seen the last 24 hours. the nasdaq is nearing a better market as investors piled into gold and government bonds as a safe haven. and the janet yellen room in front of the senate banking committee. she faces a two chins from after as, one day sometimes heated hearing you saw in the house yesterday. claritavisor, richard will give us his insights on her comments and whether this selloff will sink us into recession as we just mentioned, fed chair janet yellen will begin her

testimony before the senate banking committee. there is senator richard shelby, the committeef and we have his opening remarks and we will take you live to capitol hill and she starts. meantime, let's go to the markets desk and matt miller. it's very close to a bear market on the nasdaq. not: that's true but we're seeing the kind of selloff we saw in europe in u.s. markets. a special chart for you this is possibly the greatest chart i have ever seen. markets.ok at we are seeing drops of about 1% on the s&p 500 and a little more on the dow jones. 6/10sdaq is down about of 1% after it closed in the green yesterday. in europe, losses of 4% on the

major indexes so this is not as bad as it was over there. the banks with a problem in europe and they are the big weight on the index here as well. if you look at the s&p 500 banks, they are falling. they are all down. oil stocks are down as well. that is waiting on the index. let me off the chart. it is absolutely fascinating. this is an estimate of fed bias that michael mcdonald has together. rules combined the taylor and the bloomberg financial conditions index and made changes for certain events. are -- thesenes gold lines are fed hikes or decreases in the federal funds target rate. the red shading is recession's

shading and the sales is quantitative easing. we dipped way down during the recession but we have been steadily climbing our way back up. we are about to be back up to where the fed would have a neutral bias. we are not quite there yet and the fed raised rates last year but this is the concern that is dragging on markets. the fed still wants to raise rates this year but markets are fighting against that. this is a tantrum against that and that's why you see when she talks and does not say i will not raise rates in march, she does not say that. the market throws a hissy fit. it's a challenge for her because then people are flying into treasuries and other safe havens. matt: absolutely, gold is back up around $1200 per ounce. intraday above that mark one time this week but have not been there in a year.

37.70 eight troy ounce and people are also hiding in the yen. it is gaining strength with all the measures the bank of japan is pulling out and it's not getting what it's paying for. the yen came down to $1.11 today. around $1.12. if you look at the chart, this is the strongest month for the yen versus the dollar since the 1980's. you are seeing that across the board in sovereign debt and in the rich countries like the u.s. .he u.k. is at a record low butpigs had rising yields everyone else is collapsing. betty: thank you so much. let's also check in on the

bloomberg first word news. morning, democrat bernie sanders and hillary clinton are taking their battle to wisconsin tonight. they will have their first debate since the bernie sanders win in new hampshire. he says his campaign is a record-breaking day of fundraising, taking in more than $7 million. hillary clinton is picking up a key endorsement. the congressional black caucus is announcing their support today. nate carroll is sending warships to the aegean refugee to deal with the refugees. have died400 people trying to sell from turkey to greece. nato wants to crack down on smugglers. when international groups as refugees are entering europe from the sea at a rate of 2003 day. the head of the international monetary putting pressure on ukraine. christine lagarde says the $18 billion bailout of the country makes sense unless -- until they

overhaul the economy. she is set to win a second term as the imf managing director after no candidates emerged to challenge her. the u.s. and russia are disagreeing over a truce in syria. the u.s. was the cease-fire to begin immediately and russia begin -- proposes a begins march 1. underway in are iran to mark the islamic revolution. they seized power 37 years ago today. global news 24 hours a day powered by eric to 400 journalists in our 150 news bureaus around the world. let's dive deeper because

stocks in europe are going to multiyear lows and mark barton is in london with more on the selloff we saw in europe that carried over from asia. unrelenting, we are down for the eighth day and yesterday's respite have a gain of 1.9%. we have given back the losses and we have taken more. we fell as low as 4% earlier. there are so many statistics i could bombard you with. at least five of the worst-performing stock markets in the world are european. the stoxx 600 and it's at its lowest level since 2013. the footsie is the lowest since july oh. . -- july 12. it is indiscriminate this selloff today.

