message for investors. live coverage, instant reaction and analysis. what investors need to know. "squawk on the street," today, 10:00 eastern. cnbc. >> want to thank our guest hosts. >> you said this morning, joe. >> we have to go. becky, nice to see you, too. >> happy v-day. >> "squawk on the street" begins now. happy valentine's day, everybody. ♪ broke up for good just an hour before ♪ ♪ now i'm staring >> welcome to "squawk on the street." i'm carl quintanilla with david faber. jim cramer is continuing his week out west. market is little changed after the flurry of market highs on wednesday. yellen begins two days of semi-annual testimony in front of congress. we'll take it live in an hour after we watch developments in d.c. and the outgoing general flynn. europe is mixed.

watch bonds. wholesale prices top on higher gasoline. road map begins with the market making record highs. fed chair yellen on the hill for public testimony. plus, how will consolidation play out in the industry under a trump administration? mnuchin is confirmed as the treasury secretary. national security adviser michael flynn resigns. stocks are looking for more history. one day after the indexes hit highs, also, back up to a $7 billion valuation. in an hour, fed chair yellen will deliver her testimony on the economy. she goes before the senate banking community. we'll bring you live coverage beginning at 10:00 a.m. eastern time. in january, she said it would be unwise to wait too long before you excaccelerate the hike cycl. is that what you expect to hear today? >> look, i think she is to

definitely wait to see how much of the tripod this repatriation, the lower corporate taxes, deregulation comes into play, but i am a believer, and have said since the beginning, a march rate hike has to be on the table because of so much global growth. i mean the united states is one of the many engines that is taking off here. to be able to just say, listen, we have to wait to hear what congress does would be a mistake on the fed. i'm looking for better than 50/50 march but i don't think she'll put it out that way. >> there's been some discussion about these three vacancies we're going to expect on the board of governors. cray can vacancies filled by the president, of course. and whether or not it renders her comments from here on out, not mute, but they won't resonate the way they used to, because of the dynamics of the fed will change. how fair is that? >> well, i don't think it is fair. i think in the end, the chair is going to be able to speak for

everybody. i don't think there are going to be pop offs appointed to the fed. i do think what we know from multiple interviews with trump before he became president is he thinks rates are too low. i think he approaches it from a real estate perspective. saying, i see a lot of lending to build and, therefore, rates are too low. in the end, this is -- i've not seen a lot of disrespect coming out of the trump people for any institution when it comes to the point of view of appointments. i don't see tillerson saying, the state department is a bunch of jokers. mnuchin isn't saying, i don't like how treasury works. i think this is going to be business as usual, no matter who he appoints. >> you have that. obviously, the conversation will eventually turn beyond march to stimulus, fed oversight, fin regs, the dollar, which according to a new survey today, jim, is the most crowded trade with u.s. equities considered the most overvalued relative to the rest of the world. third highest level in 15 years. >> u.s. equities have not kept

pace with the rest of the world. when i hear that, i say, wait a second, would you tell me which of the u.s. equities are overvalued? point to them. you want to look at the indexes? the russell caught up. look at the largest cap stocks. apple is selling 13 times earnings. does that startle you? what are we going to do, decide we think exxon is too high versus oil? we're behind in the rest of the world. we should think about the rest of the world more. we should be thinking about things like brick. brazil coming back, according to many executives i talk to. russia is very strong. india making a comeback. china, just fine. we have europe good. i come back and say, please tell me where the overvaluation is versus the rest of the world, which is playing much stronger hand than we are. >> you think that's the case even after the earning season, which more or less is now concluded, jim? there are those who believe we are pulling forward to a certain extent market valuations.

the benefits accruing from tax reform. if we don't get it, and i'm talking beyond just repatriation, that stocks were overvalued, you don't agree? >> no. i mean, i look at the industrials. yes, i see some companies -- yesterday, we had an amazing number of new highs, both in the financials and the industrials. but i come back and say, yeah, could you say that honey well is overvalued? yes. ibm and apple, they haven't really moved that much versus the historics. the financials, if we get the rate hike, the financials will look cheap. i am stuck with the idea that even fang doesn't seem expensi e expensive. facebook and amazon can be expensive but not relative to ideas. apple, not expensive, unless you believe the ad market is going to collapse or samsung is going to roar back. we need more evidence that stocks are expensive based on earnings. the earning season, with the exception of retail, and we still have more retailers to come, pretty strong.

>> yeah. retail is going to be making the case on the border tax adjustme adjustment, i guess, carl, as well. >> the reports out of reuters that the retail ceos are going to go to the hill sometime this week. they won't give a lot of clarity on the time of the meeting. reports they'll meet with target, best buy, a couple mentioned, as they try to coordinate their lobbying efforts. >> i think about the border tax and amazon. by the way, out here, what is the company that is talked about constantly that's not here is amazon? do you know anyone at amazon? amazon is this great black box that takes it out of everybody. you lump in the border tax and amazon, and you have the least investable group i've come across in years. >> that's interesting point. >> amazon is so powerful. >> they are so powerful, jim. the various things they have

going on, whether it's hundreds if not a thousand people working on artificial intelligence, which we don't talk about as much with -- well, we do have an extent. people are aware of alexa. the latest patent, carl, for dropping packages from the sky. >> to be fair, they file for a lot of patents. >> right, they do. >> the one reported on today, they diagram this drone that will remain in flight and parachute goods to you. jim? >> look, drones, i think, are going to be more mainstream. what i hear out here, there really isn't a lot of recognition that amazon is so far above everybody else. i heard someone talking about an amazon air force. we should outsource defense to the guys. amazon is tired of fedex and ups, not willing to spend enough to have excess capacity so they'll have excess capacity. if amazon does what it says

it'll do, they'll have the amazon economy and the rest of the economy. if you read the papers, you think the amazon economy is going to have to prevail. >> moving on, guys, worth mentioning that aetna and humanity called off the merger, after a court sided with the justice department which objected to the combination. aetna ceo saying, quote, the current environment makes it too challenging to pursue the transaction. interesting use of the current economy. some would have thought that means a trump administration. humanity receives a breakup fee, $1 billion. $630 million after taxes. that amounts to about $4.23 a share. not a big surprise here, of course, that they would call off their attempts to appeal the decision in the court. anthem and cigna, similarly, remember, were rejected by the court recently. right now, they're trying to get an expedited appeal of that decision to block the acquisition of cigna by anthem.

they're not expected to get that. many thing anthem is trying to extend it as long as it can to perhaps get cigna to accept a lower number than the $1.85 billion it is owed before taxes when that deal breaks. but it will. highly unlikely, many believe, are they going to get anywhere in terms of an appeal there. interesting when you look at the overall landscape, with all the big insurers, aetna, humanity, cigna, anthem, all independent. u and h still the largest. they have been piling up cash, not to mention the break fees that humanity and cigna are going to get, but simply because they generate so much cash flow and haven't been returning it to shareholders because they've been in deals. they haven't been buying back stock. there is over capitalization in the industry. jim, there is an expectation once you figure out the repeal/replace of the aca, at the very least, humanity, not right away, but at some point, let's call it in the next 18

months, could find itself on the end of another bid from either cigna or anthem. >> u and h pulled away from the companies, but they're a lower multiple than humana. i don't know what'll happen but i agree the cash piled up. these are companies that, in the end, corporations have to play against each other. these are the bills that are wrecking a lot of the earnings per share. particularly, for the small to mid-sized business people who desperately need a united health and need to pit a humana versus an anthem, whatever. it is not great for humana. it is not great for them. you're right, they have a lot of cash and i think someone can take a run at them. i don't want to bet against any of the companies. i like u and h so much more. they have a good quarter. >> carl, if you are a company and there is national accounts at issue, and the department of justice comes after you, it is not a great track record so far.

