♪ ♪ ♪ ♪ ♪ the federal reserve report to congress as the economic recovery is not yet complete and the fed will continue a policy of low interest rates. the fed chair discussed the

report and the state of the economstate of theeconomy before banking committee. this hearing begins with committee chairman tim johnson >> i call this hearing to order. this morning we welcome you back to the committee for testimony and the federal reserve semiannual monetary policy report to the congress. since the chair was the last before the committee, fisher bernard and jerome were -- to effectively carry out the monetary policy and military functions. to that end, there are two

remaining spots to be filled on the board and i hope for a swift nomination of qualified candidates with expertise in community banking as well as tough and effective oversight experience. the fed continues to grapple with many issues to spend both monetary and regulatory policy and look forward to hearing yellen's perspective on these issues today. the study path of economic recovery will fall on the great recession took a sidestep with first quarter. the unemployment rate has continued to drop in recent months with long-term unemployment and youth unemployment remained at unacceptably high and the housing sector to rebound from

its troubles during the crisis with too many like the mortgage market. given these headwinds against the more robust recovery and the low inflation rate and encouraged by the view that monetary policy would likely remain for a considerable time following the completion by the program. i'm also encouraged by the continued progress being made to implement the wall street reform and an improved the u.s. financial stability. your recent comments outlining the importance of the tools must lean against the financial excess and focus on the resilience of the financial

system report to the need to ensure that the firms, particularly the largest and systemically important firms are prepared for the worst and able to withstand shocks from a variety of sources. in that end, it is imperative that the wall street reform will be completed as soon as possible. we must not forget how costly the crisis has been so the regulators and congress must continue to do all we can to keep our financial system stable and promote strong economic growth. with that i will now turn to the ranking member for his opening statement of. >> thank you mr. chairman. during doctor yellen's nomination hearing i noted the need to fill the vacancies the

chairman reference at the federal reserve board with individuals bringing balance to the viewpoints. again i state the president should nominate someone with community bank experience to the board to fill one of the remaining vacancies. the banks play an important role in the local economies and face the regulation. we've should ensure the perspective is represented in the policymaking. today's hearing is another important opportunity to discuss monetary policy and financial regulatory policy. since our last hearing with chair yellen the fed has continued to reduce the pace of the large-scale asset purchases known as quantitative easing. it has been a welcome development to see that under the chairs of action. and the process has begun and now we will likely be able to see all of the purchases cease later this year. i've consistently made my opposition to the policy very

clear. the quadrupling of the size of the balance sheet that has occurred as a result of the purchases of the treasury and agency to mortgage backed security is worrisome. these assets will remain on the balance sheet for a very long time and the reserves used to purchase them will remain in the financial system. the process of normalizing the monetary policy will be difficult. it's failed to strengthen in the way that was promised by the supporters of this unconventional monetary stimul stimulus. they indicate in the coming years any miscommunication about the monetary policy during the normalization period could create risks to the economic outlook. continued clear to communication will be important particularly as the fed is seeking to rely on the tools that are in familiar to the market. the old rituals have indicated that overnight reversed purchase agreement also known as the repo will likely pay a large part in

the monetary policy in the normalization. while the federal fund rate becomes less and are kind. at the fomc meeting some raised concerns that the overnight facility could increase problems during the adverse market conditions potentially causing the counterparties to shift funds away from making loans and opting for the safety net and stacked. how will they balance the need for open dedication with the ability to preserve the flexibility showed unintended consequences arise in this important market. i'm also interested in the comments in the use of macro prudential views by the fed. the experience with the tools is limited and many central banks will still have much to learn to use these measures effectively. introducing the concept of managing u.s. monetary policy by regulation and prudential oversight is on test did, and perhaps more theoretical than real. i agree with those that are

concerned regulators may not be able to get the timing right. many economists including those at the fed hasn't been very good judges of identifying market bubbles and predicting when the bubbles will burst. your speech discussed the ability of the regulators to change the regulatory standards on the mortgage lending such as death to income and loan-to-value ratios. as a macro prudential tool that could slow mortgage lending. i'm skeptical that during a housing boom regulators would act aggressively to restrict lending to individuals with high levels of debt or low incomes. in fact recent experience suggests all the political pressures run counter to that happening. it's a low -- highly questionable to think they would identify before handling the tools should be adjusted in the credit cycle. while financial stability can complement the goal of the monetary policy committee is paramount to the regulators thas strike the right balance without harming the economy. again we have a lot of issues to

deal with and i look forward to your testimony today chair yellen. yellen. thank you. >> thank you senator craop. i would like to remind my colleagues that the record will be opened for the next ten days of additional statements and other materials. i was now like to welcome the chair janet yellen back to the committee. she is serving her first term as ththe board board of governors e federal reserve system. the doctor yellen serves as the vice chair of the board fo boarr three years. she has also previously served as the chair of the council of economic advisers and president and ceo of the federal reserve debt of san francisco.

please begin your testimony. >> thank you. charan johnson, ranking member crapo, and members of the committee i am pleased to present the federal reserve semiannual monetary policy report to the congress. and my remarks today i will discuss the current economic situation and outlook before turning to monetary policy. i welcome clued with a few words about financial stability. the economy is continuing to make progress toward the federal reserve's objectives of maximum employment and price stability. in the labor market gains in the total payroll employment averaged about 230,000 per month over the first half of this year. a somewhat stronger pace than 2013 and enough to bring the

total increase in the jobs and the economic recovery this far up to 9 million. the unemployment rate has fallen nearly one and a half percentage point over the past year. it's down about four percentage points from the peak. broad measures of the labor utilization have also registered notable improvements over the past year. they have declined sharply in the first quarter. the decline appears to have resulted mostly. the recent indicators of the production spending suggest of the growth in the second quarter. but this bears a close watch. the housing sector however has shown little progress.