every single industry group is declining. matt was talking about the banks. 5% gain did not last , down by another 4% today and the lowest close since 2012. oil is down and basic resources are down and check out credit suisse. , theare at a record low lowest since 1989. there is doubt about its structuring plan. it is shrinking its investment bank. it is getting hammered. as matt mentioned earlier, sweden is making headlines and going into negative territory with its rates. mark: it was one of the early ones to go into the negative interest rate area. it was denmark, spit in, and switzerland. -.5ut as interest rates to

%. say thef 18 economists cut was predicted. central banks are trying to boost inflation and ensure their currencies are strong. yes, the euro is rising against the swedish net today but the dollar is falling against this an swedish stocks are falling which goes back to the theme we have been talking about for weeks-central banks are finding it really difficult to get some sort of traction on the measures they have announced . it has pressed the repeated but impaired the swedish central bank has cut rates to negative but stocks are declining and the dollar is falling against the swedish krona.

these are incredible times. repeat, cut, repeat. thank you. let's put the spotlight back on capitol hill where janet yellen is appearing again before lawmakers. she is kicking off at the senate panel led by richard shelby. yesterday, she made it clear that the continued market turmoil could throw the fed off from the multiple rate hikes that policymakers are forecasting in 2016. apparently, she did not say enough given this market selloff that ensued. let's put this into perspective with richard clarida. we were saying how janet yellen had a delicate balancing act. did she bail given the reaction you have seen? >> i think she did as well as she could.

to preserve her options. she tried very hard not to forestall and take off the table rate hikes. i don't think they will hike in march and she doesn't but she is maintaining her option allocate. she is paying a price for that. we are in a world of what i called the three d's - divergence and policy dialogue and the dollar it she has to navigate all that across all three of those. concerns about china and japan and the dollar and oil are waiting on the outlook. she is confronting that. data, speaking about the when you look at the economic numbers in the u.s., it seems the jobs numbers stand out as a break spot -- as a bright spot but if you look at the other data, one economic surprise index said we pay much have a fallen short of almost every

2013 single to data since except for jobs. is the fed behind on recognizing that? --my preferred in backs index is the bloomberg surprise index. it shows that data flow has been surprising on the downside since the fall in historical context, the underlying trend in the u.s. is around 2% growth. it is not exciting but it's not a recession and i don't think we overreaction to market sentiment when we look at the data because it has consistent -- it has been consistently have been. betty: are the bond markets overreacting? >> u.s. rates up their low but japan and you have tenure yields in the negative, they looked you see in the u.s. it's what's happening in beijing and around the world.

relativelyooked juicy. where will you get high yields? one dollar 60 at and we call at high but in germany and japan it's negative. betty: i think the bond markets are worried about what's going on in the financial system. the kansas city fed has the financial stress index. they have a dozen or so indicators and the it in this one benchmark or index. what we show is that the financial stress index by the kansas city fed shows we are just now above the zero mark. we're above our long-term average for the first time in almost four years. this indicates there really is perhaps some financial stress that we did not see before. >> this is what we are trying to do. some stress and a lot

of it is localized in the energy sector. you try to strip out what the u.s. credit market looks like. there is no perfect way to do that. but it appears that the markets are painting with too broad a brush and not -- and nonenergy sectors are getting hit. sometimes the market overshoots. i think it's a big part of that. go to break, we what you think a janet yellen has to do today? testimonies,y typically the news is made on day one. i would be surprised if she makes much news today. betty: she got to be aware of what has happened overnight. >> but it would be tricky for her to walk back the tone of her testimony yesterday which is watchful waiting. take greatect her to heights off the table. betty: stay with me and we will have much more than we are monitoring fed chair janet yellen who will take questions

from the senate banking committee in a few moments. we will bring that to you live as soon as the question and answer part of this hearing begins. you can also watch the hearing live on bloomberg using the function live. we will be back. ♪

betty: good morning and welcome back to bloomberg markets. that is fed chair janet yellen i was reading from her for her testimony in front of the senate banking committee. finger question and answer part of the session to you.

