guys. >> don't miss tomorrow. you don't want to miss tomorrow. we'll deliver the -- >> some people seek alpha. we -- some people seek it, well, we deliver it. the guys on later in the day will be on "squawk box" and throughout the day, the biggest names in the world in finance and government. make sure you join us tomorrow, and "squawk on the street" is next. good tuesday morning. welcome to "squawk on the street, i'm carl quintanilla with david faber and jim cramer. three dow components out, j and j, goldman sachs, futures print tonight, and big they for the economy as janet yellen testifies on the hill. watch the 10-year, and q&a begins in an hour.

our road map begins with jp and goldman reporting earnings beating the top and bottom lines. stogs up this morning, but there's warnings beneath the numbers. >> it is official, reynolds buys lorillard. the industry copes with declining demand. >> yellen on the hill as investors watch the fed chair's comments on interest rates and improving american labor market. two components in the banking sector, 401 a share driven by higher revenue, and investing and lending business, and jpmorgan with q2 profits at 146, and ceo jamie dimon says it was encouraging at the end of the quarter adding he believes consumers and businesses are better and the labor market is showing improve. and, in fact, addressing the media on call, he said, you look

too depressed sometimes. the economy is actually improving at a slow, but steady pace. >> i liked what he said. it was funny how he's right, by the way. there's a quote in the call that said towards the end of the second quarter, encouraging signs across the businesses including uptick in wholesale utilizati utilization, improvements in the market, but he quickly added, i don't know if it lasts. all the media heard was he doesn't know if there was good times to last. he was -- i agree with you. remember, every single line was better than expected. the two that stood up to me, commercial real estate up 14%. that's extraordinary. credit cards up 12 %. now, you know, look, you want to do anymothe interest game margiu can't look at the one-time hit. every single division up. nothing to dislike. >> average loan balance in commercial loans up 7. although mortgage originations,

obviously, down 66% year on year. >> right. >> he talked about his health and degree to which he'll remain involved as treatment begins. listen to that. >> i feel great. i think i have some of the best doctors in the world. i'll be receiving the best treatment. i'm fortunate this is curable. i do plan to work. i plan to read. i will be accessible. >> obviously, one. questions investors had. >> sure. well, you know, wish him the best of luck. sounds like a very positive situation, those of us who know people who have or have had cancer, obviously, what you want to is to hear the person will not be defeated by the chemo and radiation, a tough combination. some only have one of those. we wish him the best of luck. there was much i liked in the call, lowered expenses, you know, 58 billion against 59 bei billion. what happened is i think jamie heard -- last quarter of not a

great quarter, lowered expectations, contrast that against wells, a great quarter, but everyone in the world said it would be a great quarter so when you had that -- citi yesterday, go back to that, it was a good quarter. i said yesterday they ought to split up the pieces, own some like -- it's been not that great for the people who bought them, but i think he delivered, focused issue and corvette is focused, dimon continuing to do good work, and we can talk about lloyd's focus no longer just fixed income, but the line was better. >> better than expected, obviously, still down. >> not good, but equity market's great. >> 10% lower than the second quarter in 2013. lower revenues 234 currencies and commodities, net revenues and net products slightly lower. >> right. >> but better than anticipated. we had a lot of foreshadowing this was coming from the banks most active in the markets.

>> underwriting -- >> slowed somewhat dramatically, a number of months ago, but during this quarter. >> i was surprised mergers and acquisitions were not highlighted more. you know, mergers and acquisitions, listen, it's important, but it's nothing compared to the revenues in trading in fixed income currency. >> investment banking up 15 for goldman. some say that's characterized as being on a roll. >> look at the tangible book, must be an insult to people at goldman. that's the cash. you turn the lights out. that's what the company's worth. the idea they have a discount to others in terms of their book -- i remember when i worked at go aheadm -- goldman 40,000 years ago, it was a private company, but the idea they trade at book value is an insult. >> the m&a fees are not that large, but everything associated

in the big m&a markets, the activity with it, placing the debt, all those things, show up in other places where a will the of the big money is made. >> good point. >> shows itself throughout the business, not just the advisory fee itself. we're in an incredibly robust environment as we know. >> speaking of which, let's talk tobacco. shall we do that? >> if we're talking about specialty chemical tobacco, i'll talk about it. >> we may a bit later because we have a large deal there, but the deal we waited for is official, reynolds american confirms they agreed to acquire lorillard. they get 66 .68 a share, 25% stock roughly as part of the deal, a lot of investitures. reynolds sells brands like cool, salem and winston, and the blue

e-cig business to imperial. >> blue e-cig? that's the business i want. >> they are going with the reynolds product. >> but blue is the signature you asked for. >> they are e-cig. making it attractive to imperial buying these assets, according to its statement. in the u.k., they make all these statements, class 1 shareholder statement, saying nine times, reynolds bought it at 13 times. obviously, great potential increation from the deal. that's why, right? the cost cutting comes quickly also because as you divest assets to imperial, the costs associate with them are gone. it's not just a run down, but drawing a line there, but there had been anticipation it might be a higher price. we reported last week, again, not able to come up with a price that the market had it effectively correct where it was trading lorillard, but correct on who you talk to.

stocks down today. >> yeah. >> the key question will remain antitrust. >> right. >> yes. this large package of dive divestitures to imperial is to create a viable third player. because now you have phillip morris, and reynoldss. the market shares will not be different anymore if i look at them. phillip morris is 57%, and reynolds will be around 40. menthol a huge player as we know, and that will be the question. could take as much as a year. is it enough? they are keeple camel. there was thought if you want antitrust here, give up camel. in conversations i had, they are too important a business, too much a large part of the equity at reynolds do say good-bye to camel. that was not a part of it. >> this was the most known deal

ever ever up to yesterday saying the deal will not come until tomorrow. we were waiting for the release and people got excited. >> working this for a year and a half on and off on and off. they set the price that bats is going to buy more of of reynolds to stay at h42% of ownership, ad july 3rd i reported they were on target for the announcement in two weeks which was correct. >> i really want to own reynolds and imperial. >> it's a dividend play. >> i want to own -- it's a nice play. >> the increase of cash flow when it occurs will be significant. >> right. >> that seems to be -- >> totally. >> where most people are foe kw focused, those looking at the fundamentals of the business combination, should it be allowed to go ahead --

>> there's also the had hadded - >> 56% chance it happens, there's a lot of risk there. >> the regulatory cloud on e-cigs. we have video of them smoking an e-cig on set and it's a question for some too. >> it it is. i tried e-cigs, and they are a great health benefit, but, obviously, that's controversial. i mean, i think there's more people trying to get off cancer sticks by smoking e-cigs than people who suddenly take up smoking because of e-cigs. my nephew goes through multiple packs of e-cigs -- my head writer, cliff mason, swears by them. >> what's his brand, do you know? >> i thought it was blue. the v? >> maybe that is -- >> i have to ask him, but, boy, he shares by them. >> 70% share apparently. >> that's what i wanted. that's why i'm depressed by that. >> a game changer in the cigarette space.

this is the reynolds product in development for many, many years and obviously on the market. that's where the focus will be. will it be allowed to proceed? >> right. >> well, bond traders might need a cigarette in an hour's time. janet yellen is going to the hill and what she says about interest rates, guidance in winding down the balance sheet, and earnings today, downgrades. >> holy cow, we have so much. >> gopro with an interesting report, and intel reports tonight. >> don't forget rock group no one knew until this morning, and now we all want. >> a lot more "squawk on the street" back in just a minute.

there's a look at senate banking committee. janet yelleyellen's q&a will ben 45 minutes. waiting for questions from senators like shelby, schumer, warren, corker. we'll see what that brings. >> warren, that's always fun. >> yeah, better johnson and johnson results, earning 1.66 a share drip by new products like treatment for hep c and raising earnings guidance for the year. bottom line, sales, jim, a lot of people were waiting for a new drug for hepatitis c.