anthem and cigna went down. they were dealing with this national accounts issue and whether it would be anti-competitive. remember, sysco and u.s. foods, blocked. >> speaking of the doj, what a morning in washington. the senate confirmed steven mnuchin as treasury secretary. that vote took place in the early evening. he won 53/47 margin. that was the beginning of an eventful evening for the trump white house. national security adviser mike flynn resigned after conflicting statements about his contacts with russian officials. obviously, jim, it is all over the morning shows. today, kellyanne conway telling matt lauer this became an unsustainable situation. wouldn't say who else in the white house knew this information from doj a few weeks ago. for our purposes, how much does it complicate twhat the market s betting on? >> there is a sense that people have one foot out the door.

this is the last straw. the last straw just doesn't compute versus what i see going on out here with companies, which is, there is a huge disconnect. yes, there's a lot of talk about visas. everything else is, why are you so focused on that stuff? who cares about flynn? i think you care about flynn if you're figuring out whether the disarray in the white house can translate to anything slowing with the legislation. david, we talk all the time about this. flynn is part of the roadblock to getting it so we have corporate tax reform. whatever makes it so that the discourse is -- makes it so the tax reform is pushed back, makes it so we have to expect that some people will sell stocks, betting we're not going to get anything in 2017. >> right. i mean, each week, listen, the fact the national security adviser resigns, three weeks, right? we're not talking about a very long tenure, in terms of the trump administration, jim. yeah, but that is the question investors have.

does this bleed over into the inability to direct sort of a real march toward tax reform that's needed, potentially from the white house, or can they just play along and watch as ryan and kevin brady sort of work it through the house and the senate? >> well, i don't know. i was a judge for the "apprentice" for a bunch of years, david. three weeks wasn't too long. there were people who exited in two weeks. >> yeah. although it is interesting, carl, that they knew about this for a month and it is not clear exactly what changed with regard to flynn. if they knew that hem misrepresented the contents of the nature -- >> other than the pressure from the "washington post" and other media sources. i mean -- >> the fake media. and the failing media won this thing. >> phenomenal on taxes in a few weeks. if a few weeks come and go and there is nothing, do you begin to worry?

>> i think that president trump uniquely is able to have a conference right now where he is going to talk about the tremendous tax reform. we're going to forget about flynn. we seem to have a very short memory about everything that goes wrong, provided the president comes out with a group of corporate leaders and talks about a fabulous tax reform. then we forget it and think, it is going to happen. let me get in some disney. disney is going to start making more money. i do point out that flynn will be today's discussion. things are so rapid in washington, that there will be something tomorrow that will make it so we forget flynn. i don't know how that is possible. any other administration, we'd be talking about flynn for a month. >> it is true. >> that is a question we cannot answer. whether this story will have legs or whether, as you say, we'll forget and move on in a few days or weeks. when we come back, what intel ceo told jim about meeting and working with the president. take another look at the pre-market. s&p and nasdaq are going on five

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the tax plan that the administration is putting forward would drastically reduce that. now, there's a lot of questions. so we're betting on that tax plan coming into fruition. >> that was intel ceok krzanich talking to jim last night. interesting, another defender of the white house, saying ibm leaders have been directed with every president since woodrow wilson. >> i have to tell you that krzanich said 80% of his employees responded positivity. someone immediately said, how about 20%? 20% were against it. i have to tell you, 80% of people in favor of anything is amazing these days, considering the incredible, tense relationship we have between the two different camps. the old hillary camp and the new president trump camp. look, i think that the business

leaders are coming around to the idea that if they're at the table, they do better, except for in certain cases, where their employees hate the li guy much for whatever reason. they think it is wrong. krzanich said it is worth speaking to the president to lobby him for tax reform. did it hurt he is doing the chandler, arizona, plan? absolutely not. was it going to be done if it weren't for the president? he made it clear that it was a chance that it wouldn't get done. i do not minimize what he is doing. i think he is actually in the top of his game and the story is better than the stock. >> yeah, i think one thing to note here, not to correct mr. rkzanr krzanich, but there is not a tax plan from the administration. the only one that exists is the blueprint from house ways and means. to say the administration's tax plan, we don't know where it is going to be or where they'll come down, other than what was

on candidate donald trump's website about taxes, which obviously didn't have a lot to it. beyond the different rates, particularly dealing with individual rates. that's yet to be seen. will it include a border tax adjustment? will it include this write-off immediately of all cap ex, which would figure prominently when building a new fa til cilitfaci. it is not the administration's tax plan, at least not yet. >> no. but i thought it was interesting that he said after he spoke with president trump, spent an hour and a half with the group, increasingly i hear about the gary cohen meetings being a rigorous session about what we think could occur. the income is up as much as trump's when we talk about deregulation, repatriation, talk about lower corporate taxes. he is really -- not only is he in the mix, i think he is the mix. i think he's got the best handle on what could happen.

>> now we have a treasury secretary. that'll be interesting to see how it plays out. when we come back, cramer's mad dash and count down to the opening bell. more "squawk on the street" from the nyc straight ahead. ♪ to err is human. to anticipate is lexus. experience the lexus rx with advanced safety standard. experience amazing.

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what's it worth to talk to your mom? what's the value of a walk in the woods? the value of capital is to create, not just wealth, but things that matter. morgan stanley on investment. "squawk on the street" today, 10:00 eastern, cnbc. ♪ it's like thunder, thunder ♪ it's like thunder we have about 6:30 before we get started with trading at the new york stock exchange on this tuesday. time for a mad dash. send it across the country.

you want to talk gm, jim. >> yeah. there is a valentine's day present for gm. when i went over the gm quarter, it was 37, looked terrific on the surface. then you started hearing about how bad opal is. these have been loss makers for ages. what if you could off load them? that's the talk of what is driving gm's stock today. it is like, let's do a do over if we didn't have the horrible european operation. there are confirmed talks. david, why would they want the two brands? >> i don't know. tell me. why? >> because they are not that smart about their own business. i don't know. i mean, honestly, you can't really rationalize in europe the way you can -- i don't know if you can rationalize in this country anymore. the idea would be, obviously, you put 2 plus 2 together, and

you get, i don't know, 5. i think you might get 3. then again, i'm not in the auto business, thank heavens. >> they do share production in a number of locations, don't they, j jim? that could help in synergies. >> if i were gm, i'd pay them to take it. i'm not being facetious. david, this is a -- these guys, maybe one day, gm gets it together, but it would be so great to get rid of the time-honored opal. i am sick and tired of the asterisk. if gm did not have opal, it would have been. i mean, david, if amazon did not have amazon web services, you can't. it has it. >> yes, it does. and we have you. so just stand by for a few minutes. we'll get to the opening bell and we'll be right back with jim and carl and myself.

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you're watching cnbc "squawk on the street" live from the financial capital of the world. the opening bell in 90 seconds. fed chair yellen, about a half hour from her semi-annual testimony in front of the senate finance. we'll take you there live when that happens. in the meantime, got some numbers out.

guys, nfib, december, 105.9, where we were in december, about the same as january's number. ppi, 1.6 near on near. gasoline up almost 13% month on month. >> look, these things are -- what we've seen is when we had the oil move to the 50s, it comes back. then we come back to gasoline when we see big inventories, which is what we'll have built up, i think, rather soon. the main thing, my take away about oil, is we are drilling a lot but we're not letting the -- the oil is staying in the ground until needed. it is entirely possible if oil were to go to $55, $56, you'd see a flood gate of oil. i think this range, $50, $57 is what we're stuck with and the gasoline won't go higher. not to fret about s&p, 40 days

move up or down. that is the longest such streak in history. as the s&p and nas have had five days up and the flurry of all-time highs yesterday. there's the opening bell. the s&p at the bottom of the screen. wbiy inve investments. the asian supermarket chain in the u.s. celebrating its listing. fresh. >> we have a presidential tweet for the first time in a while, carl. >> say it again? >> the president has tweeted for the first time in a morning in a while. just seeing this one. on leaks in washington. president trump saying, the real story here is why are there so many illegal leaks coming out of washington? will these be happening as i deal on north korea, et scetera.