it's time for the bloomberg business flash. morgan stanley will pay $.2 in a joint -- federal investigation into its handling of mortgage-backed securities. this includes $550 million in cash and benefits for new york on top of $6 billion in payments and the disclosed in a regulatory filing. canceled a global pay for less than two weeks after it was imposed. bank listen toe the feedback and decided to find another way to save money. they're hiring freeze remains in place. pepsico is forecasting earnings will rise about 2% this year. the stronger u.s. dollar will continue to have an impact and the company says the impact of exchange rates will reduce profit by for percent. that is your bloomberg business flash.

for a look at tech movers, abigail doolittle has the latest live from the nasdaq. gail: after dropping 40% year to date, tesla shares are soaring today after the company's guidance in 2016 is better than was expected. 78%company is projecting year-over-year growth popping a unit range that was above that of wall street. come investorsup and analysts are focused on that number as opposed to the $.87 loss they posted for the fourth quarter versus the 10 sense profit the street was expecting. there remains a high bearish short interest of about 30%. some investors continue to think either musk will fail to deliver. another big earnings story is cisco shares up nicely after the company's fiscal second-quarter earnings and revenue both beat. the company guided strong for the third quarter suggesting it 4%.row by

investors like this. it blocks the bearish trend of other big tech names. the company mentioned that in the month of january, they saw some slowing and orders but the ceo said i don't think there is any panic here. let's hope he is right. betty: thank you so much. it is round two for fed chair janet yellen on the hill so with me as richard clarida from pimco. let's talk about the commodities space. oil is still hovering at $28 per barrel. as a goes lower, will it have as much as an -- of an impact of the other markets as we have seen? it is a wildcard because oil prices should be a net positive for the global economy. we have not seen that's about what would have the anxiety. the benefits have not yet been realized. --hink oil fighting a bottom

there is a bottom. stan fisher said zero is the bottom. betty: you cannot go negative and oil. >> that's right, but when we find a bottom in oil and i think we will be pretty close, i think that will. be a positive we are starting to get supply cutbacks. the benefits of oil should begin to be felt and we have not seen them yet. the positive story is yet to play out. betty: is oil that really that transitory with inflation? >> arithmetically, yes. at 30 prices stop degrees, the direct inflationary effect should out and that's saidjanet yellen yesterday. more broadly, when you have the dislocation in oil, you have

what the fed caused second-round effects. andpeople who supply labor input to the oil sector take a pay cut and if they do, the people they impact. arithmetically, it should only go through one level. in practice, you have to be federned betty: should the chair be paying more attention to oil? said theyoadly, she are doing watchful waiting on inflation. they have a forecast that says it will return to 2% but less wit on the forecast and putting more weight -- her cpi is around 2% right now. the deflation meme i think is gone too far. betty: why do you think so? >> because globally in some countries there are challenges with deflation. japan went to negative rates.

in other pockets of the world, there are deflation concerns. the ecb has made references to that. in the u.s., it's not the deflation rate, it's about inflation. betty: and yet the talk of negative rates in the u.s. is starting to pick up more steam even in the u.s.. janet was asked about that. >> in the spirit up in planning, it is something that, in light of europe and experience, we will look at, we should look at, not because we think there is any reason to use it but to know what could potentially be available. betty: as you said, she wants option a la tape. -- options. should they consider this option? take -- there are

complexities involving the money market and there was an issue whether the fed has the legal authority to charge interest. i don't think the fed is close to that. ago, in its stress test exercise her big banks, one of the scenarios they asked the banks to look at was a negative rate scenario. people were wondering what would that was all about. i don't think it's imminent but given thatyour kit, they have done it in europe, they're considering it in a severe scenario . betty: does a negative rate policy work? >> we have very little historical experience and it's too soon to tell. the negative rate experience in japan has backfired because they cut rates to negative and the yen is stronger and stocks are weaker. it's hard to sort out and perhaps markets are hurt by lower expectation for japanese growth. the experience overseas is not so extreme.