>> 21% increase, that's incredible, a two cents raise, some say that's not enough. if you want to bet against, go ahead. knock yourself out. it's a mistake. this company's going higher. >> you tlov that gorsky. >> i like performance. you give me one fact against gorsky. >> let the trolling begin. >> i think he's very good. i remember the easy comparisons, but this time tylenol -- they did everything other than recall band-aids, right? >> that's true. >> i'm here right now because of gorsky. i would not be here, but this band-aid keeps my hand together. alex gorsky, another fact in his favor. >> they see streets at 590 and

stock since quarter one is up 8%. a lot of stocks are up 8%. >> look, it's a good drug stock and what happens people say you know that? that's not good enough, and three weeks from now, they report, and johnson had the fastest growth. amazing. only other one that touches it is, allergan. >> yeah, in the meantime, interesting rumors from microsoft, quote, until we really change culturely, no renewal happens. that was a message delivered last night at the brainstorm tech conference amid speculation the company is planning the biggest round of job cuts in five years. a bloomberg wire report saying layoffs could be announced early as this week. the number 6,000 tossed around. >> saying, listen, you have to own it, bump the price target, i believe pc -- an excellent pooes

in "usa today," pcs, talking not about just declining slower, but doing better because of the ultra light pc. michael dell made that statement that you can do a lot on your pc you can't do on the phone. >> it appears that was a good purchase made by mr. dell after going through a great deal and raising the bid when they said they would not. he and his partner, silver lake. talking the corporate sidement on the consumer side, no hope you'll see growth. >> no. but the idea is that -- you -- the usa piece talking tablets not doing as well as we think versus the pc. >> best quarter in two years. >> yeah. >> still. >> no, i guess i don't -- i mean, listen -- >> it will be good. >> looking forward to the dell ipo. will be higher multiple than it went out.

>> i agree. intel -- >> that's a joke. there's no plan for dell any time soon. >> you were being facetious. >> yes, sarcasm. >> i think that microsoft will do well precisely because of that story. >> buy intel ahead of tonight? >> it's a pretell when they announced -- analysts are slow to bid on this one. >> you're all in. >> i like -- there's two -- there's cranston, and -- >> one guy gets an emmy, the other guy, gets, to me, accolades for a good quarter. >> what about yahoo!? >> look, just you -- >> it's alibaba. >> would be terrific for growth. google, starting with an

outperform. it's -- they have a sea going theme here. unsailable mote insert -- well, water theme. ocean front water property on big data. you don't need flood insurance when it comes to their ocean front property. >> no. the alibaba ipo, may be the largest of all time here on the new york stock exchange looks like it's going to be -- could change -- first week of august. they are still aiming for that. >> wow, in the middle of the summer? >> that date on the 8th, a friday. >> that's the only day -- >> they don't care. they're too big to ignore. >> okay. >> we'll see. that's important, of course, and how much yahoo! sells, we want to know what that will be, can they figure out a tax efficient way to sell that stake, less than anticipated, and what do they do with the proceeds? those are big yahoo! questions. >> i think bit shop is the way to monitor alibaba.

teaches a great class at columbia, uniformly -- i went there to teach and said that's the favorite name. and that turns out to be a red hot chinese stock that's fantastic. >> cramer's mad dash as we head to opening bell this morning: futures, retail sales a miss, empire a beat, and t-40 minutes until yellen's q&a. more "squawk on the street in a of with all the opinions about stocks out there, how do you know which ones to follow? the equity summary score consolidates the ratings of up to 10 independent research providers into a single score that's weighted based on how accurate they've been in the past. i'm howard spielberg of fidelity investments.

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. oh, man. it is mad here. we're dash, and it's mad because we have a lot to talk about. what do you have on the mad dash? >> talk about two retail names, really names people love. gopro and stratuses. there's a recommendation of gopro. i love it's saying it's an ecosystem that youtube channels -- one of the best youtube channels they've got. 8.5 million motion captured devices. it's a tremendous growth story. the only thing gopro has not talk about right now is world cup soccer. they are not going to use it for that. >> not going to put it on the ball? >> or the soccer players' heads, but everything else is interesting. i think the story is an exciting one. >> it's an ecosystem story. >> that's the apple. people say it's the apple. they are having trouble keeping them in stock. i know that from my sources.

st straasys is important. a manufacturing leader, i liked stratays is it's a manufacture. look what dell said about pc, you can't do 3-d work on a hand held. 3-d, we constantly hear about it when you talk to industrial companies being a great way to make things. it's stratays that's the leader. >> is there a deal with home depot, if i recall? >> harvest technologies and a lot of deals, but i want to talk about is that when you go to the small businesses that do manufacturing and they want to do 3-d, this is it. whitman has not delivered a 3-d product for hp, i love that stock very much, but if they do it, that's the short story. i think this is viewed as a manufacturer. hp is not their pure.

it's a good story. >> we'll have more news to cover, of course, hp's chairman stepping down. more on that, a lot of stocks, a lot of earnings, a lot of deals all coming back on "squawk on the street." [ male announcer ] the mercedes-benz summer event is here. now get the unmistakable thrill... and the incredible rush... of the mercedes-benz you've always wanted. ♪ [ tires screech ] but you better get here fast... [ daughter ] yay, daddy's here! here you go, honey. thank you. [ male announcer ] ...because a good thing like this... phew! [ male announcer ] ...won't last forever. see your authorized dealer for an incredible offer on the exhilarating c250 sport sedan. but hurry, offers end july 31st. share your summer moments in your mercedes-benz with us.

welcome back to "squawk on the street" about a minute from the opening bell. at 11:15, ceo of reynolds-american, the big acquirer of lorillard and big divester -- is that a word? imperial tobacco deal, joining us at 11:15 to discuss that deal.

she, of course, rejoined as ceo not that long ago. she was, then wasn't, and then she came back in may. >> people hate those stocks because of what they do. they don't -- if you buy or sell them, no one knows, but that reynolds dividend and combination of gross margins going audiotape enthe fact the stock is down today, just buy it. >> it got ahead of itself, analysts predicted the deal, but prices far higher, and morgan said 68 was more or less right. >> right. >> and then there's question on the increase right now, i'm hearing. on the call, they said 800 million. could be close to 300 million. we'll ask about that. >> and antitrust. >> meantime, some interesting downgrades today, coors, citi cuts price target frto 98 from 7 107.