the sector has recovered notably from its earlier trough and the housing activity leveled off in the wake of last year's increase in the mortgage rates and readings this year have 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 estimate of its long-run normal level. the participation appears weaker than one would expect based on the aging population and the level of unemployment. these and other indications that a significant slack remains in the labor markets are corroborated by the continued slow pace of growth in most

measures of the compensation. inflation has moved up in recent months but you moves below the 2% objective for inflation in the longer run. the personal consumption expenditures price index increased 1.8% over the 12 months through may. pressures on food and energy prices account for some of the increase in the price inflation. the core inflation which excludes food and energy prices rose 1.5%. most committee participants project total and core inflation will be between one and a half to one and three quarters% for this year as a whole. although the decline in the gdp for the first quarter led to some downgrading of the growth

projection for this year i and other participants continue to anticipate economic activity will expand at a moderate pace over the next several years. in the drag from the fiscal policy the effect of the higher home prices and equity values and strengthening foreign growth. the committe committee seized te projected pace of economic growth as sufficient to support ongoing improvement in the labor market with further job gains and the employment rate is anticipated to continue to decline toward its long-run sustainable level. consistent with the anticipated further recovery in the labor market, and given that longer-term inflation expectations appear to be well

angered we expect inflation to move back into 2% objective over the coming years. as it's about the projections for economic growth, unemployment and inflation buffer disappeared correctly judge these risks to be nearly balanced but wa warren to the monitoring in the months ahead. i will now turn to the monetary policy. we are committed to policies that will promote the maximum unemployment and price stability consistent in the dual mandate from the congress. given the economic situation that i just described we judge 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 zero to one quarter% and have continued to rely on the large-scale asset purchases and forward guidance about the path of the federal fund rate to provide the appropriate level of support for the economy. since it has occurred since the inception of the federal reserve asset purchase program in september of 2012 and the assessment of the labor market conditions would continue to improve the committee has made measured reductions in the monthly pace of the asset purchases and each of our regular meetings this year. if the incoming data continue to support our expectation of ongoing improvement in labor market conditions and inflation

moving back towards 2%, the committee likely will make further reductions in the pace of asset purchases and upcoming meetings with purchases concluding after the meeting. even after the committee and is the purchases the sizable holdings of long-term securities will help maintain the conditions. thus supporting further progress in returning employment and inflation to mandate consistent levels. the committee is also fostering to be accommodated conditions in the forward guidance that provides greater clarity about the outlook and expectations for the future path of the federal funding rate. since march, the post meeting statements have included a description of the framework that is 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 the wide range of information including measures of labor market conditions come indicators of inflation and longer-term inflation expectations and readings on financial development. based on its assessment of these factors, in june the committee re- iterated it expectation that the current target range for the federal funds rate likely will be appropriate for a considerable period after the asset and if it continues to run

below the 2% long-run goal and provided inflation expectations remain anchored. we anticipate after employment and inflation are a mere mandate consistent level economic conditions made for some time aren't keeping the federal funds rate below the levels the committee views as normal in the longer run. of course the outlook for the economy and financial market is never certain and now is no exception. therefore the path of the federal funds rate remained 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 kennedy

resulting in faster convergence towards the dual objectives, then increases in the federal funds rate target likely would occur sooner and been more rapid than currently envisioned. conversely if it is disappointing tha that the futue path of interest rates likely would be more accommodated than currently anticipated. the committee remains confident that it has the tools it needs to read the short term interest rates when the time is right and to achieve the desired level of short-term interest rates thereafter even with the federal reserve of eight of the balance sheet. at the meetings this spring we have been constructively working through the many issues associated with the normalization of the stance and conduct of monetary policy.

these are a matter of prudent planning and do not apply in the imminent change in the stance of monetary policy. we will continue discussions and expect to provide additional information later this year. they may provide incentives for some investors to reach and they could increase the abilities of the financial system to adverse event. will the prices of real estate, equities and corporate bonds have risen appreciably and valuation metrics have increased they remain in line with historical norms. in some sectors for valuation is stretched and issuance are

closely monitoring developments in the low market and enhancing this. more broadly the continue to become resilient as banks continue to post the cli clip liquidity positions and growth of the short-term funding and financial markets has been modest. and tom this time, since about monetary policy report further progress has been made in restoring the economy to health and strengthening the financial system. yet too many remain unemployed, inflation remains below the long-run objective and not all of the necessary financial reform initiatives have been completed.

we remain to the resources and tools to achieve its macroeconomic objectives to foster the system. thank you. i would be pleased to take your questions. scenic thank you for your testimony. as we begin questions while the clerk five minutes on the clock for each member. chair yellen, there seems to be mixed signals about the economy. as it considers aiming the larger scale purchases.