always nice for an opening tweet at the opening bell. >> normally they fall in the 7:30 to 8:00 a.m. trarange. >> we haven't heard from him lately. >> when you talk about twitter out here, there are two twitters. the one that people say, you have to follow the president. then the other one is the one that maybe is worth $8 to $10, even if they get it right. this has been a constant back and forth out here. how much is twitter really worth? x the president, i think you'd see a real dramatic takedown of the valuation. he really has kept this thing afloat. >> really? >> yes. >> after those earnings, it is not as though investors did not react and punish twitter because of the lack of growth, jim. >> david, i think there is a takeover premium. do you want to buy a stock where the revenues are coming down? i have a lot of companies i follow where the revenues are going up. do not have many companies when the revenues are going down. i think that's what matters with twitter. and the president can't keep those -- he's not a good offset to declining revenues, as much

as he likes to tweet, clearly. >> jim, you're going to be talkitalk ing ledger later. there's been a lot going on in the wireless world. yesterday was the big announcement. actually, sunday afternoon from verizon about going unlimited. we got t-mobile's numbers. what's your take in stock is up a lit. they seem to have guided to a 45% to 48% three-year, three-cash flow growth rate. that's off, i'm told, slightly lower than expected base of $1.43 billion in fiscal year '16. numbers look good to you? >> i think the numbers look great. i do think that what's happened is you have verizon come out -- you have sprint, by the way, talk about someone who gets to sprint immediately, said, listen, let me show you the

comparison between sprint and t-mobile. as much as this quarter matters, and i think it was a great quarter, what you have instantly is, wait a second, we're not going to let legere have his way here. we're not dumb, dumber and dumbest anymore. the fact is, legere has a better network than i thought in terms of what the objective people are saying. i think it is playing out with more than 70 million subs. remember where these guys were, david? nowhere. >> i know. although, there is a question -- >> this guy, wow. >> it is. but there is a question as to whether they're capacity strained overtime, whether they need more spectrum. you know, sprint, that's one thing they've got a lot of. by the way, verizon now, some questions about that, given all the increased traffic they'll have as a result of unlimited. do they need more capacity? that's why dish was up a bit yesterday. it'll be so interesting to see how all of this plays out over the course of this year when it comes both to the fight going on, carl, between these

companies in terms of price and service, and consolidation, which is going to sort of overhang the entire group. >> yeah. meanwhile, goldman has a chart out today looking at companies with market cap over $10 billion in tech and media telecom with high statutory tax rate. t-mo is number three behind siri and level three, in terms of companies that would benefit for bringing down the statutory rate down. >> i noted siri has number one. the satellite radio, what we're talking about there. there would be huge benefits to the likes of a t-mo. given these companies have large capital spending, which could be written off immediately, and against earnings, they are not -- they are domestic, almost solely domestic in nature. they typically have high tax rates. all of which, not to mention

dereg at the fcc, all that plays in their favor, jim. it's been moving that way. i mean, you've got comcast up 9.5%. you have charter up over 12%. just the question, i guess, is can it keep going? >> well, look, one of the things i like about legere, he may be a revolutionary, but on page six, he talks about network transformation and they continue to have spectrum growth. how much they have. this is all within the context of, he welcomes you to binge. he says it is okay. the one thing i hear from a lot of the companies out here is no one has enough spectrum versus what's coming from the telco companies because of the revolution in technology of what they use. look, we may be looking at this snapshot but if you go to 2018, 2019, david, everybody is going to be a spectrum hog. everybody. there's too much good stuff

coming down the pipe. >> yeah. >> got a lot of retail news, guys. matell gets the partnership with alibaba. one of the big gainers this morning. you've been reading this morgan stanley upgrade of under heaarm. equal weight, price target, $20. >> under armor is existed, seeing how nike has done and is playing catchup. the overvaluation in the market is in the senior growth stocks. interesting about the under armor call, it is valued as a more mature company. i question that. mature companies do not typically sell at 36 times earnings. when you look at the disneys and the nikes, which is where people were when we had little growth in the world, those stocks, arguably, you could say, wait a second, we have hikeightened pre turnings. do they deserve it? other than retail and apparel,

we have good valuations if you think about 2018 and get tax reform up and also because the world is getting better. i like how t-mobile acts today. what t-mobile is saying, don't -- the stock is saying, don't pay attention to the other guys offerings. we've got the momentum. we really have to hear from legere. he's got to answer to klclaure' tweet, where he says, we're the cheapest. if everybody is the cheapest, where are the millenials going? they tend to swing. i have to say it would be difficult to expect the people who just signed up with t-mobile will switch to sprint. >> got to love his use of emoji, too. the boom. that's a nice touch. >> yeah. i like the valentine's day stuff, too. >> jim, the transports, trying to break through this level here that it got close to at the end of january. a lot of people watching it,

again, as some of the other major sectors and indexes hit all-time highs. how important is that? >> oh, my, incredibly important. the rails, which have been incredible, as if there is just -- we're shipping a lot more coal along with agriculture, autos, big containers, the rails are -- have been very strong. now, we need to see the international carriers do better. that is something that i don't know is going to happen yet. i think that they are -- they're a little more earnings driven. they, right now, have been largely about capacity takeout. i think southwest air and alaska air are the two to watch. starting to resume the old run. kelly is a good operative. >> apple not quite crossing the inter day high but adding a few more pennies to the effort, trying to get to 134.54. >> it is not hitting the

all-time high because the best days are behind it. only gained $200 billion since tom cook said the best days are in front. we have to hit another couple billion before the analysts come around. >> yesterday, it crossed the $700 billion market cap number but it had been higher than that, even though the stock price has not been higher than this because they bought back so much stock. which is something to always keep in mind. though the market cap has larger, the price has never really gotten quite here, right? >> well, i bumped into an analyst yesterday. i'll leave his name out because it was a happenstance and not on the record. he said, i liked apple the whole way. i thought that was interesting. that was a recognition that there were apple analysts who fought this kicking and screaming but kept a buy on it. did they keep a buy on it because they wanted to cover their butts? because this was an analyst that said, jim, listen to me, i actually liked it.

wow. i mean, can you imagine? there are people who love stocks and put them out as a flag. you see them. they've got it tattooed on their forehead. i thought it was interesting to have an analyst admit a lot of guys with buys on it really despised it. >> yup. you've been talking about that for a long time, jim. >> yeah. >> home depot is leading the doug dow. cat is the laggard as the index is up two points. let's get to bob on the floor. >> some sectors moving the markets and banks, once again, have been a leadership group. the kbe, the thanks, new high yesterday. up at the open. flat right now. energy not doing too much. health care has been a market leader recently and it is flat. fairly flat trades here. there's been a lot of debit about whether the market is overbrought or not. on a technical level, it is over bought. i look at strength indicators. we put up the sectors that are in the over bought territory

here. nasdaq, 100. the dow industrials, the s&p 500, the higher closes to lower closes, the indicator. these are a little over bought but nobody is worried. what everybody is focused on is the global nature of the rally. it's broken out and it isn't about the s&p 500 much anymore. look at the rest of the world around the globe here in 2017. the u.s. is up nicely but emerging markets are out performing. japan is out performing. even europe, the efa, which is what i follow, overall europe, is out performing the united states right now. we see regional exchange traded funds hitting 52-week highs, as well. not just the s&p 500. latin america and the pacific region. emerging markets. go to the next full screen. japan and europe, all out performing here. all doing a little bit better here. those are at 52-week highs, as well, here. regional etfs are at new highs,

as well. the next full screen, i'll show you what we're talking about. country e.tfs were also at 52-week highs. chili, poland, australia and canada. 52-week highs because we've had a commodity rally that's been moving the markets, as well here. that's been moving things. if you look at the country etfs. finally, the entire world investing, you can buy the whole world, acwi, 23 developing, 23 emerging markets, that's at a new multi-year high, as well. this is an indication the whole world is expanding, not just the united states. why is this happening? why are we seeing this global expansion? number one is earnings are slowly improving, not just in the united states, but all around the world we're seeing that. and the higher inflation we've been talking about is underpinning a global reflation trade that's moving virtually everything. particularly, commodity-based countries here. all right. what could derail this happy story we've had? there's a couple of things that

are obvious. obviously, tax reform moves the markets. the president talked about it last week. markets moved on that. that doesn't happen, we have a problem. if profit expectations, which are now high, start getting dramatically reduced in the next few months because we're not getting the things we want, which is tax reform, that's going to be a problem, as well. finally, i know nobody has a rate hike on the docket in march, and that's why it is a little risky. something like a rate hike could definitely stop the rally at this point. those are the three things to watch out for. for the next day or two, yellen is speaking today and tomorrow in congress. generally, the markets rise when she is giving what used to be called the humphrey hawkins testimony. if you sold on the close wednesday, s&p up 75% of the time typically up 0.1 a point. technology stocks typically rise. ten-year yields tend to move down as prices move down 0.2%. now, the dow is down ten points.