>> that's a commentary negative. reiterates, sells, saying losing market share. citi -- sounds like they are warming up to coach. i don't want to cut coach. >> the last couple days for sure. there's the opening bell and s&p top of the screen. the big board, infrastructure companies celebrating its 10th listing anniversary, and over at the nasdaq, staples kicking off the back-to-school shopping season that starts earlier than you think. >> man, that was not easy. >> keep your eye on coors, and twitter, upped to a neutral. some limited downside, they say, fundamentals improving, mkm has a proprietary survey in which they argue user trends in turn get -- improve on some of the fixes made. >> come on, i know i'm doing a dialogue on twitter right now, but, look, i think facebook has tremendous momentum, and here

the acquirer is cautious on user growth, but limited downside. i'll go for that, and going there is this kind of seal of approval. yeah, although, i'm sure he's going to be a very strong cfo, but he's still a cfo. >> in terms of allocation. >> in some companies, it's extraordinarily important, it depends, but is he the guy who gets users to engage more? >> yeah. >> he is? >> yes, he is. >> how for the numbers? >> i just feel he's got a lot of ideas. seen a lot of companies go public -- >> he's more than a cfo is what you argue in. >> i would say he's a cfo who is more of a coo. >> a duval type? >> yes. maybe they want him to go home like michael, listen, take your wife and mistress. that's a line for the movie. >> okay. got it. >> jp morgan best performer,

co-america -- >> i went over that, like, oh, come on, but they loved it. it came out at 6:30, reading the lines, well, will that help the group? well, you know, people like it. what's interesting about this group is it is so far behind the market and people are underweighted it in so they scramb scramble. under weighted in pc teches and banks. heard it here first. >> jpmorgan said the trading uptick in june did not carry into july, and the second half of the year is low volume, low activities. is that sandbagging? >> i think there's a lot of sandbagging in the previous quarter. you know, they -- joe would say, listen, jim, particular jpmorgan says you can't use the term sandbags because it implies -- they are being conservative. i think they are being conservative. >> goldman's annualized return

on equity 10 .9 makes people feel like old times. >> breaking into double digits. >> i remember when you said, david, it's going to be 6% that is the goal for the companies, so maybe there's -- you also -- i mean, who would have thought we'd have an incredible equity market. it is very buoyant. >> you can celebrate over double digits at the same time when they were credibly highly leveraged institutions. >> what did we celebrate last night when we went out? >> a lot of things. >> i was looking at the competition, changing prices dramatically. >> involved drinking a lot of tequila. >> miscalculation. look out for the brand of that store. >> new intraday record here at 17,104. what happens if yellen talks in 30 minutes and shows the slightest sign of hawkishness? >> you know what? i think people keep hoping -- look, there's a faction that just thinks she is just whistling past, and there's

another faction saying, look, she wants better job growth. we don't have that. this number is amazing. >> crude today is below a hundred. >> she said it's noisy. if you get rain in the central valley, you see prices down. usda came out with prices last night, ideal condition, best crops was 1994. i think she is willing to stay the court. i don't think she's going to change her view until more people are hired. i'm speaking with jack lew tomorrow at delivering alpha, and the administration said, listen, it's not working. we paid people hiring. yellen is part of that, not a tool of the administration, but i don't think it's going to vary. she has a script, and i don't think they can throw her off. >> shares of hewlett-packard, we told you, ralph whit worth, the

company's nonexecutive chairman there on an interim basis, but disappeared recently from discussion of mr. whitworth. he has left, resigned from the role due to health issues, also stepping down at least for now, temporarily, one hopes, from relational, the large activist fund which he founded and run. you mentioned many times. we wish mr. whitworth the best. >> he's a great investor. >> hp looking for a new chairman, looking to discuss that at the next board meeting. he took over from ray lane who stepped down in early 2013. >> wish him the best of luck. tremendous investor. he's a big thinker -- >> a brand of activism that is different -- says it all. he's the chairman of hewlett-packard, what activist can you be there? >> right. >> it goes to the brand of his

activist. you can't imagine carl icahn. >> activism is the wrong word. he's like steve miller, comes in and fixes the company. he does it from the outside and then comes in. he convinced the timcan family that timcan was wrong. can you imagine that? how persuasive? >> he was. >> the tobacco deal is not helping anybody who got in recently in the hopes it would be a large premium deal. it is not. let's not forget, obviously, reynolds and lorillard move on the prospects for a combination for a very long time, and the stock, itself, up over 20-plus percent, but reynolds down, and disappointment with the overall consideration that 68 -- call it 68.80, not worth that anymore, 25% of the consideration is reynolds's stock, remainder is

cash, divestitures are large, large enough to meet any potential antitrust opposition is the key question for this combination, which could take as much as a year to get through the regulatory process if it does. hit the open market. talking increasing as you consolidate in the industry creating, what they hope regulators view as a number three player with imperial with the divested brands. >> we have to caution it's a british company. does not -- there's a little adr, do not try that adr. it's a mistake. really trades in london. you can't buy it here. >> finally, this would be apple's highest close of the year, split adjusted, upped the target to 115, and jay carney might take the job open right now. >> whatever. it's been a real win, and i think it's an inexpensive stock.

i don't want to play the game of what they will earn because tim cook specifically said don't play the game because you won't be able to figure it out. the stock inexpensive, a great buyback and dividends, and what's not to like? what's not to like? >> s&p 1980, dow at a record high, and bob is on the floor. good morning. >> consumer staples lagging a little bit. i see some of the other names like energy lags, but banks are on the upside leading. now, remember, banks as pointed out, it's been under performing for the year, and the financials up 5% as i recall, 7% for the s&p 500, there's underperformance there, and it's not just that coamerica and goldman sachs had better earnings than expected, but they generally had positive commentary about the outlook for their businesses and particularly some of the commercial lines of businesses. look what jpmorgan said, this is dimon, strengthening pipelines in our commercial and business banking segments and some

improvements in market activities. said they were in increasing good financial shape, that's a prime audience, middle market companies, improvement in investment banking and management. the best comments from from coamerica. they are the opposite of wells fargo. wells is a community bank with auto lending and mortgages. coamerica is primarily a business bank, 70% is from commercial loans, lines of credit, loan syndication services, all middle management market, based in texas, huge in california, huge in the southwest. they had good numbers. the ceo there attributes results to continued improvements in the economy, particularly in the loan growth area in texas and california. again, this is largely commercial loan growth they are talking about. good signs in terms of the economy. what we don't want to see is what we heard from wolverine.

this is a footwear company, keds, hush puppies, those shoes. they is taken a conservative look to the gieps. low end of the expectations reflective of a continued soft retail environment in the u.s. as i said, not helpful for us who want better revenue growth. movers, valero disappointing guidance last night, same situation in kellogg, a downgrade at goldman and kors down as well. barclays. a lot of people nervous about yellen's testimony thinking she might be more hawkish. i don't know what people are reading, but i read what i could see in "the new yorker" yesterday, and she reiterated the position she's reiterated all along. even as the head winds diminished to the point where the economy is back on track,

even if that happens, it's still going to require an inusually accommodative monetary policy. she said what she always says, has not changed the position, and people are worried about her being more hawkish than normal are not looking at the facts right now. her system set to begin very shortly. guys, the dow up 54 points right now on strengths in financials. back to you. >> another reason the market is strong, could be at least, merger and acquisition activity. we talked about tobacco, another deal to get to, but jim has thoughts on the specialty chemicals industry. rockwood bought out by albemarble. try saying that ten times fast. there's cast lit and surface treatment all going to be combined in the new company. rockwood, by the way, interesting. there's albemarble is up.