most importantly the gdp growth is reported by the bureau of economic analysis to have declined at almost 3% of an annual rate in the first quarter. with that said, many indicators concerning the economy indicators are spending in the production are substantially more positive than that. through period it has also continued to improve and somewhat faster rate than we had seen previously. indicators of consumer sentiment and business sentiment and optimism also seem to be positive. so, my reading at the present time is that the gdp decline is

largely due to factors i would judge to be transitory and i do think that it is substantially that negative number substantially understate the momentum in the economy but of course this is something that we need to watch very carefully. but nonetheless my view is more positive. it has been improving not only is the unemployment rate been declining, but broader measures and in the labor market they've also shown and it's important this is of course exactly what we want to achieve the federal reserve does need to be quite cautious with respect to monetary policy. we hope the growth with speed and pick u pickup and the labort

would improve more. they are overly optimistic so we are watching very carefully especially when short-term overnight rates are at zero so we have no ability to lower them further. we need to be careful to make sure that the economy is on a solid church after he. we want to make sure that it is on a sound trajectory. >> pertaining to the collins amendment, the senate recently passed legislation to clarify that the ability to apply an

insurance specific capital standards to insurance companies overseas. why is it important that congress act quickly and pass this legislation. >> my colleagues and i have made clear on many occasions our objective in designing regulation for insurance companies have come under the supervision or other non- banks that will be tailored to suit the needs and special characteristics of the entities that we supervise and we are certainly trying to achieve that in the case of the insurance entities that we supervise. but there are constraints on the ability to take the appropriate regulations in the collins constraint of the amendment that does pose constraints.

so i think it would be useful to increase flexibility to allow us a greater latitude in tailoring the appropriate regulations. >> in light of your recent speech, will you elaborate on how you envisioned the fed using the tools instead of monetary policy to maintain financial stability and build resilience in the financial system? >> i think most importantly we have substantially strengthened the capital and liquidity positions 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 that

the financial system or the economy are buffeted with shocks the firms will be resilient and they can continue to lend to support the credit needs for the economy even under adverse circumstances and i would say 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 crisis to see a more recently and better capitalized system i would say is the core of that effort so if there were an asset price bubble and we didn't intervene effectively to deal with that and the bubble burst, we want to make sure the financial system can withstand such a shock that is an objective of our efforts.

we can also use more targeted tools that try to make sure that as the business cycle conditions improve as we go into more robust boom times for example of the stress tests we've automatically designed the scenario two in in prose that firms need to be able to survive as asset prices increase and the economy goes more robust so those are the kind of tools i largely have in mind. >> senator crapo. >> thank you mr. chairman. in your testimony you mentioned you anticipate the federal funds rate will continue below the levels the committee views as normal for an extended period of time and you also added depending on economic outlook it could occur sooner or later as

we get a better feeling for the strength of the economy. based on your view of the economy in the markets when do you anticipate this first rate hike to occur next >> the committee has given guidance. this is what we will be looking at is the progress we are making towards the congressionally mandated objectives maximum employment and price stability or the 2% inflation will so there is no formula and there is no mechanical answer i can give you about when the first rate increase will occur. it will depend upon the progress of the economy and how the ss into based on a variety of indicators. to get a sense of the views that members of the committee hold a

included in the monetary policy report is a summary of economic projections that all participants in the fomc provided at the beginning of the june meeting so these projections are just that. they depend on each participants own personal economic outlook, but they provide some sense of concretely what participants expected at the beginning of the meeting. and they show that almost all participants anticipate the first increase in the federal funds rate if things continue on the trajectory that they expect would come sometime in 2015 and the median projection for where the rate would stand if at the end of the year it was around 1%

so, a positive but relatively lolow-level and that gives you a feeling for what the participants thought would be appropriate given the projections in june. i want to emphasize as i said repeatedly that what actually happens in the projections change with incoming data and the economy is uncertain and what will happen is going to depend on the progress the economy makes that i think that is consistent with the forward guidance that is contained in the statement as well. >> based on the minutes of the most recent fomc meetings, the discussion of the monetary policy normalization has become an important topic for the committee. one of the strategies is that it

will lend its securities out of the market as they reverse. such the facility would be a safe haven in times of the market stress attracting the funds. how could they aggravate the market crisis. >> but they say these are matters that we are discussing an ongoing basis and no final decisions have been made about the precise strategy that we will use when the time comes. we try to provide in the minutes a very good summary of the thinking and the committees and the discussions that have taken place. one of the challenges we face is as you mentioned in your opening remarks, the balance sheet is very large. they are a very large quantity

of reserves in the banking system. there are some limits on the ability to precisely control the federal fund rate. we can't really use quite the same strategy of intervention prior to the crisis, so we have indicated the main tool that we don't use is the interest rate you pay on overnight reserves. it's a facility that you referred to i think of as a backup tool that will be used to help us control the federal funding rates to improve our control over the federal funds rate. as you mentioned, we do have concerns about allowing that facility to become too large or

too played to prominence as a role and for precisely the reason that you gave if the stress were to develop in the market and in effect i fact it a safe haven that could cause pride from lending to other participants in the money markets the tools that we can use and are discussing to control those risks one would be to maintain a relatively large spread between the interest rate that we pay on the overnight reverse rp and the excess reserves the larger the spread of the last views that facility will be. also, we can contemplate limits on the extent to which it can be used either aggregate limits or limits that would apply to individual participants and all of that is figuring into the

discussions. >> senator reid. >> you pointed out that the mandate or one of the mandates is full and claimant. we have seen some progress but there have been variations the state suffers from significant unemployment crisis and also undermining the overall statistic as high-level unemployment number. can you comment about what they are doing to comment these specific issues and comment and by reinstating the long-term unemployment benefits for these people. >> as you noted nationally the long-term unemployment is at almost unprecedented levels historically in the average duration of the unemployment