back to you. >> thank you, bob. let's check in with rick santelli, as well, at the cme group in chicago. good morning, rick. >> good morning, carl. i know everybody is thinking about janet yellen. when i looked at today's ppi, it is amazing to me how low rates are. we did see the year-over-year ppis didn't really reflect any significant move to the upside. but the headline move of up 0.6 was the biggest month over month headline change in ppi since september of 2012. did it have an affect on the markets, which is all that matters? no. the longest maturity should be the most sensitive to inflation. it jumped a little itty-bitty bit, like a half basis point to 3.04%. drifted a bit. all maturities are unchanged. the middle of the curves, fives

and tens down a basis point. you have the doe up a littw up over 3%. the s&p, little over 4%. down one basis point on the year. if you look at one week of tens, the bias is up to the mid 2.40s. maybe the formation has changed a bit. let's turn to foreign exchange. remember, we've been talking about net change. dollar index right now, 100.90. it is close for the year. the euro versus the dollar, it certainly looks as though its fortunates have reversed. the aformentioned dollar index hovers above 100, which is a good thing. traders think it needs to test at almost 104, top made a month ago. jim, david, carl, back to you. >> rick, we'll come back to you

in a bit. big day. when we return, more than three weeks into the trump presidency, janet yellen to face questions from a gop-led panel following her testimony on the economy. we'll bring it live from capitol hill. dow is down 19.

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♪ groove is in the heart ♪ groove is in the heart apple speaking at the media conference last night, talking about the original consent. asked whether apple would consider buying a company like netflix. >> the things we're trying to do aren't being done by anybody else. so that's the -- that's what we're bringing to the table. that's what we'd like to do. yes, to the extent if we wanted to do what everybody else is doing, you're right. you might be better off buying somebody or doing that. that's not what we're trying to

do. >> all right. try to read tea leaves here, jim. was that definitive by cue's standards? >> i think so. i think that the time to have bought any of these properties came and went. i think that apple has decided, look, we don't need to add radically to our service stream. we can do it ourselves. the do it ourselves thing is working for apple, given the fact where the stock is. i know i favored them buying netflix and sirius satellite. they didn't do any. harmon bought away from them, obviously. i don't think they want to do it. i don't think they want to do anything that is radical, given the fact they think they're winning and their customers are not demanding it. they're customer oriented, not wall street oriented. wall street wanted to don't, not the customers. they ain't do ing it. >> right. i think there is a belief generally over the next three to five years, as you see the convergence between technology companies, apple, google, amazon, facebook and content

companies, disney, that you will see a large deal, guys. you will see an apple even perhaps one day reconsidering whether it need to go down a different route. not necessarily a netflix, but something like a disney. years from now, but don't count it out. >> well, i do think that the valuations have gotten to the point where apple stock would go down if they did it. there was a period i felt the apple stock would go higher. at this point, i think it would get hammered. >> and if we're using what customers want as a litmus test, jim, were customers dying for them to buy beats? that's one question. >> well, i mean, look, i don't think the jury -- i think the jury is back and the jury says, well, you know what, beats was not so special. but you know what, again, apple is not a company that looks back. i think they can easily say, wait a second, beats brought us to a whole new world of sound.

i also think that when you make these acquisitions, you have to be weary that the fact the stock market has been incredibly strong. you're coming in so much later than anyone would want on wall street and it is not clear you'd get more subs, not clear you'd sell more phones. in the end, they're in the business of selling more phones and hoping the service revenue stream goes with it. >> yeah. 90 cents from all-time inter day high. when when he come back, stop trading with jim. countdown to fed chair yellen's testimony on capitol hill. dow will remain in a muted range, down nine points. opportunities aren't always obvious. sometimes they just drop in. cme group can help you navigate risks and capture opportunities. we enable you to reach global markets and drive forward with broader possibilities.

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against the border tax. >> all right. we're going to find out more about that hopefully during the week. jim, what's on "mad" tonight? >> okay. we have first appearance of visa. new ceo, al kelly. t-mobile, the stock is red hot right now. the stock hits the high list every day, mcnamara's flex. they make the stuff you think is exciting in technology. the hidden power behind a lot of the actual, physical products that go with the software and the artificial intelligence. >> that's a show, jim. you having fun out there? >> i love it out here. i just find that the -- it is such a breath of fresh air. everybody is very excited about technology. they do not think front and center about what's going on on capitol hill and in the white us. it is just not front and center, other than tweets. nobody seems to like twitter, just for the record. >> yeah. you can see how much he enjoys

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good tuesday morning and welcome back to "squawk on the street." i'm carl quintanilla with sarah eisen and david faber. janet yellen will begin testifying on capitol hill in front of the senate banking committee. we'll take you there live. s&p down 3.5% in six sessions. fed chair yellen about to deliver the semi-annual testimony in front of the senate banking committee. let's get more on that. >> janet yellen is flagging here. the fed will be evaluating whether or not to raise rates at its upcoming meeting. some hint that march could actually be on the table here. she also warned that waiting too long to raise rates would prove, quote, unwise. she also mentioned though that the pace of rate hikes is still likely to be gradual and monetary policy is

accommodative. when it comes to the economic outlook, no big change. since her speech in january, she says gdp is growing at a moderate pace, inflation and rising to its goal of 2% and the job market is continuing to strengthen. particularly in wage growth, involuntary part-time employment and minority employment, some of her favorite measures to look at in the past. janet yellen noted the strong dollar appears to be holding back manufacturing output, rising mortgage rates may be restraining the housing market. she noted business sentiment is improving. all of this is happening against the back drop of big changes here in washington. janet yellen noted that fiscal policy is now a source of, quote, uncertainty, and she encouraged lawmakers to put the u.s. debt on a, quote, sustainable trajectory. she didn't weight in on the tax reform debate or policies but she urged the boost of long-term growth and productivity. one thing that didn't get a

mention that is important is the balance sheet. janet yellen did not give any clues as to when they might end reinvestments and start to shrink the balance sheet going forward. back to you. >> thank you for that. we are getting some action in the dollar index. yields rising a bit to 2466. let's bring in our economics reporter, steve. >> my thoughts are what you mentioned. put up the two year if you could. you'll see four basis point rise in the -- there is the fed. not seeing it picked up there. running very low for march at 13.3%. if you look at the two year, you'll see a four basis point tick up. don't mean to steal rick santelli's thunder. i'm sure he'll be all over that. look at the shaikthat. we thought this would happen. fed chair yellen saying, be on your tiptoes for a possible rate hike. not guaranteeing it. using the word, unwise, waiting

too long, echoing words used by kaplan, saying if you wait too long, you'll have to do more later. there is the dollar index. using the word unwise there, saying policy accommodativ accommodative. elon, congratulations on her fed breaking news there. there is a lot of talk in the markets about whether the fed will get around to reusing the balance sheet or reducing it. yellen not saying anything. it was it was interesting how she got ahead of the questions that will be coming about the fiscal side. you can be sure the lawmakers will use this testimony to try to get yellen to back up their ideas of where fiscal policy should go. she said, it is too early to tell. shouldn't affect the forecast here. saying, you know what, if you're going to do it, focus on productivity growth and increasing underlying economic output. but be mindful of the fiscal situation. sarah? >> steve, thank you.