i think it's the smaller of the two, but using stock, 70% of the conversation is stock -- or excuse me, stock in cash. shareholders own 70% of the combined company, 30% held by rockwood shareholders. this is a company whose ceo left not long ago to run air products, and sold the company not long after. there's the consideration we're talking about it. not that large a premium, 13% rs but the acquirer price up, rockwood holdings up over 13% at this point, and the goal here, if there could be a goal, and there's only a hundred million -- talking about a hundred million in cost synergies by 2016, not that human a number, but, jim, the goal seems to be to create a must-own stock in specialty chemicals. >> it is a must-own stock

because lithium, ion batteries are the futures for okay car, and this company are the ones that break down dirty oil, heavy oil. honeywell has a similar business, and that's very important so they've got these -- this kind of very noncyclical group of chemical companies so this company will be -- i like the analogy -- will be the go-to name for people who want proprietary chemicals. i love this combination, a great idea. >> interesting. rockwood itself, the kkr long out of the stock or out entirely. a number of divestitures playing for the m&a end game here and got it with this deal. 12 times and to your point, 25% plus margins. not a bad -- >> just a killer. i mean, that is -- people have to understand that money

managers are always looking for something. like timcan steel, oh, people want a steel company. people say, listen, get me a proprietary chemical company, one that's not swinging with the economy. this company has everything all at once. people used poly pour, this replaces all of these. this is a must-own for many managers. i like the deal. >> watching that, of course, from here on out too. we'll see. >> they need a better name. that's an old name. >> you say it well, albemarl. let's head to the monday pits now. the cme group in chicago with rick. >> good morning, david; looking at the intradays of tens, you see rates moved up on some of the data points this morning. some of the components were not as good as the heline, and, of course, retail sales taken a

couple months with revisions, not bad either. rates did go up, but moved to unchanged. the two-day chart, you see the 255 area and this is a good pivot if nervous about a selloff in the higher rates. that's the marginal line. the better charts, open june 1. granted rates down, but look at the path it took to get that. contrast that with europe and the 10-year, up close to, what, 23 basis points on this chart? it's definitely a ski slope down. that really reflects all the action today when we see europe, our rates are pressured lower. see our better that da, wear the clean shirt in the dirty hamper, that coming out as well. the charts together, it's somewhat breathtaking. remember, the separation of these two yields is now the widest it's been in a long time. we're going back close to 15

years. now, switch gears a bit. look at the pound against the dollar. this is our canary in the coal mine for high rates, mr. carney, bank of england, and seems recent comments walk back a bit, you can't fool the foreign exchange market this time. look at the intraday of the pound against the dollar. especially note the high trade today at 171.75. open the chart up, you see we are hovering at virtually the highest levels since 2008 other than the one blip on july 2 because the july 2nd close was 171.66 below today's intraday high, but it's about the close all the time. carl carl, back to you. >> thank you, bracing for the capitol hill testimony, a panel with questions for the fed chair bringing you that live in 15 minutes. later at 11:00 a.m. eastern, exclusive with susan cameron

about the company's very big deal to acquire lorillard. dow's up 6 n2, a new all time intraday high. back in a minute. [ male announcer ] we know they're out there.

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just a few minutes until fed chair janet yellen takes a seat at dirksen, and q&a begins after that, and tomorrow, visits the house, financial services committee, twice annual report on monetary policy and the economy to congress. meantime, delivering alpha arrived, the conference begins tomorrow morning. treasury secretary jack lew speaking. >> yep. i can't wait. classmate of mine in school, and, obviously, a fellow queens native. not that we knew each other, but -- >> carl icahn, chris christie,

highlights from the speakers and exclusive inside access, of course, all day tomorrow on cnbc, a great broad view of where we are going as an economy and as a market and some great microcalls and ideas too. >> nelson peltz made people money last year. i wonder if he'll do bank of new york. i think he can bring value there. >> they did file on that. >> stay tuned on that. i think he's going to come with game. >> that's great, actually. we played some sound earlier on "squawk," and last on this set saying yellen would be dovish way beyond what coincides with an interesting hearing today. follow that with dow up 51 points. we'll see what happens in the next hour. of course, stock trading with jim in a moment, and counting down to the testimony on the hill. live coverage begins in just a few minutes. ♪ ♪

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welcome back. the senate banking committee preparing to hear testimony from fed chair janet yelli inen in a moments, see what the q&a is like, interesting and telling what the fed chair thinks even with the new yorker article already out. dow up 60 points, new intraday high. something we said repeatedly over the last few days, but jipters settling in before the testimony. we'll see what that brings, and financials leading the charge on good results from jp and sachs. >> retail sales below expectations with numbers. upward revisions in the last two months, not a terrible report, but not the end thursday yachl you want to see after the winter

has gone away, consumer spending is supposed to be picking up. i'll look for yellen's comments on the jobs mamplgt we saw the better jobs report and whether she acknowledges higher inflation. >> crude, as well, below $100 a barrel. hampton has headlines on yellen. >> good morning, carl. she's preparing to tell the senate banking committee, although the economy continues to improve, the recovery, she says, is not yet complete. the unemployment rate is above fomc estimates of the longer run normal run level, and labor force participation rate is weaker than one expects, and gdp quarter declined due to transitory factors, and the second quarter, she says, production in spending rebounds, but, quote, this bear's close watching. on housing, the housing sector, chair yellen says, has shown little recent progress. housing activity readings this year have, quote, continued to

be disappointing. inflati inflation, yes, up in recent months, but blow the fomc longer run objective, and economic activity expands moderately over the next several years the fomc believes. chair yellen in the testimony repeats the fomc pledge to complete asset purchases after the october meeting if data supports an improving economy. on interest rate policy, the decision about the path of the feds' fund rate remains on the information, and two key what-ifs. if labor market conditions improve more quickly, then the rate increases would occur, she says, sooner and more rapidly than currently envisioned if disappointed, the future path of of interest rates likely would be more accommodative. there is a concern to wrapping up the testimony here, if you will, about financial stability.

she says specifically on the question of low rated corporate debt, we are closely monitoring developments in the leverage loan market. highlights from the testimony that should begin momentarily and then, of course, the all important question and answer session. back to you >> thank you very much, hampton. we are seeing yellen taking a seat there in front of the committee. let's bring in senior economics correspondent steve for more, and, steve, to me, it sounds like she's not convinced that the economy is on better footing despite the batch of better news. >> i think she's trying to, you know, really thread a needle here, sarah, saying there's improvement, but there's not enough improvement to warrant anything faster in terms of the federal reserve. interested in the comment here which, you know, hampton presents as balanced. it there's improvement faster than the fed expectexpects, we the rate faster, and if it's slower, it's slowerment one of two things happen here. i think the fed under yellen is

trying to move away from calendar dates and expectation of the market of when exactly the fed moves. the consensus in the fed survey puts it in the second quarter, up 2015, and yellen is leaning much more on data dependency here, and another thing they emphasize, sarah, seen here in the testimony, is uncertainty. not certain about where things are going, but laying out a general forecast how things progress. >> yeah, and it seems like she mentioned unemployment rate, mentions the housing market. did not say anything that i can see right offhand about the consumer, but there are clearly enough worries out there for her to keep interest rates very low, steve. what's interesting is that the unemployment rate has improved so much since the last time she took the stand back in february. >> right. so the -- the sentence we parse is if the labor market continues to improve more quickly than anticipated by the committee. i'll stop there. the question is, what is the metric here? the unemployment rate or other measures of slack, people working part-time forever economic reasons, total number

of part-time workers, people dropped out of the work force, discouraged worker, those sorts of things. yellen maintained in this under pins the policy, the accommodative policy, there's more slack out there that is represented by the 6.1 % unemployment rate. there's others who argue against her saying, no, the labor market is tightening faster than the fed believes. >> thank you very much, steve, for running us through the yellen headlines. for more on what this means for the markets and the economy with the dow now up 50 points, allen lance, editor of "the lance letter", and chief u.s. economist with rbc capital markets. tom, are you surprised she's in no hurry to raise rates soon? >> no, in fact, it sounds like she used her post fohc conference as a template. in q&a, will be hard to deviate from what she said just, you know, a short month ago. given the fact if you look at the flow of data between then

and now, it has not deviated from the trend in play. i think it's going to be status quo yellen today, again, relative to the last fomc meeting. >> i think if assigned to the bulls, nothing to worry about in raising rates at all. >> kbagt exactly, a situation w to confirm there's not going to be changes. i mean, i think she's going to maintain the cautious stance, you know, the employment and inflation numbers of close to the feds' numbers, but food inflation dampered by the best, you any, u.s. crop in 20 years, and as far as energy lowering, you know, their geopolitical front, and there's workers going out of the system. combine that, she'll maintain the cautious front bullish.