we have little historical experience and we really don't know. getting back to her testimony and the reaction we have seen in the markets, i know the house of view is that possibly these bond gains cursing could learn to losses. the view is that the fed is going to raise rates. what could change that scenario? >> our baseline view was a couple of more hikes this year. in norket is pricing hikes this year presently and only to large over the next four years. rates, comes to interest you have to be playing to figure conviction on both sides we think the markets have overshot. scenarioa left tail with a low probability event of a recession. the fed would then have to respond. the baseline case is that the fed will hike one or two times

more this year. betty: thank you so much. >> you bet. janet yellen will take questions coming up in a few moments. she is still going to pair remarks. this is a fast-moving equity market. we are down 214 points on the dow. let's go to matt miller with a check on the markets. matt: i want to do something different. everyone is highlighting the drops. this is where people are putting money. gold, interesting is above that of hundred dollar mark and we have not seen it there in quite some time. it was there briefly monday but has not closed there in a year. gold is up 4790. and lookingiding for the perceived safety of

gold. they are also looking for the perceived safety of government. ist the 10 year yield getting pushed down. it was first down earlier and now it's 1.62. came down.n the uk what incredible strength for the yen this month can it is now trading at one dollar cents. the bank of japan cannot by any yen weakness. there is concern about global equities. the dow jones industrial average was down more and it's. you see the nasdaq and the s&p but keep in mind, compared to the percent drop in compared to three to 5%, it's not nearly as bad as the carnage in europe.

banks have dragged them down and they were dragging is down as well. you can see where the damage is being done. financials, health care, materials are the biggest losers. index groups are down but you see slavers in technology. we were talking about tesla gains and cisco gains and expedia. and he gains you see today will likely come from the nasdaq. betty: thank you. we are awaiting fed chair janet yellen to take questions from the senate banking committee. she is speaking her prepared remarks right now. they are the same remark she prepared for the house financial services committee yesterday. wait, meantime, while we i want to bring in from the hill, brendan greeley was there

all day yesterday monitoring and analyzing her testimony in front of the financial services committee. give me the biggest take away. review again the biggest takeaways from yesterday at what might we hear today that's new? brendan: for almost all of us, what got her attention was janet s admission that what's going on in the market had an effect on the real economy. she talked about lower equity effect.aving an she talked about tighter credit conditions particularly for people with lower credit scores. that has an effect on borrowing and those are the most likely to spend and she talked about weak exports with a strong dollar and it adds up to an actual number. up private domestic final demand so she is looking at demand in the u.s. without exports. this is not affected by the strong dollar and that growth declined a little bit.

it did not go as much in the last quarter. what she is saying is that of markets look bad, it's not just that somebody in greenwich have a bad quarter, it has an effect on the real economy. when the markets here that, it will spook them. betty: she has had a tough time with lawmakers on the financial services committee yesterday. a harder time today in front of the senate banking committee? was a lot of back-and-forth about interest paid on excess reserves yesterday. has a huge effect on the way the fed conducts its business. what we are likely to hear more of today with the senate is from the democrat from ohio, sharon have and david vitor strange romance about community banks. they will likely ask her a lot about easing conditions in dodd

frank for community banks which has said they are having trouble lending because the regulatory burden. expected or more about that today. betty: we are playing her comments about negative rates and the possibility in the u.s. she set of something we will look at. what kind of reaction did that get? trying toe are all dig into this to figure out whether or not it's legally possible. it's not clear that the federal reserve can charge banks interest on the excess reserves. what got her attention is she said she looking into it but it's not completely clear that it is legal. betty: thank you so much. it looks like the fed chair is now taking questions that she has finished her remarks. first, inflation expectations play a key role in determining inflation.

the supply shocks such as movements in the price of oil or commodities or in part prices and play an important role third, the degree of slack in the labor market or the degree of more generally pressure on resources in the economy as a whole exerts an influence on inflation as well. underlines the kind of statement that i have made ,hat if inflation remains inflation expectations remain well anchored and the transitory influence of energy prices and ae dollar fade over time, in tightening labor market with higher resource utilization, i expect inflation to move back up to 2%. it is consistent with the phillips curve theory.