we continue to watch the ten-year note yield tick higher. looks like the key phrase is at our upcoming meeting, in terms of consideration for whether it is appropriate to raise rates. also with us, as you mentioned, steve, is rick santelli. >> i'll start out with the dollar index. definitely volu definitely volatility. scaling on computers makes it look huge but we're down three in the dollar index. 1/4 move from low to high. 124. the fives were at 192 so 195. here's wheret is interesting. so there is definitely a flattening bias to this. short rates moved quicker and further than long rates but they're trying to catch up. the twos and fives moderates, the tens are still guns hot at 2.47, t

2.47%, the highest i've sen. it -- seen. it seems from all the people reading the flashing headlines on at least this floor, the ohs and the ahs, there is danger if you wait too long. i'm paraphrasing. the issue of how it reads, first blush maybe a little more wa hawkish. the traders are interests in the action at the next meeting in march. back to you. >> see how she handles further questions about the march meeting, as well. rick, thank you. want to bring in guests jpmorgat strategist. and head of short rate strategy at bank of america. mark, i'll start with you. we are seeing a spike up in yields. do you think she's trying to telegraph to the markets that march is still firmly on the table? >> i do. i think that the chair believes every meeting should be live, and march is certainly in that camp. it should be live. the fed is going to continue to wait for incoming data to see

whether or not it makes sense to move. our sense is that it might be a little too soon, based upon the data we have seen thus far. i think chair yellen wants that option optionality, so the fed could move if they felt it was important to. prior to her comments, the market was prying less than 20% odds of a march rate hike. that might have been too low by her assessment. she might have been trying to move the market to give the fed the option, if the data improves materially, that they could potentially be going in march. >> we've been talking, david, a lot about the move and bonds and currencies. dollar goes from negative to positive. yields tick up. equities though, they're kind of negative. move down a tick. are there implications for the stock market, which continues to just melt up? >> so i think that's a perfect way to put it. the market recently has been kind of climbing this wall of worry. if we think about the end of last year, we had pretty good economic momentum going into the election.

the election unleashed these animal spirits and we've had a nice run in equities. i think what is supporting markets now is investors are scared of missing out on further upside. they're not worried about taking a loss on the down side. that keeps markets trending higher. if the dollar is contained, if rates don't bank up too much, it gives the fed an option to move at the march meeting. >> is the dollar going to be contained? 101.17. highs of january. if we break out of the range, could we eventually be talking about how that strong dollar could hurt economic growth? >> yeah. so i think for the fed, they're quite concerned about the dollar and the impacts that a strong dollar could have on the economic outlook. the fed has a lot of models that show as the dollar appreciates, that has a sustained drag on the overall economic output of the u.s. so i think they will be cognisant of how much the dollar does move. now, the dollar rally is given back a little bit, since what we

saw immediately after the election. seems like for president trump, a lot of the policies he wants to advocate in terms of growing the manufacturing sector, would rely on a somewhat weaker dollar. so it may be that as the fed looks to tighten, that's going to put some upward pressure on the dollar. that could be counteracted by any type of verbal intervention, let's say, from the white house or the treasury that tries to moderate the extent of that dollar appreciation. >> david, people want to -- some people argue trump is going to make the board more dovish. >> right. >> we know the lessons of the last couple years. go in with expectations, barely getting a hike at the end of the year. >> right. >> we are conditioned to think any meeting without a press conference isn't life. >> right. >> does the market need to break itself of that correlation? >> i think that the market does need to prepare itself to break out of that feedback loop. you put it very well. last year, the year before, what would have? the fed would talk about hiking rates. it rays would go up, the dollar would strengthen, equity would

fall and they say, we can't hike rates because the financial market tightened. the inflation is beginning to tick higher. this is a federal reserve which wants to normalize policy. i think maybe a move which is not in line with the market's expectations could be a way of showing they're serious about getting rates off the bottom. >> do doves, what are their best argument at this point? >> i'm of the belief that lower interest rates are doing more harm than good for the interest. interest income as a percentage of disposable income is at a low. my grandmother gets income from bonds and money market funds. it is not there today. i think rates higher than they are today could stimulate the economy a bit. >> i wonder if president trump and janet yellen, everybody has been wondering if they're going to have a clash. i wonder if there is a collision course here over the value of the u.s. dollar. if she keeps hinting at march and hinting they're looking at raising interest rates, you read, david, the "new york

times" report the other day that gary cohn went in and said the strong dollar is an inhibitor to economic dollar. mark, i'll ask you for color from the trading floor, is this going to be where we see the president and the chair of the federal reserve clash? >> yeah, so again, a strong dollar is certainly -- would be a by-product of the fed tightening rates, perhaps faster than the market expects. it is really not what i think the current administration is strongly advocating for. now, obviously, the administration wants strong and robust growth. they've talked about getting the growth to the 3% to 4% range annually. if that happens, the fed will need to begin to raise interest rates. i do think that does pose a bit of a dilemma for the trump administration and what they need to see from the dollar. now, maybe the trump administration will try to talk it down in a variety of forms. or they'll try and spur growth through other means, certain trade deals and the like.

but i do think that it will pose a pit of a challenge as the fed does try to tighten further and the impact that has on what trump would like to see, vis-a-v vis-a-vis, the dollar. >> david, you mentioned earlier on the broader market a wall of worry. >> yeah. >> typical phrase. what is number one in terms of those worries? >> you know, i think that right now, the market is being supported by two pillars. one is a pillar of hope about lower taxes, infrastructure spending. the only is nominal data. we're more concerned with the economic fundamentals. i think what could get in the market's way is if we continue to see growth soften. if we don't see as much progress made in washington. and really, most importantly, if that begins to impact estimates for corporate profits over the coming year. earnings will be key in driving returns. if anything undermines the earning story, we'll see stocks take a wobble. >> they're coming back here. the dow down less than five

points. we'll see what happens as we await fed chair janet yellen, who is on capitol hill, before the senate banking committee. we'll bring it live as soon as she takes questions. thank you. >> thank you. >> david and mark, thanks to you. aetna and humana ended their merger agreement after a court sided with the department justice which objected to the combination and won in court. we're joined for more betadetai. bertha? >> aetna ceo is disappointed after nine months of planning to consummate the deal, to end it. both companies need to move on right now. the news, in many respects, is priced in. federal judge rejected the company's $34 billion deal last month on the grounds it would reduce competition in the medicare advantage market. aetna is paying humana $1 billion break up fee, and also fees for the assets to molina

health care, part of the effort to gain approval for the merger. a federal judge also blocked aetna aae anthem and cigna's deal last week. analysts think the deal is headed for an unfriendly divorce. the agreement expires april 30th and carries a $1.85 billion breakup fee likely to be contested. cigna's ceo was reluctant to be acquired from the start. in recent weeks, he made it clear to analysts he has the cash and the inclination to pursue another deal once the anthem agreement ends. analysts think cigna and anthem, or both, could once again pursue humana, which was the one that got away two years ago. the trump administration and republican health reform plans may be up in the air, but medicare advantage continues to be a growth area. humana is a monster in that market. this year, the peak of the baby boom is going to reach

eligibility for medicare. huma humana, they want to go to loan. we may learn more when they have a conference call after the bell. carl? >> bertha, thank you very much. that is a huge story. along with the fed care, who is going to begin her testimony in a few moenments here. as we told you, dollar index, three week highs. here's the chair. >> pleased to present the federal reserves semi-annual policy to the congress. in my remarks today, i will briefly discuss the current economic situation and outlook before turning to monetary poli policy. since my appearance before this committee last june, the economy has continued to make progress to dual mandate objectives of maximum employment and price stability. in the labor market, averaging 190,000 per month over the second half of 2016. the number of jobs rose an