>> tom, obviously, it's hard without the explicit target, but what's going to change her tune? there's a message, slack out there, going to stay on hold, will it be more signs of wage growth? is that going to do the trick? >> i think the hurdle for her to change her tune is much higher than people appreciate. look, i think it's been very obvious begin her stance on the employment background in general she's worried about the people sitting on the sidelines. i'm sympathetic to that for sure, but it's possible the market is a bit tighter than she suggests given this one important fact. it's possible that a lot of those people sitting on the sidelines as sad it might be, they may not come back into the labor force any time soon. if you exclude them from the equati equation, you see the labor fort and market is a little bit tighter than what yellen suggests. if we're waiting for all the people to come flooding in, then

i think she has the green light to continue to talk in a dovish way about the labor backdrop. i argue that we shouldn't be waiting for that to happen, but we need to look at that equation at those folks, and when you do that, it's a little bit tighter than she would argue. >> allen, i wonder, you know, begin speeches in the past talking about income inequality and the ancillary effects of qe. i have no doubt the senators will hold her feet to the fire on that. >> yeah, you know, i think there's a lot to look at, carl, you know, as far as in the next two days. you know, another thing is just, you know, in new york, you know, the transit workers against the transportation authority, you know, the unions show muscle, and, you know, i think that wage aspect of it, like you mentioned, is going to be critical. as critical, you know, as the employment and inflation, so it'll be interesting, but i don't see major changes on her front.

>> interesting to hear what she'll say about too big to fail, if anything, senator warren on that panel. we'll take you to it live. gentlemen, thank you for the commentary. good to see you both. >> well, after a year and a half and good deal of coverage in the press, of course, we did get a tobacco deal this morning in which reynolds is buying lorillard, a complex deal with four companies, bat at 42% ordinary person of reynolds spending $4.7 billion to stay where it is. and reynolds buying lorillard and divesting assets worth about -- well, selling for 7.1 billion to imperial tobacco, all designed to make or create a real player, a number three player in the u.s. market. why? because antitrust is a significant risk to the deal. we did get it now. the stocks both down, and down rather sharply. reynolds for the buyer this morning is down about 3 .5%, and lorillard, well, almost plunging

this morning because there had been hopes that the deal would be worth more than the $68.88 called for initially, less than that now, the stock down, therefore, the overall deal price is also a bit lower, 75% of it in cash. .2909 of a share. they are divesting a number of brands, but not included is camel. there was at least some speculation, perhaps, that if they really wanted to make they were not going to have an antitrust problem on their hands, they would divest camel, but indications were never part of the serious negotiation. camel too important a part of reynolds as you take a look at the various parts of this deal, bat, by the way, agreed on july 2 to buy the stock they need to

to keep the stock at 16.66 a share. they are not far from that now, and they are the brands we are talking about, and consolidation supposed to result in great acreation and cost savings and there's questions about that in terms of an $800 million cost savings number including divestitures. what's the run rate on savings or synergies perhaps closer to $300 million, analysts weighing in on this morning pressuring stock to a certain extent, and, of course, both run up sharply over the last few months. april 29th, we first reported on a poeshlg transaction, and prior to that, other reports from our competitors, july 3rd, they were on track, all of which continued to help those shares move higher until the deal actually arrives. now, the key question is going to be antitrust, and what the likelihood is that you will get it with that divestiture pack e package.

will it meet the approval of the antitrust regulators? susan cameron our guest an hour here on "squawk on the street" to discuss, amongst other topics with her, her feelings about how likely it is. >> were you surprised on the price? some of the consumer am inimaal expected $70-plus. >> endless predictions we'd get a deal was high and may have moved the number of shareholders up in terms of what they were willing to pay for lorillard. others, morgan stanley, for example, at 68 as fair value. 13 times what they are paying, not a bad multiple. i mean, it's on the higher side, not the highest of the transaction of this type we've seen for the part, imperial tobacco paying nine times for the divested assets including lorillard's e-cig brand, blue. >> blue, a surprise also. i want to mention in today's session the banks. the dow's at intraday records.

>> crapo is giving remarks, introducing yellen. in her words, equity value weighs of smaller firms as well as social media and biotech firms appears to stretched. quoted on that, and facebook, twitter, yelp, intraday, at 10:00 a.m., you see the drop, as yellen weighed in on stocks. >> that's in the testimony? >> that's a greenspan moment there a little bit. >> we'll watch that. and, of course, we talked about the bigger picture, no material change. her she is in front of the senate banking committee. >> semiannual report to congress. in my remarks today, i'll discuss the current economic situation in outlook before turning to monetary policy. i will conclude with a few words about financial stability. the economy is continuing to make progress towards the federal reserve's objectives of

maximum employment and price state. in the labor market, gains in total nonfarm payroll total employment averaged 30,000 a month over the first half of this year. a somewhat stronger pace than in 2013 and enough to bring the total increase in jobs during the economic recovery thus far to more than 9 million. the up employment rate has fallen near 1.5% over the past year and stood at 6.1% in june, down about four percentage points from its peak. broader measures of labor utilization also registered notable improvements over the past year. real gross domestic product is estimated to have declined sharply in the first quarter.

the decline appears to have resulted mostly from transitory factors. a number of recent indicators of production and spending suggest the growth rebounded in the second quarter. this bears close watching. the housing sector, however, has shown little recent progress. while the sector recovered notably from its earlier trough, housing activity levelled off in the wake of last year's increase in mortgage rates and readings this year have overall continued to be disappointing. the economy continues to improve, the recovery is not yet complete. even with the recent declines, the unemployment rate remains above the federal open market committee participants estimates of its longer run normal level.