spells is extremely long. and also of course there are variations from state to state and the level of and plane and with some states seeing much lower than the national average and the readers. so, our monetary policy can't affect things at the level of individual states and we have no specific tools to target long-term unemployment. if the pace stays where it is or it even rises i expect to see improvements on all of the fronts and in fact long-term unemployment has declined, and the evidence i've seen although

perhaps not definitive suggest the long-term unemployment does on balance reflect those that have experienced long spells getting jobs and moving into employment not simply becoming so discouraged that they moved out of the labor force, so that is a healthy development and in a long-term unemployment it remains at exceptionally high levels and is a grave concern. i do think we are seeing an improvements as the job market is strengthening and in every state we should expect to see as confidence and the recovery grows and strengthens we should expect improvements. >> you point out that the monetary policies have limitations but fiscal policies in the congress can be much more proactive in terms of the

unemployment benefits so that these people have some support as they look for and don't get discouraged in a job the jobs ad second, infrastructure and a host of programs and i would assume you would see d's as complementary to your goal and necessary to the goal. >> i think these are matters for the congress to debate and decide with respect to the long-term unemployment benefits. obviously we have a situation where long-term claiman unemplos more common in the population and posing serious tolls. >> you don't have to respond but my sense is that for the last several years you have been the only one in town trying to deal with this issue because we haven't taken the other actions that would have been beneficial in a much better situation

today. >> fiscal policy has been i think the cbo would confirm a drag on the recovery, and fortunately that is diminishing and in fact i think that is one of the positives for the economic outlook for the economic growth going forward. the federal reserve had a program in the process which it would try to help people who've been missed served in the foreclosure service that was scrapped shortly afterwards and essentially went to direct payments in the form of $3.9 billion. i'm told that if they haven't been able to reach out to people that may receive checks and cash

then order in this residual money can you put into the state agencies were local initiatives that are much more effective getting the money out what you consider that? >> no decision has been made at this point what to do with residual funds, so there may be a number of options we have yet to debate that. >> there are states that need this help if you can get money. thank you madam chair for being here. this year on that though we expected to adopt and pass the amendment to mandate. the community bank is

supervisory experience. i welcome the appointment of the community bank or board. they had a great deal to the work that we do and i've worked with community of thinkers like a governor or the community bank supervisors mike then governor raskin and seeing how that experience may contribute to our work so i am very positive on the idea of having a community bank or appointed to the board. there are several governorships they have many different needs i

think if we were to sit down and make a list of all of the kinds of expertise that is needed and useful there would be more than seven items on that list and i would prefer to see appointments made in light of the priorities including for the community bank or rather then for the indefinite future walking in and earmarking the particular seats for particular purposes. i feel that as a road that can go further in the duration that would worry me if we are earmarking we could end up earmarking each seat for a particular kind of expertise and i think a greater flexibility needs to change over time but that is no way to diminish my support for seeing a community bank or appointed to the board.

>> we look forward to the community bank experience being more forcefully put on the board through this legislation so we will agree on that and look forward to it. madam chair, we've talked a lot over the visits about too big to fail. it's a concern of mine and other members on both sides of the oil aisle and what i have personally heard is you are agreeing in general concern, but i have not really seen that translate into concrete policy moves to change the continuation of too big to fail so in that context were waxed before us on february 27. what if any specific policy changes and initiatives movement has the fed were other regulators taken to curb and

help an two and a too big to fa? >> we finally finalized the capital three requirements that significantly increase the quality and quantity of capital in the banking system even before we did that through our stress tests. we worked to ensure the largest and the most systemic and detentions have the ability to not only survive a very adverse stress in the system but also to lend in support the economy through such a stress and the amount of cap at all in the banking system has basic clique doubled since 2009. we have put out for a place in the comment the ratio rule we

hope to finalize this year. we are in the process of working through a regulation that could implement the so-called surcharges for the largest and most systemic firms. we finalized a leverage standard for the largest firms in the united states and we are working very hard to make sure that they are resolved for bowling the event that overwhelms those substantial defenses so the fdic under its orderly liquidation of a ready has the ability to resolve such a firm. it has established an architecture for doing so in the

united states as 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 systemically wor working as asians to hold sufficient unsecured long-term debt at the holding company level to enable a resolution that would be smooth and the event in the evem have to be resolved and we are working with them also on living wills to enhance their ability to be resolved in the bankrupt bankruptcy. >> thank you mr. chairman. senator schumer. >> thank you mr. chairman and madam chair you have done a good job and make us proud and i am so glad to have these hearings.