additional 227,000 in january. those gains bring the total increase in employment since its trough in early 2010 to nearly 16 million. in addition, the unemployment rate, which stood at 4.8% in january, is more than 5 percentage points lower than where it stood at its peak in 2010, and is now in line with the median of the federal open market committee participants estimates of its longer run normal level. a broader measure of labor underutilizati underutilization, those marginally attached at the labor force and those working part time and would like full time jobs is continuing to improve over the past year. in addition, the pace of wage growth has picked up relative to its pace of a few years ago. a further indication that the

job market is tightening. importantly, improvements in the labor market in recent years have been widespread. with large declines in the unemployment rates for all major demographic groups, including african-americans and hispanics. even so, it is discouraging, the jobless rates for those minorities remains significantly higher than the rate for the nation overall. ongoing gains in the labor market have been accompanied by a further moderate expansion in economic activity. u.s. real gross domestic product is estimated to have risen 1.9% last year. the same as in 2015. consumer spending has continued to rise at a healthy pace, supported by steady income gains, increases in the value of households financial assets and

homes, favorable levels of consumer sentiment and low interest rates. last year's sales of automobiles and trucks were the highest annual total on record. in contrast, business investment was relatively sho lly soft for last year, though it posted larger gains toward the end of the year, in part reflecting an apparent end to the sharp decline in spending on drilling and mining structures. moreover, business sentiment has noticeably improved in the past few months. in addition, weak foreign growth and the appreciation of the dollar over the past two years have restrained manufacturing output. meantime, housing construction has continued to trend up at a modest pace in recent quarters. while the lean stock of homes for sale and ongoing labor market gains should provide some support to housing construction going forward, the recent

increases in mortgage rates may inpart some restraint. inflation moved up mainly because of the diminishing effects of the earlier declines in energy prices and import prices. total consumer prices is measured by the personal consumption expenditure or pce price index rose 1.6% in the 12 months ending in december. still below the fomc's 2% objective but up 1 percentage point from its pace in 2015. core pce inflation, which excludes the volatile energy and food prices, moved up to about 1.75%. my colleagues on the fomc and i expect the economy to continue to expand at a moderate pace with the job market strengthening somewhat further

and inflation gradually rising to 2%. this judgment reflects our view that u.s. monetary policy remains accommodative, and that the pace of global economic activity should pick up over time, supported by accommodative monetary policies abroad. of course, our inflation outlook also depends importantly on an assessment that longer run inflation expectations will remain reason my well anchored. it is reassuring that while market pace e based measures of inflation compensation remain low, they have risen from the very low levels they reached during the latter part of 2015 and first half of 2016. meanwhile, most survey measures of longer term inflation expectations have changed little on balance in recent months. as always, considerable

uncertainty attends the economic outlook. among the sources of uncertainty are possible changes in u.s. fiscal and other policies, the future path of productivity growth and developments abroad. turning to monetary policy, the fomc is committed to promoting maximum employment and price stability as mandated by congress. against the back drop of head winds weighing on the economy over the past year, including financial market stresses that emanated from developments abroad, the committee maintained an unchanged target for the federal funds rate for most of the year in order to support improvement in the labor market and an increase in inflation toward 2%. at its december meeting, the committee raised the target range for the federal funds rate by 0.25% to 0.5% to 0.75%.

in doing so, the committee recognized the considerable progress the economy had made toward the fomc's dual objectives. the committee judged that even after this increase in the federal funds rate target, monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2% inflation. at its meeting that concluded early this month, the committee left the target range for the federal funds rate unchanged. but reiterated that it expects the evolution of the economy to warrant further gradual increases in the federal funds rate to achieve and maintain its employment and inflation objectives. as i noted on previous occasions, waiting too long to remove accommodation would be unwise.

potentially requiring the fomc to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession. incoming data suggests that labor market conditions continue to strengthen and inflation is moving up to 2%, consistent with the committee's expectations. at our upcoming meetings, the committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case, a further adjustment of the federal funds rate would likely be appropriate. the committee's view that gradual increases in the federal funds rate will likely be appropriate reflects the expectation that the neutral federal funds rate, that is the interest rate that is neither

expensi expensionary nor contractionary, will rise somewhat over time. current estimates of the neutral rate are well below pre-crisis levels. a phenomenon that may reflect slow productivity growth, subdued economic growth abroad, strong demand for safe, longer term assets and other factors t. committee anticipates the depressing effect of these factors will diminish somewhat over time, raising the neutral funds rate, albeit to levels that are still low by historical standards. that said, the economic outlook is uncertain and monetary mopoly is not on a pre-set course. participants will adjust their asusme assessments of the appropriate path for the funds rate, changes to the outlook and associated

risks as informed by incoming data. also, changes in fiscal policy or other economic policies could potentially affect the economic outlook. of course, it is too early to know what policy changes will be put in place or how their economic effects will unfold. while it is not my intention to opine on specific tax or spending proposals, i would point to the importance of improving the pace of longer run economic growth and raising american living standards with policies aimed at improving productivity. i would also hope that fiscal policy changes will be consistent with putting u.s. fiscal accounts on a sustainable trajectory. in any event, it is important to remember that fiscal policy is only one of the many factors that can influence the economic outlook and the appropriate course of monetary policy.

overall, the fomc's monetary policy decisions will be directed to the attainment of its congressionally mandated objectives of maximum employment and price stability. finally, the committee has continued its policy of reinvesting proceeds from maturing treasury secretaries and principle payments from mortgage backed securities. this policy, by keeping the committee's holdings of longer term securities at sizable levels, has helped maintain accommodative financial conditions. thank you. i would be pleased to take your questions. >> thank you very much, chair yellen. i want to get into that last issue you talk ed about with regard to the fed's balance sheet. before that, you have two or three quick questions go through with you. first, dodd/frank established a new position at the federal

reserve, the vice chairman of supervision. president obama has never yet designated anyone for this role. instead, fed governor has acted as the de facto vice cahairman n various ways. in terms of the board on supervision and regulation, overseeing the large institution coordinating committee and representing the fed at the financial stability board, among other functions. what role do you envision for the fed vice chairman for supervision having, and how do you envision working with this person when we get one nominated? is it your expectation that a presidentially-appointed chairman will have the responsibilities that the governor currently has, including chairing the committee on regulation and negotiating on behalf of the federal reserve? >> chairman, i think as you

know, the entire board has a responsibility for approving new rules, but the vice chair would head our supervision and regulation committee and would coordinate our efforts in this area. he would -- he or she would also represent the board on international negotiations for financial regulatory standards, including representing the fed -- in beyond that, any semi-anl testimony to congress on supervision. i look forward to working with the individual. >> thank you very much. secondly, president trump recently issued an executive order directing the treasury secretary to work with the member agencies to review the extent to which existing laws and regulations promote core principles. first of all, do you agree it is important to promote the core

principles mentioned in the executive order, and do you plan to work with the treasury secretary and other members to ensure this review occurs? >> so i certainly do agree with the core principles. they enunciate important goals for our financial system and for supervision and regulation of it. and i look forward to working with the treasury secretary and other members of fsoc to engage in this review. >> thank you very much. third question before we get to the balance sheet is, fannie mae and freddie mac were in 2008 and continue to dominate the mortgage market. i'm not alone in calling for housing reform. considering it the most significant piece of unfinished business following the financial crisis. do you believe finding a solution is urgently needed and

are you willing to help us achieve that? >> yes. i think it is very important that congress continue to deal with the gses and figure out what the government's role in housing finance should look like going forward. the goal of bringing private capital back into the mortgage market, i think, is important. i would hope that congress would decide explicitly on what the government's role is and if there are guarantees that they would be recognized and priced appropriately. and we look forward to continue working with you to help achieve these objectives. >> thank you. i just wanted to get your comments on those few issues before i go into the final question on the balance sheet. the fed said it will not begin shrinking its balance sheet until normalization of the level

of federal funds rates is well underway. recently, some reserve bank presidents suggested it is time to consider beginning that process. what are the benefits of starting to let the balance sheet runoff, rather than relying on short term rate hikes to tighten policy? as rates rise, is it problematic to have the large balance sheet continuing to put downward pressure on longer term rates? >> well, chairman, the federal reserve resorted to purchases of longer term assets after the financial crisis, at a time when the economy was very depressed. unemployment was very high. inflation running below our objectives. extraordinary support was needed. but we would hope that that was a very unusual intervention, and one that we would not frequently be relying on in the future.