labor force participation appears weaker than one would expect based on the ages of the population and level of employment. these and other indications that significant slack remains in labor markets are corroborated by the continued slow pace of growth in most measures of ho hourly compensation. inflation has moved up in recent months, but remains below the fomc's 2% objective in the longer run. the personal expenditures or pce price index increased 1.8% in may. pressures on food and energy pricesing th accounts for some. core inflation educational background colluding food and

energy prices rose 1.5%. most participants project that both total ainflation is betwee 1.5% and 1.75% as a whole. although decline in gdp in the first quarter led to downgrading of our growth projections for this year, i and other fomc participants continue to anticipate the economic activity expands at a moderate pace over the next several years. supported by accommodative monetary policy, waning drag from fiscal policy. the lag defects of higher home prices and equity values and strengthening foreign growth. the committee sees the projected pace of economic growth as sufficient to support on going improvement in the labor market

with further job gains, and the unemployment rate is anticipated to continue to decline towards its longer run sustainable level. consistent with the anticipated further recovery in the labor market and given that longer term inflation expectations appear to be well anchored, we expect inflation to move back towards our 2% objective over coming years. as always, considerable uncertainty surround our projections for economic growth, unemployment, and inflation. fomc participants currently judge these risks to be nearly balanced, but to warrant monitoring in the months ahead. i will now turn to monetary policy. the fomc is committed to policies that will promote

maximum price stability consistent with our mandate from the congress. given the economic situation that i just described, we judge that a high degree of monetary policy accommodations remains appropriate. consistent with that assessment, we have maintained the target range for the federal funds rate at 0 to .25% and continue to rely on large scale asset purchases and forward guidances about the path of the federal funds rate to provide the appropriate level of support for the economy. in light of the cumulative progress towards maximum employment occurred since the inacception of the purchase program in september 2012, and the fomc assessment that labor markets would continue to

improve, the committee has made measures productions in the asset purchases at each of the regular meetings this year. if incoming data continued to support expectation of ongoing improvement in labor market conditions and inflation moving back to 2%, the committee likely will make further measured reductions in the pace of asset purchases at upcoming meetings with purchases concluding after the object meeting. even after the committee ends the purchases, the camera reserve's sizable holdings of longer securities help maintain accommodative financial conditions. thus supporting further progress in returning employment and inflation to mandate consistent levels. the committee is also fostering accommodative financial

conditions through forward guidance that provides greater clarity about our policy outlook and expectations for the future path of the federal funds rate. since march, our post meeting statements have included description of the frame work that's guiding our monetary policy decisions. specifically, our decisions are and will be based on an assessment of the progress both realized and expected towards our objectives of maximum employment and 2% inflation. our evaluation will not hinge on one or two factors, but rather will take into account a wide range of information including measures of labor market conditions, indicators of inflation, and long term inflation expectations and readings on financial developments. based on its assessment of the

these factors, in june, the committee reiterated its expectations that the current target range for the federal funds rate likely will be appropriate for a considerable period after the asset purchase program ends. especially if projected inflation continues to run below the committee's 2% longer run goal and provided that inflation expectations remain well-anchored. in addition, we currently anticipate that even after employment and inflation are near mandate consistent levels, economic conditions may, for some time, warrant keeping the federal funds rate below levels that the committee views as normal in the longer run. of course, the outlook for the economy and financial markets is never certain, and now is no

exception. therefore, the committee's decisions about the path of the federal funds rate remain dependent on our assessment of incoming information and the implications for the economic outlook. if the labor market continues to improve more quickly than anticipated by the committee, resulting in faster convergence towards our dual objectives, then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned. conversely, if it is disappointing, the future paths of interests rates would be more accommodative than currently anticipated. the committee remains confident that it has the tools it needs to raise short term interest rates when the time is right and to achieve the desired level of

short term interest rates therefore. even with the federal reserve's elevated balance sheet. at our meetings this spring, we have been constructively working through the many issues associated with the eventual normalization of the stance and conduct of the monetary policy. these ongoing discussions are a matter of prudent planning and do not imply any imminent change in the stance of monetary policy. the committee will continue its discussions in upcoming meetings and le expect to provide additional information later this year. the committee recognizes that low interest rates may provide incentives for some investors to reach for yield. in those actions, could increase as a ru vulnerabilities in adverse events. while prices of real estate,

equities, and corporate bonds have risen appreciatively and value metrics increased, they remain generally in line with historical norms. in some sectors such as lower rated corporate debt, valuations appear stretched, and issues brisk. accordingly, we are closely monitoring developments in the leverage loan market and are working to enhance the effectiveness of our supervisory guidance. more broadly, the financial sector has continued to become more resilient as banks have continued to boost their capital and liquidity positions. and growth in wholesale short term funding in financial markets have been modest. in sum, since the february monetary policy report, further important progress has been made in restoring the economy to

health and in strengthening the financial system. yet, too many americans remain unemployed, inflation remains below our longer run objective, and not all of the necessary financial reform initiatives have been completed. the federal reserve remains committed to employing all its resources and tools to achieve its macroeconomic objectives and to foster a stronger and more resilient financial system. thank you. i would be pleased to take your questions. >> thank you for your testimony. as we begin questions, will the clerk please put five minutes in the clock for each member. >> yellen beginning the q&a, and the news of the morning is her comment, not in her prepared remarks, but a concurrent fed filing that goes along with this

testimony in which they talk about, you heard her now, talking about corporate debt issues, but in this case, referring to smaller firms in the feds' words and companies in the biotech and social space. it has been called her irrational exuberance moment, although it's early. >> in the biotech industries. >> valuations stretched. >> she says valuation metrics appear substantially stretched. and then adds, smaller firms. i don't know what firms she or the board of governors has in mind when they refer to the valuation metrics or what constitutes a smaller firms in biotech and social media. clearly, facebook, which was down, in part, is not a small firm nor are the bigger bioteches we talk about. >> think how unusual it is for a monetary policy reports, boring as boring gets, to mention social media and biotech. she takes some hieg likes of this in the prepared remarks and

testimony. i wonder if the senators get notes on blackberries to people to ask about this. clearly, the woman is thinking about financial stability, stretch value rations, the side effects of fed policy, but bottom line, she's not prepared to change monetary policy as a result of it. >> what we don't know is whether or not the senators read this filing in addition to her testimony we're about to find out. >> like the rational exuberance comments of greenspan in 1996, the most incredible bull run in stocks that went on for four years, but, again, here i note it is very -- she or whomever wrote this is particular in citing smaller firms in biotechnology. you see it there, and social media. >> there's the direct quote, just getting so much attention, and the line that proceeds this, where she talks about the stretched valuations, talking about how overall broad markets

within historical norms and do not point to overly enthusiastic or irrational exuberance with the participants. >> with that, let's burn to the q&a. >> we have seen false dawn periods in which we thought a group with speed, would pick up, and the labor market would improve more quickly, and later events have proven those hopes to be unfortunately over optimistic so we are watching very carefully, especially when short term overnight rates are at 0, and we have no ability to lower them further. we need to be careful to make sure that the economy is on a solid trajectory before we raise interest rates, and i think the forward guidance we provide in the policies we have put in

place are providing a great deal of accommodation to the economy to make sure that it is on this sound trajectory. >> pertaining to the collins's amendment, they passed legislation to clarify the feds' ability to apply insurance-specific capital standards to insurance companies that are overseas. why is it important that congress habit quickly and pass this legislation? >> well, is as my colleagues and i have made clear on many occasions, our objective in designing regulations for insurance companies that come urn our supervision or other nonbanks will be tailored to suit the needs and special

characteristics of the entities that we supervise, and we're certainly try to achieve that in the case of the insurance entities that we supervise, but there are constraints on our ability to take tailor appropriate regulations and the collins amendment does pose constraints, so i think it would be useful to increase flexibility to allow us greater latitude in tailoring appropriate regulations. >> and in light of your recent speech, will you elaborate on how you envaision the fed using pru dern issue tools rather than monetary policy to maintain financial stability and build resilience in the financial system? >> well, i think most importantly, we have

substantially strengthened the capital and liquidity positions of banking firms and financial firms that we supervise more generally. our objective is to make sure that these firms are on solid footing and to the extent the financial system or economy are buffeted with shocks, that these firms will be resilresilient, c continue to lend and support our credit needs in the economy even before adversities and our stress tests are a very important part of that as well, so first and foremost, the entire agenda from dodd-frank and more broadly coming out of the financial cries y crisis to more resilient, better capitalized financial system,

banking system, i say is the core of that effort, so if there were an asset price bubble, and we did not intervene effectively to deal with that and that bubble bursts, we wants to make sure that the financial system can withstand such a shock, and that is an objective of our efforts. we can also use more targeted tools that try to make sure that business cycle conditions improve as we go into more robust boom times that, for example, in our stress tests we've automatically designed the scenarios to impose a more severe stress that firms need to be able to survive as asset prices increase and the economy grows more robust, so those are the kinds of tools i largely have in mind.