so, my first question deals with the most difficult issue as the fed chair the age-old balancing test between fighting inflation and going into full unemployment. it's a hard tightrope to walk particularly as the conditions change and we are now in the period of change. obviously the unemployment has declined thankfully and is beginning to pick up. it's not only to accelerate at the end of the quantitative easing and two raise the rates. i would urge caution very strongly. to me the greatest problem the country still faces his lack of good paying jobs in the middle-class incomes that is with us very strongly into the

worldwide labor market still your state targeted 2% ten years ago people heard the target was to present and your predecessors chose what drop, but we are not even at that. so i did ask yo would ask you je very cautious before you taper the program to quickly and entertain the prospect of raising rates. >> i agree try to emphasize that while we are making progress in the labor market, we haven't achieved our goal. and it's also the case that inflation is running under the 2% objective. so, both of those facts plus the

fact that those that have been substantial headwinds that were effectively overcoming them and making progress. it calls for an accommodated policy to offset that and i would say that even if you consider the forward guidance that we put in place in march, the committee indicated that even after we think the time has come to raise rates, we think that it will be some considerable time before we moved them back to historically low levels. that reflects different people have different views but in part it reflects the fact that the headwinds holding back the recovery to continue the productivity growth has been

slow and we need to be cautious that the economy continues to recover. we have tried with respect to the asset purchases to set up a clear objective that we had to see a significant improvement in the labor market and to put in place the process by which reductions in the pace of the purchases would be deliberate and allow us time to assess how the economy is recovering and we followed i think a very deliberate course. this is not a preset course if we were to have the conditions that have changed significantly. >> i would like to just use each side of the question is my final question. we are seeing improvement in the job growth that we are still seeing declines in the income and middle-class incomes and

lower incomes and what it means is the number of jobs created that really pay well isn't going quickly enough. the jobs are paying more quickly. how can the fed appeals with that and on the other side one of the things we worry about our bubbles. ththe queue e3 and others pushed the money to the corporate bondage stock market and i don't think they are there yet, but i hope you are considering ways to reduce the rate. can you comment on both sides of that? >> with respect to the wages, most measures of compensation have been running roughly in line with the gains and compensation prices or the real terms that have been nonexistent

so the rising compensation or wage growth is one sign that the labor market is healing. we are not up but they are rising at a pace that they could rise to installation in fact, while wages have been rising less rapidly than the productivity growth and what we have seen is a shift in the distribution of the national income from the labor and the tort capital, so there is room for faster growth and wages and gains before we need to worry that is creating an overall inflationary pressure for the economy that is something that we are watching closely. with respect to the bubbles i've stated my strong preference is to use the macro prudential supervision policies to address

areas where we see concerns and as i mentioned, we are doing that in the case of, for example, the leverage lending, but i would never take off the table totally the idea that the monetary policy might be needed to address financial stability concerns. i don't see financial stability concerns at a level at this point where they need to be the key determinant of the 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 the macro prudential tools fail, the monetary policy might be called on to play the role that we are not there yet. >> thank you. >> senator. >> madam chair thank you for being here today. this is the third time that you have been before the committee

wants as a nominee and now twice in the role as the chair. when you came to the committee last fall i was concerned about the lack of progress to deal with. i was then and 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. in fact you have moved at a pace that maybe i did not anticipate. you are down to $35 billion per month. the reality is there is still a 4 trillion-dollar balance sheet which is concerning.

there has been some defense starts with the fed in terms of tapering. so my question gets to this issue. what could have been enough period of time that would cause you to recount a great and decided that october is not the appropriate data may be the program should go on for a period of time. tell me what metrics you're looking at to make these judgments as you go along. >> well, the committee indicated that the path of purchases is not on a preset course and all along at each of the meetings where we have had to decide

whether or not to cut the pace of the purchases or to stop that or even to increase purchases we've asked ourselves two questions. is the labor market continuing to improve or to retain confidence that the debate will continue to do so and to see evidence and that we will continue to move back towards the 2% objective overtime and at every one of the meetings since last december. guess we think the inflation stabilized. and yes we think the labor are dead will continue to improve.

we will continue to see those conditions and i think the evidence that we are seeing is consistent with that and if he continues to see progress in the labor market as i expect and inflation stabilizing or moving up we would continue on the course and as i mentioned the purchases would cease after october tha we would see some vy significant change in the outlook that we see between now and october so now that we lost confidence. and it would move back up to 2% then we would have to rethink that plan but that is the plan. >> let me ask you a question i'm running out of time here about the labor market because i think that this is a very good

concerning issue for the economy and for the country. .. carter was president many, many years. i don't know if that's you or me, but it's annoying. we haven't seen those kinds of numbers since jimmy carter was president. the fed has said that you'll look at the labor market. you just reiterated that in your origally iemed the it seemed like the benchmark you were trying to achieve was 6-1/2%. it's now 6.1%. but to me that doesn't tell the store h story. the fact our unemployment rate is 6.1% doesn't reflect the reality that really what is

happening is people are taking part-time work, whether it's obamacare or some other reason. we could debate a long time. so tell me what you're looking for when you constantly refer to the labor market. are you looking for more participation, more full-time employment? what are you trying to achieve? i'm going to ask you to be brief. >> so, briefly, labor force participation has moved down. part of that, i believe, is an aging population and demographic. when we see diminished labor force participation among prime age men and women that suggests something is not just demographic, and so my personal view is that a portion of the decline in labor force participation we have seen is a kind of hidden slack or unemployment. it may be, if that's correct,

that as the labor market strengthens, that labor force participation will remain flat. instead of the demographic trend continuing to pull it down, that people who have been discouraged come back into the labor force and start looking and getting jobs, we will see labor force participation rates flatten out and the unemployment rate may not come down as quickly as it has been, but we'll need to look at that. that's hypothesis. i do want to make clear, 6.5% has never been our objective at the labor force. what we said about 6.5 is that we would not --s long as inflation was not a concern, we would not think about raising the federal funds rate above the zero to a quarter percent range until unemployment had declined, at least below 6-1/2 percent.