in essence, yes, i want to make clear that all of those elements play a role. there can be other factors and idiosyncratic factors or other factors not captured by that model that make it -- that make a difference. that model, in part, underlies an expectation that inflation will return to 2% but in our statement in december and january, the committee indicated that we will continue to assess actual developments with theytion and see whether are in alignment with our expectations because this is not a perfect theory. that theyou say today precipitous decline in the price plus the rise of feddollar has surprised the

to some extent? could you have predicted all of this? been annk we have markets have been quite surprised by movements in oil prices. i think in part they reflect supply influences but demand may also play a role. the stronger dollar is partly something that we anticipated because the u.s. economy has been performing more strongly than many foreign economies. in the a divergence stance of monetary policy that influences capital flows and the dollar. the strength of the dollar and the extent to which it has moved up since mid-2014 is not something we anticipated. yes, we have been surprised in

part by the developments and they have played a significant role in holding down inflation. you believe this economy, even though it's a number of years old as you would say, has peaked or is near peaking or will start declining and put us into a recession of some type? is that something you're watching? >> we're watching developments very carefully. someld say there is always chance of a recession in any year. the evidence suggests that expansions don't die of old age. testimony,ned in my we are looking very carefully at global financial market and economic developments that create risk to the economy.

we are evaluating them and recognizing that these factors may well influence the balance of risks over the trajectory of the economy. thereby, it might affect the appropriate stance of monetary policy. at this point, i think it is premature to make a judgment. we will meet in march in our committee will carefully deliberate about what impact these developed have had. today i think it's premature to render a judgment on that. >> are you saying that the fed will be careful of looking at every aspect of the economy and the international economy before it raises the federal fund rates? >> yes, we certainly will. we will evaluate the outlook taking these developments and cap account. as i said,ount

monetary policy is not on a preset course. we want to set the path of policy that will achieve the objectives that congress has assigned to us and that certainly entails making sure the expansion and doing what we can to make sure the expansion continues. could you take a couple of minutes and share with us your strength of our ?anking system today we hope we won't go into recession but we have cycles and we know that. what is the condition of her banking system? do you feel comfortable about our banking system? is it something you are working every day on? >> i think the steps we have seven yearshe last

have had very substantial thoughts in the form of a much more resilient and stronger, better capitalized, more liquid banking system. we have not only raised capital and liquidity standards including especially ramping up those for the most systemic firms. stress test used whether we to see think those firms, and we think they can, continue to support the credit needs of our economy even in the scenario of very significant stress. i think we do have a strong banking system and we have seen market improvement. >> thank you. in said in your testimony

regards to monetary policy that you are not on a preset course and you later said if the economy were to disappoint, you suggest they would be -- you would be less likely to raise interest rates. i have a couple of questions about wages. the dual mandate is important and i appreciate your emphasis on it in restraining inflation. important andly too many of our constituents, the importance of job growth. i also appreciate the importance to you of wage growth as you deliberate on these questions of raising interest rates. betterob growth has been than some might have expected with 71 consecutive months of there are good signs regionally but not enough. show howased earlier

much hourly wages increased in 2015. three questions -- our other wage growth indicator showing the same increases? are wage increases occurring across race and gender and across economic sectors or are certain groups doing better than others? finally, can the economy reach full employment without labor force participation increases for women and minorities and have widespread wage growth? if you could pull those together and answer them together -- >> you asked about other wage indicators. havege hourly earnings picked up but it is a series that is volatile. while we see evidence of faster wage growth there, i would still refer to that evidence as tentative. in compensation per hour, we basesee a slightly higher

over the last 12 months in its growth but this is a very volatile series. and him's of the employment cost index, compensation growth has really not shown any sustained pickup. that is significant. at best, i would say the evidence of a cup is tentative. thatcontinue to envision if the labor market continues to improve as we certainly hope it will, that there is scope and we will likely see some for the cup and wage growth. particular groups in the economy, i cannot give you developmentsce on

-- i think you asked for race and gender -- >> and sector. >> i don't have that data at my fingertips. hadnow in the u.s., we have a long-standing trend toward , rising wagelity inequality in this country and that more educated people have seen faster wage growth than those in the middle and at the bottom. i believe that trend continues. a lot of jobs during the downturn, middle income jobs, were lost. although jobs across the occupational distribution have been created, job creation is skewed more heavily toward sectors that have lower pay.