>> senator crapo. >> thank you, mr. chairman. you anticipate the federal funds rate will continue below levels that the committee views as normal for an extended period of time. you also added that depending on economic outlooks, this rate increase could occur sooner or later as we get a better feeling on the strength of the economy. based on your view and the markets, when did you anticipate this first rate hike to occur? >> well, the committee has given guidance that says what we will be looking at is the progress we're making towards our two congressionally mandated objectives, maximum employment and price stability or 2% inflation goal so there's no formula and no mechanical answers that i can give you

about when the first rate increase will occur. it will depend on the progress of the economy and how we assess it based on a variety of indicators. to get a sense of the views that members of our committee holding inned -- included in the summary of economic projections that all participants in the fomc provided at the beginning of our june meeting, so these projections are just that. they depend on each participant's own personal economic outlook, and they are not a policy statement of the fomc, but they provide some sense of concretely what participants expected at the beginning of that meeting, and those projections show that almost all participants

anticipate that the first increase in the federal funds rate, if things continue on the trajectories they expect, would come sometime in 2015, and the median projection for where the federal funds rate would stand, if the end of that year was around 1%, so a positive, but relatively low level, and i think that gives you a feeling for what apartments thought would be appropriate given their projections in june. i want to emphasize as i said repeatedly what actually happens, our projections change with incoming data, the economy is uncertain, and what will actually happen clearly is going to depend on the progress the economy makes. i think that's consistent with the forward guidance that's contained in the fomc statements

as well. >> thank you. based on the minutes of the most recent fomc meetings, the discussion of monetary policy normalization has become an important topic for the committee. one of the strategies that is discussed is that the fed will drain reserves by lending securities outs to the market as part of the reverse purchase agreement. there's concerns a facility would be a safe haven in market stress attracting large funds and deprives business of credit. is this is concern of yours? how would the fed address the potential that the facility could aggravate a market crisis? >> well, let me say these are matters that we are discussing in an ongoing basis and no final decisions have been made about the precise strategy that we will use when the time comes to normalize monetary policy, but

we've tried to provide in the minutes a very good summary of the thinking in the committee as these discussions have taken place. one of the challenges we face is, as you mentioned in your opening remarks, the feds' balance sheet is very large. a very large quantity of reserves in the banking system, and because of that, that poses some limits on our ability to precisely control the federal funds rate. we can't really use the same strategy of intervention we used prior to the crisis. we've indicated that the main tool we will use is the interest rate we pay on overnight reserves. the overnight facility that you refer to, i think of is a backup tool that will be used to help

us control the federal funds rate, to improve our control over the federal funds rate. i think it's a very useful and effective tool. we gleaned that from the initial testing we've done. as you mentioned, we have concerns about allowi ining facy to becoming too large or playing too predominant a role. if stresses were to develop in the market and in, in effect, provides a safe haven that could cause flight from lending to other participants in the money markets, so two tools that we can use and are discussing to control those risks. one would be to maintain relatively large spread between the interest rates we pay on overnight reverse rps and the

interest rate on access excess, the laress spread, the larger t facility will be. we can express how much to be used, either agate limits or place of employme limits that apply, and that is in our discussions. >> thank you. >> senator reid. >> thank you, and thank you, chairwoman. you mentioned full plimt, and we've seen progress, but there's variations, recently, my state suffers from an unemployment crisis, and underlying the statistic is the long term up employment number. can you address what the fed is doing to address these two specific issues and further comment upon whether the -- as i

feel, congress can compliment your efforts by reinstating benefits for these people? >> well, as you note nationally, long term unemployment is almost unprecedented levels historically in the average duration of unemployment spells is extreme ly long, and also, o course, there are variations from state to state in the level of unemployment with some states seeing much lower unemployment than the national average and the reverse, so our monetary policy really can't affect things at the level of individual states, and we have no specific tools to target long term unemployment, but my expectation is that as the

national up employment rate comes down and pace of job creation stays where it is or rises, i expect to see improvements on all fronts, and, in fact, long term unemployment has declined, and the evidence that i've seen, although perhaps not utterly definitive, sunlights -- the long term unemployment does unbalance reflect those who experienced long spells getting jobs and moving into employment and not simply becoming so discouraged that they move out of the labor force. that is a healthy development, and while long-term unemployment remains at exceptionally high levels and is a grave concern, i do think we're seeing improvements as the job market is strengthening, and i think in

every state we should expect to see as confidence in the recovery grows and it strengthens, we should definitely expect to see improvements. >> you point out that the federal reserve -- >> yellen taking questions on capitol hill from a number of senators. i want to take a moment to see the markets. they reversed directions, the dow in negative territory, nothing steep, but down 13 at the moment, s&p 500 down a quarter of a percentage point. watching social media and biotech stocks after the monetary policy report which was released in conjunction with fed chair yellen's testimony appointmented out stretched valuation metrics in some sectors are stretched, particularly those for smaller firms in social media and biotech industries. swift reaction on social media and biotech stocks, selloff on the fed' viewpoint there on stretched valuations, but talking about markets she

doesn't see signs of overly optimistic market participants in terms of the sentiment out there on wall street. let's go back to fed chair yellen continuing to take questions now. >> trying to deal with the issue now because we have not taken actions that we could have that would have been beneficial and see us in a much better situation today. >> fiscal policy has been -- i think cbo confirms a significant drag on the recovery and fortunately, that is diminishing, and, in fact, i think that's one of the positives for the economic outlook for economic growth going forward. >> well, i hope you are right. >> i hope so too. >> just quickly changing the subject and probably making a point because my time is rapidly diminishing. the federal reserve in 2011 had a program, independent foreclosure process, which was trying inin ining to help peop

by the foreclosure services. that was scrapped shortly afterwards and essentially went to direct payment form, about $3.9 billion. i'm told that that program is still has cash on hand, that you have not reached the people, people who have been receiving checks have not cashed them or intend to. this residual money, can you reprogram to state agencies or local initiatives much more effective in getting the money out. would you consider that? >> no decision as all has been made at this point on what to do with residual funds, and so there may be a number of options i have we have yet to debate that. >> again, there are states, you know, and regions that need the help, and if you could get the money to the people who can get it out, that would be, i think, positive. thank you. >> senator vitter.

>> thank, thank you, madam chairman, for being here for your work. this week, the bill on the floor, the senate's expected to adopt and pass my amendment to mandate at least one member of the federal reserve board have direct community bank or community bank superadvisory experience. what is your reaction to the manda mandate? >>. >> senator, i would welcome the appointment of the community banker to the boardment i think a community banker can add a great deal to the work that we do, and i worked with community bankers or community bank supervisors like then governor raskin and seen how much that experience can contribute to our work, so -- >> right.