so that's never been our target, and 6.1% is not our target, either. participants in the fomc are asked, what they think a so-called full employment or normal longer run unemployment rate is, and in the monetary policy report we distributed in june, they thought that was 5.2 to 5.5%. but of course we don't know and we're looking at all the things you mentioned in judging the labor force. in judging the labor market, not just the unemployment rate but a broad range of indicators, including involuntary part-time employment as you mentioned, and broader metrics concerning the labor market. >> thank you, madam chair. >> senator menendez. >> thank you. you were quote it in a "newnewnw

yorker" profile saying while the economy is improving, that, quote, the head winds are still there and even when the head winds have diminished to the point where the economy is back on track and where we want it to be, it's style going to require an unusually cooperative monetary policy. that was consistent with concern of economists outside of the fed, that it's producing an environment that requires lower than normal interest rates to generate economic growth and create jobs. can you explain to me what you mean about the need for, quote, unusually accommodative monetary policy and do you agree with the views being discussed by many that larry summers and others about lower than normal interest rate and the danger of tightening too soon. >> so, i mean, i do agree with

the view that there are substantial head winds facing the economy. one example would be that we see in surveys of households that their expectations about their future finances and growth in their real incomes are exceptionally depressed, and i think that is a factor that is depressing spending. we see in the housing market where we had some progress but it now looks like it's stalled. a lock of credit -- a lack of credit availability for anyone who has anything other than a pristine credit rating i think remains a factor, and that's in many ways in complicated ways a legacy of what we have lived through. so, i think there are, fiscal policy has been a factor in my view, holding back the recovery, and that is what monetary policy

has had to counteract, and that's in part why we needed such an accommodative monetary policy for so long. the economy is making progress. i do believe it's making progress, and eventually if we continue the day will come when it will be appropriate to begin to raise our target for the federal funds rate, but to the extent that even when the economy gets back on track, it doesn't mean that these head winds will have completely disappeared, and in addition to that, productivity growth is rather low. at least that may not be a permanent state of affairs but certainly something that we have seen in the aftermath, during most of the recovery. that's a factor that i think is suppressing business investment and we'll work for some time to hold interest rates down. these concerns and these factors aren't related to what

economists are discussing, including stagnation. the committee -- when it thinks about what is normal in the longer run, the committee is recently slightly reduced their estimates of what will be normal in the longer run. it's the median room is around 3-3/4%. we don't know but it's the same factors that are making the committees feel that it would be appropriate to raise rates only gradually. there's some of the same factors that figure in the -- >> let me askon what the fed is doing. are there fiscal policy steps congress can take to reduce the head winds against growth? for example, we have interest rates at near historic lows, and construction employment still below the precrisis levels.

for example, wouldn't it be time to invest in repairing our nation's transportation and other infrastructure as a way to help any such head winds? >> as i've said, fiscal policy for a number of years has been a drag on growth, and that is we can translate that into a factor that has necessitated lower than normal interest rates to get the economy moving back on track, and of course, it's a judgment for congress what the appropriate priorities are, but i would certainly say that fiscal policy has been unusually tight for a period like we have lived through. >> if i understand that, you don't want to dictate congress' priorities are, but enough fact congress were to say, well, investing in significantly robust in our transportation infrastructure and other similar infrastructure projects, would that be something that would

help against the head winds? >> well, certainly it would be a counter to the head winds, yes. >> thank you. >> senator heller. >> thank you for holding this particular hearing, and chairman, thank you for being here. i apologized. i haven't been here for all the questioning. the ranking member and myself are running back and forth to the energy committee talking about fire suppression. i'm not blaming you for the fires out west. so we can take that question off the table. i know you do take a lot of blame, and i just want to thank you for taking time. you said in your opening remarks that the recovery is not complete from the great recession. and we have had a lot of lively debates here in this committee of the soundness and the safety of our market structures. we even had a hearing last week on high-frequent trading. some are going so far to claim that markets perhaps are rigged.

if you talk to individuals five yours ago in 2008, told them we're going to five years through a great recession and in that five-year period you'll see the stock market go from 6500 to 17,000, not too many people would have believed that. the question, books are being written about this, visiteds are now going as far as to claim the markets are rigged. i want to get your feelings. do you believe the stock markets are rigged? >> well, i think there are a number of concerns that have been outlined about high frequency trading, and i believe it was in june the chair of the sec gave a very important and very detailed discussion of high-frequency trading, outlining where she saw problems, at what potential solutions might be to those problems. >> the -- do you believe that

unintended consequences of qe1, 2 and 3, may be, with all the bond buying, it's forcing people into the stock market, creating the bubble? >> well, i think it an environment of low interest rates in general, which have been promoted by our -- both our keeping the federal funds rate at zero and additionally by our purchases, low rates do have an incentive to push individuals to look for yield, to reach for yield and that's both a good thing and a bad thing. on the one hand we need handcuffsy risk-taking in order to spur a recovery. and low interest rates, i think, have had a positive effect on helping the recovery, but of

course, we have to be careful about looking for situations where low rates may be innocent tough behavior that might be dangerous to financial stability, and i particularlyout lined in my remarks an area like leverage lending where we're seeing a marked deterioration in underwriting standards and may be part of a reach for yield and we're trying to deal with that through supervisory means. but the kind of broad-based increase in leverage in the economy and maturity transformation and credit growth that one tends to see in this situation with your intense financial stability risks, i don't think we see those things. so, at this point, they're more isolated and not broad-based in