i think there are deeper structural reasons that these trends continue. they predate the downturn in the economy. the downturn probably accelerated those trends that perhaps relate to globalization and technological change that are demanding increased skill. have one comment -- i think we cannot be satisfied we have full employment without full employment across demographic lines meeting women and minorities especially. we don't really have full employment until it's full for them also. i know you recognize that. buton't have a lot of time we have discussed the process of living wills and you felt the fed and fdic have provided companies and clear feedback on the deficiencies of the

submissions and you would be willing to make formal determinations that some plans are not credible. wendy you anticipate inviting feedback on last year's submissions? when do you provide feedback on those submissions and are you committed to making formal determinations about insufficient plans and will you differentiate between and among firms when you provide feedback or make determinations? actively engaged in evaluating these plans, the board has met regularly since august. i believe we have had seven board meetings to discuss these plans. we have worked closely with the fdic. we have not made final determinations. it is premature for me to give you a definite time. we will make these determinations in the not-too-distant future.

we are very actively engaged and yes, we are still committed as i to finding that plans that don't meet the specifications we outlined, we are prepared to find them deficient and specify what those deficiencies are. does an aggressive living will process answer the question of too big to fail? >> it certainly helps. we have also put in place requirements for adequate plac rules for adequate loss observance a. requiring thaty firms have workable plans for how they would be resolved under bankruptcy. sure that there is a way they could be resolvable under bankruptcy and

that the resources are there so that the taxpayer would not be at risk. authority is a backup , title ii, if it's necessary, it would be an additional we can use. i think it's premature to say that we have solvedtoo big to fail but we have made towardtial strides dealing with it and addressing it. >> thank you. i appreciate your comments at our last hearing when we discussed the $50 billion trigger paying you to determine when a bank is systemically your openness to increasing the threshold and focusing on the flexibility we need. while congress continues to make progress on this effort and hopefully we will make some

progress soon, you have previously noted that the federal reserve has the authority and discretion on its own to tailor the application of these rules as they apply to systemically important those coveredks, by section 165 of dodd frank. examplesive a specific of the kind of tailoring that could be in the works as the federal reserve works on this and will there be stress test planning? engaged inctively reviewing our stress test, testing in capital planning, framework for the bank holding companies above $50 billion. and we are considering ways in which we can make that less burdensome for the bank holding companies that are close to the $50 billion asset line. along with that, we might make it somewhat stricter for some of

g-sivs. we are considering that and that would be tailoring it appropriately at in -- at both ends of the spectrum. there in close attention to cost and benefits of particular changes and how they affect those institutions. we have not made final decisions but that is certainly something on the drawing board where i hope we can make progress. >> do you believe we will see any of that tailoring announced soon or applied soon? >> certainly this year but i think if we were to make changes, they would not take next yearil the cycle of stress testing. liquidity of the issues that occurred on october 15, 2014 in the treasury market, there has been a lot of effort

by the federal reserve and others to better understand the factors that impact the liquidity of the treasury market stressedy during market conditions. several factors including new regulations may have reduced market making capacity in the market and during stressed market conditions, liquidity may be more fun to disappear when it is most needed. seemed to do on october 15. are you concerned that liquidity in the bond market may be less available in stressed market conditions and we need to better understand all the factors including the impact of regulations on this? >> yes, i agree with what you said. the normal metrics that we typically monitor on liquidity conditions in these markets have not changed that much. and someption experiences that you cited suggest that under stressed

conditions, liquidity may disappear once most needed. -- when it is most needed. we look carefully at that and all the factors that may be involved. regulation is on the list but there are other things as well, the prevalence of high-frequency trading has increased, broker-dealers have reconsidered in the aftermath of the crisis the appropriate models they want to use to run their businesses. there have been changes in disclosure that affect corporate bond markets and we want to try to disentangle the impact of all of those different influences. >> thank you, one last question -- there have been several hearings on financial stability oversight council but focused on improving transparency and communication. the april subcommittee, the

witnesses agreed the financial stability oversight council needed to provide actionable to designate the systemically important financial institutions and how they can de-risk and shed their designation label. to as aneen referred offramp. you agree that further progress in this area is appropriate for it when our financial system be safe companies new with they could do to address the risks and had an incentive to become less systemically risky? >> i would certainly agree with you. it would be good if they became less systemically risky. designation is not intended to be permanent. oc reviews these designations each year and it is important for firms to understand the kind of steps they could take to shut their designation and become less risky.