>> i am very positive on the idea of having a community banker appointed to the board. that said, i don't support requiring it by a legislation. there is seven governorships. the board has many different needs. i think if we were to sit down and make a list of all of the kinds of expertise needed and are useful, there would be more than seven items on that list, and i would, you know, prefer to see appointments made in light of the priorities including for a community banker rather than for the indefinite future locking in and earmarking particular seats for particular purposes. i feel that's a road that could

go further in a direction that would ware me if we are earmarking, we could end up earmarking each seat for a particular kind of expertise and greater plex the needs to change over time, but that's not in any way to diminish my support for seeing a community banker appointed to the board. >> well, we look forward to this community bank experience being more forcefully put on the board through this legislation, so we'll agree on that and look forward to it. madam chair, we've talked a lot over your various visits about too big to fail. it's a concern of mine and other members of the committee on both sides of the aisle. what i personally heard is you're agreeing with that general concern, but i have not really seen that translate into concrete policy moves to curve

and change continuation of too big to fail. that's any opinion. in that context, you were last before us on february 27. what, if any, specific policy changes, initiatives, movement has the fed or other regulators taken to curve and help end too big to fail? >> so, we have finalized our bazal three requirements that is significant for quality of banking system, and before we did that in the stress tests, we worked to ensure that the largest and most systemic institutions have the ability to sort of not only survive a very adverse stress to the system, but also to lend and support the

needs of the economy through such a stress. the amount of capital in the banking system has basically doubled since 2009. we have put in place, put out for comment, a liquidity coverage ratio rule that we hope to finalize this year. we are in the process of working through a regulation that will implement so-called sur charges or surcharges with the largest, most systemic firms. we finalized, enhanced a higher leverage standard for the eighth largest firms in the united states. we're working very hard to make sure these firms are resolvable

in the event they should encounter a stress that overwhelming those substantial defenses, so the fdic, under it tablt to resolve such a firm. it has established an architecture for doing so, and the united states is working with other global regulators to think through how that authority could be exercised to deal with cross-border issues. we are discussing in the united states and globally a requirement for the largest and most systemic organizations to hold sufficient, unsecured long-term debt at the holding company level to enable a resolution that would be smooth in the event that such a firm had to be resolved, and we are working with those firms also on

living wills to enhance their ability to be resolved under the bankruptcy code. >> thank you, mr. chairman. senator schumer? >> thank you, ms. chairman, and thank you, madam chair. you've done a very good job. you make brooklyn proud, and i'm so glad to have these hearings. i've been sitting at home since 1981, in the house and senate, and they're it very aelucidating. so my first question deals with probably your most difficult with fed, and fighting inflation and going to full employment. it's a hard tightrope to walk, particularly as conditions change. and we're now in a period of change. obviously, unemployment has declined, thankfully, and obviously the economy is beginning to pick up, and as a result, there's a lot of pressure, coming from many, for you to not only -- to accelerate

the end of qe 2, of quantitative easing, and to raise rates. i would urge caution very strongly. to me, the greatest problem this country still faces is lack of good paying jobs, decline of middle-class incomes. that's with us very, very strongly. and worldwide labor markets still keep a lid on inflation. your stated target of 2%, ten years ago, people heard the state of target, 2%. your predecessors, their jaws would drop, but we're not even at that. so i would just ask you to be very cautious before you taper the qe 3 program too quickly, and entertain the prospect of raising rates. could you comment? >> yes. so i certainly agree and tried

to emphasize that while we're making progress in the labor market, we haven't achieved our goal, and it's also the case that inflation is running under our 2% objective. so both of those facts, plus the fact that there have been substantial headwinds holding the recovery back, and those headwinds well they we are effectively overcoming them and making progress, until they're completely gone, it calls for an accommodative monetary policy to offset that, and i would say even if you consider our forward guidance we put in place in march, the committee indicated that even after we think the time has come to raise rates, that we think it will be some considerable time before we move

them back to historically normal levels, and that reflects, well, different people have different views, but to my mind it, in part, reflects the fact that headwinds holding back the recovery do continue, productivity growth has been slow, and, of course, we need to be cautious to make sure the economy continues to recover. we've tried with respect to our asset purchases to set out a clear objective that we had to see a significant improvement in the outlook for the labor market, and to put in place a process by which reductions in the pace of our purchases would be measured deliberate and allow us time to assess how the economy is recovering and we've followed, i think, a very deliberate course, and as i've also emphasized, this is not a

pre-set course, if we would to judge the conditions had changed significantly. it's not locked in stone. >> thank you. i'm glad and somewhat relieved to hear and i know there are pressures. i'd lyke to tweeze each side of that as my final question. we're seeing improvement in job growth but still seeing declines in median incomes and middle class and lower incomes and what it means is the number of jobs created that really pay well isn't -- isn't -- isn't growing quickly enough, and -- jobs are growing more quickly. how can the fed if anything deal with that and on the other side one of the thinks you worry about, of course, are bubbles, qe 3 and others pushed a lot into the stock market. i don't think there are bubbles there yet, but i hope you're considering ways to reduce the possibility of bubbles without wholesale increases in rates. can you comment on both sides of that?

>> well, with respect to wages, most measures of compensation have been running roughly in line with inflation so that real gains in -- in compensation adjusted for prices or in real terms have been non-existent. so while rising compensation or wage growth is one sign that the labor market is healing, we're not even at the point where wages are rising at a pace that they could give rise to inflation. in fact, real wages have been rising less rapidly than productivity growth, and what we've seen is a shift in the distribution of national income away from labor and toward capital. so there is some room there for faster growth in wages and for real wage gains before we need

to worry that that's creating overall inflationary pressure for the economy. that's something we're watching closely. with respect to bubbles, i've stated my strong preferences to use macroprudential and supervision policies to address areas where we see concerns, and as i mentioned, we're doing that in the case of, for example, leverage lending, but i would never take off the table totally the idea that monetary policy might be needed to address financial stability concerns. to me, now, i don't see financial stability concerns at the level at this point where they need to be a key determinant of monetary policy, and it's not my preference as a first line of defense by any means, but i would never want to take off the table that in some

circumstances, particularly if macroprudential tools failed, monetary policy might be called on to play a role, but we're not there. >> thank you. >> senator? >> thank you, mr. chairman. madam chair, thank you for being here today. this is the third time you've been before the committee. once as nominee and now twice in your role as chair. when you came to the committee last fall, i was concerned about the lack of progress to deal with about the $4 trillion balance sheet. i was then and i still am concerned that the risk of quantitative easing outweighs the benefits. since that time i want to say to you, i think you've moved in the right direction. >> thank you. >> in fact, you've moved at a pace that maybe i did not

anticipa anticipate. you're down to $35 billion per month, but the reality is, there's still a $4 trillion balance sheet out there, which is concerning. in your testimony you speak of your concerns about false dawns, and there's been some fits and starts with the fed in terms of tapering. so my question gets to this issue -- you're anticipating that by october this program will cease, come to an end. what could happen in that period of time that would cause you to recalibrate and decide that october is not the appropriate date, maybe the program should go on for a period of time?

tell me what met tricmetrix yout to make these judgments as you go along. >> well, the committee indicated that the path of purchases is not on a pre-set course, and all along at each of our meetings where we've had to decide whether or not to cut the pace of purchases or to stop that, or even to increase purchases, we've asked ourselves two questions. is the labor market continuing to improve? and do we retain confidence that going forward it will continue to do so? and do we see evidence that inflation is moving and will continue to move back to our 2% objective over time? and at every one of our meetings, since last december, when we started to taper the pace of purchases, we've asked those questions, and the answer