the fomc has enunciated that its longer run goal is to shrink our balance sheet to levels consistent with the efficient and effective implementation of monetary policy. while our system evolves, and i can't put a number on that, i would anticipate a balance sheet that's substantially smaller than at the current time. we would like to -- in addition, we would like our balance sheet to, again, be primarily treasury securities, whereas, as you pointed out, we have substantial holdings of mortgage-backed securities. now, to financial conditions, in order to influence economic developments in line with our dual mandate objectives, the committee would like the maximum

extent possible to rely on variations in our short-term, overnight interest rate to accomplish that objective. it is our traditional tool. it is the one that we have the most confidence in. that markets best understand how we set it. and we have the greatest confidence in our ability to calibrate it relative to the nud needs of the economy. so we do not want to use fluctuations in our balance sheet policy as an active tool of monetary policy management. so what we would like to do is find a time when we judge that our need to provide substantial accommodation to the economy in the coming years is minimal. when we have confidence that the economy is on a solid course and the federal funds rate has

reached levels where we have some ability to address weakness by cutting it. and once we have that confidence, we will try to -- we will begin to allow maturing principle from our investments to gradually and in an orderly way, we will stop reinvestments, we'll diminish them and allow our balance sheet to shrink in an orderly and predictable way. the committee has decided that it will not sell mortgage backed securities, but as principle matures, we will begin to allow those assets to runoff our balance sheet. we do expect to be discussing in greater detail. we gave general guidance that we want to wait to start this process until the process of normalization is well underway.

and the committee in the coming months will be discussing issues pertaining to reinvestment strategy to try to provide some further guidance. >> thank you very much. senator brown? >> thank you, sir, mr. chairman. madame chair, you testified last year the banking system was more safe, more resilient. is that still true? >> i believe so. yes. i mean, there is much more capital in the banking system. the quantity of high quality capital to your one capital has more than doubled since before the financial crisis. there's much more liquidity. i believe the financial system is much more resilient than it was. >> thank you. now, now that we know that, and i think we already knew that, i appreciate your assertion and convincing arguments that you made for some time. some have remarked that banks are not lending now.

is that true? >> well, a recent survey by the national federation of independent business, which is smaller businesses, indicated that only 4% of respondents were unable to get all of the loans that they needed. the fraction of businesses ranking inadequate access to credit as their main problem stood at 2%, which is an extremely low number. >> so just because people -- >> it has expanded overall, but the banking system and also to small businesses. >> just because people in high places say it is true doesn't make it so. are u.s. banks competing -- others said u.s. banks can't compete. are u.s. banks competing relative to their international counterparts? >> u.s. banks are generally considered quite strong relative

to their counterparts. they built up capital quickly, partly as a result of our insistence that they do so following the financial crisis. and as i mentioned earlier, are very well capitalized. they're lending. they're pri their price to book ratios are substantially higher than ratios of banks headquarters in other areas. they're gaining market share and remain quite profitable. >> banks are safe -- safer and more resilient. banks are lending. banks are able to compete with their international counterparts. consumers, some have said consumers are worse off since the crisis, or are consumers better protected today from abusive, deceptive and fraudulent practices than they were? >> certainly, we focused very much on protecting consumers in

our implementation of strengthening the financial system. of course, consumers were very seriously harmed by the financial crisis, but i think we've seen a significant recovery. >> and the fed is tailoring rules, as we've discussed personally and in this room, the fed is tailoring rules for community banks, regional banks, the largest banks based upon factors including size and riskiness, correct? >> yes. >> seems to me that steps taken after the crisis with higher capital requirements, as you said, was stress tests with orderly liquid squn ation autho better for stability and consumers are better protected. i think if the rules are removed, as one executive said during the crisis, if the music is playing, you have to get up and dance. if the rules are removed, wall

street will almost assuredly be back to their risky and reckless behavior we experienced before you took the job, before the crisis. couple other lines of questions, if i could, madame chair, mr. chairman. recent executive action directs the secretary of treasury to chair the financial stability oversight counsel to review the rules and regulations. determining if they're consistent with the core principles of the executive branch. i know the fed and other agencies regularly review their work to make sure the rules continue to enhance financial stability and promote safety and soundness and to protect consumers. to the extent that you provide any information or conclusions to treasury or to fsoc about your agency's rules about the process, could you provide those materials to the banking committee? >> i don't yet have any clarity about what the process will

involve, but -- >> but when you do. >> -- we always try to work with our oversight committees to provide materials that are, you know, relevant here, oversight of us do. >> thank you. >> we will strive to -- >> thank you. i have doubts about the executive order that requires federal agencies to eliminate two rules, to con summsumer pr protecti protections. like telling the highway department to take down two feet of guardrails for every foot it puts up. the it clear that -- a series of questions and i'll put them together. is it clear that financial regulators, including the fed, are not covered by this rule? does it make sense to remove two safety and soundness rules for every new safety and soundness protection? does it make sense to remove two consumer protections for every new consumer protection? will it make our system more stable and better protect

consumers from bad actors? >> so i believe the independent agencies are not covered explicitly by the rules, but let me just say that considering regulatory burden and looking for ways in issuing rules and reviewing outstanding rules, constantly looking for ways to mitigate burden, i think, is an important goal. it is one that we will strive, have strived and will strive to achieve. it is a legitimate and important goal. >> understanding, of course, what some people call rules and regulatory overreach, others call consumer protection and environmental protection and worker protections. chair yellen, last question. mr. chairman, i want to follow up on an issue we've talked about, diversity in the federal reserve system. we see the least diverse president's cabinet we've seen any time in the last three decades. the presidents of two of the

most diverse federal reserve districts in the country, richmond and atlanta, have announced their retirement. each bank begun its search for the replacement. what is the board of governors doing to ensure a diverse set of candidates is considered for these positions? >> the board consults with the search committees that are charged with nominating individuals to serve as presidents of the reserve banks. we consistently emphasize that diversity is an extremely important goal. we ensure that the search is inclusive, that robust efforts are made to identify diverse pools, and that the boards are focused on this important goal as they go about their searches. >> then the last connected

question. significant racial disparities in unemployment and wages persist everywhere. not, of course, just mississippi, louisiana, maryland, south carolina, places in both of these districts. what is the fed doing -- what is the fed doing to ensure that these challenges are understood by the board of directors in these districts? what can be done by the fed or others to address these issues? >> well, i think we are trying to address issues of high minority unemployment by adopting policies that result in robust labor market and strong overall job conditions. over the last year, for example, the unemployment rate of african-americans, i believe, has come down about a for sperce point. moved substantially more than that for white americans.

so a strong labor market does improve the situation of vulnerable minorities, although it is, as i mentioned, disturbing that such large disparities continue to exist. >> thank you. >> senator shelby. >> madame chair, good to see you. >> thank you. >> i want to pick up on the theme that chairman crapo got into a minute ago, dealing with the vice chairman of the fed. we've been hoping that -- we did at one time hope that president obama would nominate someone, but he didn't. now, as i understand it, there's going to be three openings at the fed. this coming april, whenever it is, resigning. two other openings there. then your tenure, your appointed until, what, next february? is that correct?