needs to be very careful not to micromanage these firms and to try to tell them exactly what their business models ought to be. those firms know exactly why they were designated. they have received detailed letters and analysis explaining what the factors were about their businesses that would give in the systemic risk event of their failure. they do understand why they have been designated and the things they would need to address. designation is not intended to be imminent. we do have regular reviews. i think those firms do have an understanding of the kinds of things they need to be prepared to do. i just don't think it's

to sayiate for the fsoc what you should do the following business plans. there are many different ways in which a firm might decide to address those issues. >> thank you, my time has expired. senator tester. >> thank you for being here today. i want to follow up because there is new information that you gave that i was not aware of. correct me if i'm wrong, you just said that the companies understand why they are designated and therefore they understand what they have to do designated? that's new information for me to >> in the sense they happen given detailed explanations of what aspects of their business

gives rise to the systemic risk has caused them to be designated. asis that information given the process goes on or after the process of designation is done? >> there is a three stage process. there is a great deal of duringtion with fsoc the process of i believe before they are designated, there is a sufficient amount of interaction that they will understand. they are led to be designated and they are given a detailed -- >> what they have the opportunity to make changes as the process goes on so they can change the direction? if that information is being given out early enough so the company can say we will make some changes?

do you believe they have time to do that for the designation is made? they certainly have lots of opportunities to interact withfsoc and explain your business model and the directions going. >> thank you. i want to talk about the housing sector very briefly. could you give us your perspective on what the fed is seeing in the housing sector right now? what would a hiccup in that sector mean for the american taxpayer? we are seeing a recovery, i would say, in housing. it has gone on now for a number of years but it is very, very gradual. house prices are recovering. bit have increased quite a and i think that is helping the financial situation of many

households. the level of new construction, residential investment, remains quite low relative to underlying demographic trends. that there is quite a significant way forward for housing to go before we can say it's at levels consistent with demographic trends. i think it will continue to improve. it is a support to the economy. >> what would a hiccup in a housing industry mean for the taxpayer right now? what would a housing slowdown or a decrease in their growth mean to the american taxpayer like with freddie mae -- like fannie mae and freddie mac. >> oh, i'm sorry,.

>> give me a sense of what the fed is doing to ensure that we are protecting consumers while at the same time differentiating between community banks in the big banks? >> when you say we are protecting consumers -- >> while at the same time differentiating the regulations between the community banks in the big guys. >> consumer protection is an important part of our supervision. cfpd examines the larger banks in terms of their consumer compliance. is now withbility the smaller banks and community banks where we have consumer protection enforcement.

we try to tailor our examinations, our consumer exams of the community banks so that they are not burdensome and they are focused on real risk. >> do you feel you have been successful in that tailoring? >> we are very focused on regulatory burden on community banks. we are trying to do both in the safety and soundness side and on the consumer compliance side, everything we can to reduce burden while still making sure that banks abide by consumer protection. quickly, we are seeing consolidation in banks in montana the rapidly. is that true throughout the country and are you concerned? >> there has been consolidation. we are concerned about the burdens on community banks and trying to relieve that.

in a low interest rate environment, net margins are squeezed these banks and that is a factor. >> thank you. .> thank you for being here we went to the confirmation hearings and i noted your the head theut dove to fed and you honored the statement you made was that if the day -- the data showed that unit to raise interest rates, you would do so. you are talking about 2% inflation and full employment. at there any other rules fat other than 2% inflation and full employment that guide where you are going? i'd would not like a long answer to that. abouthas been criticism

whether there was really a rule-based system that people like thed so it's not fed is the wizard of oz and nobody knows what will happen. the markets have followed 53 points which is unusual in the last couple of days after testimony which i thought was good yesterday. other rule-based system that those of us who care about these things could count on relative to what the fed's actions are? wouldllen: if i might, i like to distinguish between a systematic approach to monetary policy, which i believe we have thatn place and the system is in line with what central banks do and a mechanical, mathematical, rule-based approach which i don't support and no central bank that i am aware of follows.