general. at least in my assessment. >> thank you, dr. yellen. go back to senator johan's questions on quantitative easing and may ask a little differently. you see a time when the federal reserve stops the bond-buying program? >> well, as i indicated in my opening remarks, if things continue on the current course, and as the committee expects, the purchases would cease after october meeting. >> so if they cease, do you see -- i guess my question today would be, would you ever see the restarting of quanity tatetive easing -- quantitative easing? is this a new normal, the federal government buys the bond or would you commit to saying quantitative easing has come and gone and we've seen the last of it? >> really depends on what the economy does. the economic outlook is very uncertain. i hope we're on a solid course of recovery, and that it will

continue and not encounter some serious setback. i wouldn't take it off the table forever as a tool the federal reserve might need to some day in some circumstances use again, but my hope is we're on a path of recovery, and monetary policy will over time normalize that our purchases will end e, eventually our balance sheet will shrink back 0 a normal side, and when the time is right, that short-term interest rates will move above their current very, very low levels. >> dr. yellen, thank you. mr. chairman, thank you. >> senator brown. >> thank you, mr. chairman. madam chair, thank you for being here. these hearings often focus on when the fed will change its policies so financial markets will rally and wall street lenders can make money. too often we forget about the human side of these issues.

as federal reserve chair you have worked to put a face on economic numbers. we appreciate that. last february you spoke of the toll on unemployed workers, quote, being simply terrible on the mental health of workers, on their marriages and children. it seems too many people around here still view unemployed workers as lazy, shiftless people who do not really want to work, and so we simply don't stepped -- extend programs like unemployment insurance. talk about the psychological effects that unemployment has on workers, why the psychology is so important, why it should matter to us, even a senator who goes to work in a suit every day and speaks with an upper class accent. >> well, i think many workers who lose jobs that they're attached to and depend on for their livelihoods experience exceptional psychological trauma when they become unemployed, and

especially when the unemployment is of long duration, as it has been for so many individuals who find themselves unemployed now. first of all, there is a very significant loss in lifetime income. many studies documented for workers who experience job loss when unemployment is as high as it has been, and they find it difficult to get another job. and of course, there's the fear that goes with that of, how will i support my family? how will i take care of my children? i gave a speech in chicago in february, and talked to a number of unemployed workers, and i heard personal stories about individuals who were supporting children and concerned that because in some cases they could

only find part-time, low-paying jobs, that they couldn't continue to support their children adequately. and there are number of studies like when i use those words that it takes such a toll on families and children and psychologically, that's based on a number of studies that have documented that. there are health costs to workers who lose their jobs. that in terms of the progress of their children, that there are losses to their children when a parent loses a job for a significant amount of time, and in terms of the odds of divorce and breakup of the family, that's obviously present, too. so, for people, their jobs are often their identities, and when an individual can't find a job for a prolonged period of time,

who aim and what is my role and how do i contribute to my community and to my family backs a real psychological toll, i think anyone who has ever talked to people experiencing significant unemployment, realizes what the psychological toll is, and the ways it affects their well-being and that of their community. >> thank you for realizing that that's an important part of your job, to continue to forcefully speak out about the human side and the human cost of economic policies. let me shift to another in my other questions. too many americans look at washington's response to the financial crisis and feel that nothing has changed after all. the four largest banks are 24 -- 25% larger than they were in 2007. federal reserve vice chair stanley fisher said last week, quote, what about simply breaking up the largest financial institutions in there's no simply, he points out in this area, actively breaking up the largest banks would be a

very complex task with uncertain payoff. unquote. it's troubling to me the largest banks are so complex, one of our nation's top regulateors carpet understand these institutions, considering he work at one of them. but dr. fisher reflects the -- that breaking up the banks is more of a slogan, but gore torell o vies evolved last year. he praised the plan i worked on with senator kaufman from delaware, to liables at 3% of usgdp. my question is, do you agree with vice chair fisher or do you agree with governor torello? >> well, i think one of the things that vice chair fisher said that i certainly agree with is that systemic risk in the financial system is not purely a

question of too big to fail institutions. and we shouldn't lull ourselves into think that if we deal with ways to resolve or diminish the roles of those institutions that systemic risk is not still a real phenomenon that we have to worry about. during the great depression, when we had a financial crisis, it was mainly a large number of small banks that were affected, and then we saw runs on the banking system that had the potential to and did cause a collapse of credit in the economy. so, i think he pointed out, and i agree, that we have to worry about more than the too big to fail firms and could have systemic risk if a large number of smaller institutions are hit for some reason.

but it is certainly -- i agree with my colleague, governor torello, we're completely committed to trying to deal with too big to fail, and we have put in place numerous steps and have more in the works that will strengthen the institutions, force them to hold a great deal of additional capital, and reduce their odds of failure, and then on top of that, if they do fail, it's important that we be able to resolve these firms and we're also working on having the ability to do that. so, on the one hand there will be much lower odds that a so-called systemic firm would fail, and should that occur we would have better tools to deal with it. and through the living will process and through other

aspects of our supervision, we are trying to give these firms a feedback on ways in which they can alter their structure in order to enhance their resolvability. >> i think the important point you made was during the living will process for 11 largest firms, that the issue of complex, that we really can't address the issues of complexity. >> thank you for joining us again. i think you know from our previous conversations i've long been of the view that the ribs associated with this unprecedented experiment in monetary policy probably outweigh the meager benefits. so i disclose that up front. but i want to understand better a different aspect of this and that is movement towards