>> that's correct. >> do you intend to fulfill the last year of your appointment? >> i do intend to complete my term as chair. >> sure. what will be the mechanics of how the fed vice chairman will work? the chairman got into that some. with the whole board. you mentioned he would come before the committee to testify. he would represent people in the international deals, dealing with regulatory relief and regulatory affairs, so forth. you got anything else to add to that sf. >> importantly, he would chair our board committee on supervision and regulation. that committee takes the lead on behalf of the full board in working with the division of supervision and regulation to craft rule makings that are then brought to the full board for a

vote. the vice chair would head that committee and would have oversight in that role for our division of supervision and regulation. and would also represent us in supervision, international supervision groups, such as the bozl committee. >> if we have three new appointments to the fed board of governors, that'll be three new people to deal with, and you'll have to deal with that as a chairman. is that right? >> of course. we have, you know, diverse membership changes over time. the role of the chair is to work constructively with all the governors to manage the matters that congress has charged us with. >> when you're getting in the area of monetary policy, inflation, deflation, so forth, price stability, what is the

biggest challenges you're looking at all the data inside to see where inflation is rearing its head, so forth? is it wages and salaries? is that one of the big components? is it -- energy is generally a component there. food is a component. sometimes, you don't count that, you know. what is your biggest challenge in measuring, engaging in configuring what inflation is doing or not doing? >> so we look at many measures of inflation. our objective, we recognize that food and energy are very important parts. consumers spend a good share of budgets on food and energy. we do not want to ignore movements in food and energy prices in measuring inflation. so in my testimony, i began by saying that in overall

comprehensive measure of a price increase, that includes food and energy, ran at 1.6% last year. there are many different measures. we've focused explicitly in saying we have 2% inflation goal on the measure we regard as the best measure we have of consumer prices, which is the personal consumption expenditure price index. less well-known than the cpi but we think it is a more comprehensive measure. food and energy prices are very volatile. in looking forward over a number of years, in trying to estimate where inflation is going, we often look at measures called core measures that remove food and energy prices. >> sure. >> wage developments, it is

unclear that they have much direct effect on inflation, but generally, what we've found is that in a situation where labor and product markets are tight, inflation tends to move up. and movements in wage growth gives us a sense of just how tight labor markets are. >> in the area of regulations, last time you came for this committee, i believe it was back in june, i asked you the federal reserve's plans to tailor the seat car process to provide much-needed relief to smaller regional banks. on january 30th, the federal reserve issued its final c-car rule, for institutions less than $250 billion in total consolidated assets and less than $75 billion in non-bank assets. what is the significance of what

you did there and how will that help them? >> i think that that change will reduce burdens substantially. >> regulation. >> yes, for a significant number of institutions. after engaging in a five-year review of c-car and our stress testing methodologies, we decided that the capital planning processes of those smaller institutions could be adequately reviewed and commented on to our normal supervisory processes. and that it was appropriate to exempt them from the qualitative portion of that capital review. but we still are subjecting them to our stress tests and asking that -- requiring that they conduct stress tests themselves. that is an important component of our supervision.

>> but as a regulator, you will continue to monitor that and if it needs to be tailored, you'll do it, whatever it takes? >> yes. we believe very strongly in tailoring to make sure that our regulations fit very strongly in tailoring to the particular institutions and especially for smaller institutions we're very well aware of the burdens they face and are looking for every way we can find to mitigate those burdens. >> senator reid? >> thank you for your leadership. some of my colleagues called on the federal reserve to use a very strict formula in setting interest rates that many times refer to the tailor rule. could you explain how this would affect particularly working americans. how do we -- would it be good or bad and how do we explain the

ramifications to constituents. >> right now the tailor rule would call for a short-term interest rate between 3 1/2 and 4%. that is a higher value of the federal funds rate than they have deemed appropriate given the needs of the economy. i believe we would have a much weeker economy if in the last number of years we followed the dictates of that rule. unemployment would be substantially higher, the labor market would be weaker. and instead of inflation running below 2%, and we want to see it move up, i think inflation would be lower than it is now. >> so fuelling jocks, mobs, mor

rates. >> yes, i recently a few weeks ago gave a speech where i tried to explain why i thought it was appropriate to adjust the recommendations of the fact in a not only do the fmoc, but the forecasters and the so-called neutral rate of interest has been unusually low in the after math of the crisis. and the role would assume it is at 2%. current estimates would put t t that. >> the language assures that

clearing platforms are used, but there is a risk that systemic fail yuf would be. so can you give us a update on what you are doing to ensure that the central platforms are adequa adequately protected from failure? >> we strongly believe that well regulated and managing financial market infrastructures and they would include center counter parties and a positive financial stability role, they can stem the propagation of disturbances and they reduce the volume of key financial institutions and we think that they play a financial stability rule.

but they are a risk to the financial system if they are not themselves well managing. title eight created a structure to make sure that the key infrastructures of our managing risking successfully and that we're cooperating with the other regulators in our examinations to make sure that appropriate risk management standards are in place. >> thank you, a final question. cyber security is the issue on everyone's mind. and you recently have on advanced notice, you require adequate expertise. i have been part of a publicly

held company. it is not limited it's y ubiquitous. >> i think cyber security is a major major risk that financial firms face. i think they're very well aware of the risks. my sense is that boards of directors generally appreciate the seriousness of cyber threats. but sometimes they don't have a comprehensive or enterprise wide view of the institutions capabilities in this area into it is very important for boards to have appropriate expertise. >> thank you for your service and being here today.

i don't always agree with every agreement mr. trujillo made, but he was a very committed public service. madame chairman, i was interviewed earlier today, and people always hinge their futures on what you have to say, and i'm somewhat thankful now that it looks like you have a little built of a partner. we knew at one time there was probably not going to be any changes here. now we look at potential tax reform and we look at potential changes to the health care policy, things real tiff to infrastructure and all of that. as you see the possibilities occurring, is that affecting how you look at monetary policy

decisions moving down the road. a stagnant decision, is that affecting for deliberations. >> we're very well aware of how it could affect the outlook and we don't have enough clarity on what changes will be butt in place to really clearly factor those policy changes into the economic outlook. so we don't want to base current policy on speculation about what may come down the line. we will wait to gain greater clarity on policy changes and -- >> those policy changes, once you change them, couldn't it

affect monetary policy decisions? >> yes, it is one of my factors. i think the answer is yes, they could. exactly how depends on the timing, size, competitikpcompek. >> paying attention to that and when it happens and it can happen fairly quickly, can it not? >> we will certainly pay attention to it. i think some policies may have supply side impacts and raise productivity growth. >> you mentioned something about sustainable trajectory. you're hope pg the administration will develop policies that call a sustainable trajectory relative to fiscal issues. is there anything that you're saying coming down the pipe or being debated that caused you to raise that issue. i agree by the way, but is there

something you're looking at that caused you to put the note in there? or is it just a standard line that would be in a report like this. >> i think we have known for many, many years that the u.s. fiscal trajectory is not sustainable and the budget office's most recent forecasts show deficits increasing every the next ten year period under their baseline and the ratio of debt to gdp -- >> nothing that you're looking at coming out of the administration or congress that is causing you to raise that ala alarm. more of just the standard concern that many of us that that we're conducting ourselves in an inappropriate way. >> well, i mean, some of the policies being discussed might well raise deficits, and in that context, you know, they may also

have impacts on economic growth. and the economy's growth potential. so it is not a simple matter to evaluate, but i do think it is worth pointing out that fiscal sustainability has been a long standing problem, and that the u.s. fiscal course, as our population ages, and health care costs increase, is already not sustainable. >> agree 100%. >> you gave a very fulsome answer, and i understand how the feds fund rate is more tolerable and accurate. but just allowing the maturity, just to allow them to mature and rolloff, it is hard to understand how that would create vagueries, if you will, relative to monetary policy that would be hard to predict.