normalization, which is underway now, necessarily depends on the projections that the fed makes. you have discussed some of those projects, inflation projections, up employment projections, gdp projections. what concerns me is these things are very hard to project and the fed doesn't have a great track record in projecting these things. i don't think the fed anticipated the extent to which a decline in work-force participation would drive unemployment rates lower. i have a little graph here that you can't see but i it by included in the record. simply depicts the fed's protection of gdp one year out and then compares that where gdp actually was and it's been pretty terribly wrong for ten years. it seems as though they're a systemic bias with a more optimistic outlook than what has actually come to pass. so my question is, to what extent -- how introspective is the fed being about their own

limitations in making projections which ultimately are driving a movement in the direction of normalizize, and maybe more precisely, do fed members incorporate into your own decisionmaking process the fact that these projections haven't been so good and that's not to say you're unique in getting these wrong. i understand how difficult they are. don't they argue for a more conservative approach and a quicker move to normalization since you know that very frequently these projections have been wrong? >> so, i certainly agree that projecting future economic activity is a very difficult business, and our gdp projections have been, for a number of years, too optimistic. i would say that our projections about the labor market and

unemployment, as well as inflation, have come closer to the mark. so, gdp stands out as someplace where our projections have been systematically off. of course, we have to gear monetary policy to what actually occurs in the economy, and not just what we expect will happen in the future to the economy. so, our guidance, for example, is very explicit in saying that the time of normalization of policy, the time at which we would begin to raise the federal funds rate above the zero to a quarter percent range, will depend on both actual progress, which we can see that is not a forecast, and our expectations about future progress in achieving both of those goals. so, we are looking at what happens in the economy, and when

we're wrong, we take that into account, and as we see ourselves coming closer to our goals or failing to achieve our goals, that is real live data we respond to and adjust our policy accordingly, and i think that must be a feature of monetary policy, is that it adjusts to actually unfolding events and not just what we expected. >> thank you. one other question. there's often a lot of discussion about the fed following some kind of well-defined rule, and obviously many central banks do that. the fed has done it in the past. what is your reaction to the idea that the fed would be able to design its own rule, but it would be an objective data-driven rule, they fed would be required to disclose the rule, and the federal would be allowed to deviate from the rule but it would have to come to congress and explain when and

why it was doing so. what are your thoughts on an arrangement of that nature? >> well, no central bank in the world follows a mechanical mathematical rule and i think it would be a terrible mistake to ask the federal reserve to specify a mathematical rule -- >> we have central banks that peg their currency. that's a well-define rule. >> through a currency board. >> ore having a gold standard. so historically it's not uncommon. >> if that's what you mean by your rule of gold standard, currency board, yes, that has happened. but given the coals that congress assigned to us with respect to inflation and employment, i'm not aware of any, for example, an inflation targeting country of which there are many, that has a mathematical rule. nevertheless, it makes perfect sense to behave in a relatively

systemic way. looks when you have objectives, asking the question, how far are you from achieving those objectives, and how fast do you expect progress to be made in determining whether or not exactly how much accommodation is needed, and a number of different factors come into play at different times. if we were following a math -- a specific mathematical rule, i really think performance in this recovery would have been dreadful. most of the rules we would have used, first of all, we couldn't have followed in the depths of the downturn. they would have called for negative interest rates, and if we tighten edmond tear policies, some of those -- tighten edmond tear policies, the recovery would not be as far advanced as it is. so, to there are special factors

and structural changes that need to be taken into account that would make me very disinclined to follow a mathematical rule. but it is important that a central bank behave in a systemic and predictable way, and to explain what it's doing and how it sees itself as likely to respond to future economic developments as they unfold. and that is precisely what we're trying to do with our forward guidance. >> thank you for your work, i income previous sessions we have had you have agreed that the soc and the fed have and should exercise their authority to develop industry specific guidelines and metrics rather than forcing insurers or asset management firms into a bank regulatory model. that is still your position, i would assume?

>> i believe with respect to designation, that each unique company under consideration needs to be carefully evaluated. >> we raised concerns that the fsoc seems to have a lack of transparency in the sifi designation process. can you give me you views whether the process should be -- can you tell me why the process should not be transparent if you think it should not be transparent? >> well, i think that it should be transparent what it is that the fsoc is considering and looking for and trying to evaluate when it evaluates any particular firm, and i believe the fsoc has made it clear

they're trying to identify entities that are responsible systemic risk to the financial system, and the metrics that it looks to, to evaluate that. but there's a great deal of confidential firm-specific information that comes into play in evaluating a particular firm that i don't think should be in the public domain, unless it is actually designated in which case it has been brought into the public -- >> you do believe the metric should be transparent. >> both the criteria used to establish -- to designate should be clear. >> do you believe they are now? >> i believe they're reasonably clear. >> okay. because there's some -- well, there's some -- and i'm one of them -- that believe the process has not been transparent at all, and what i would ask of you -- i

believe you think it should be, and i agree with you. the information that is specific to a company doesn't need to be transparent but i think the metrics they're using so we know what they're looking for so that, quite frankly, everybody knows what they're looking for when it comes to designation, it's important. >> i believe they've indicated more kinds of things they're taking into account. >> six months ago when when youe before the committee we talk about clarifying the end user exemption in the dodd-frank given minimal risk they pose in the market. you and former chairman bernanke and governor torello all indicated comfort with exempting end users from the costly margin requirements. is this still true today? you still feel this way? >> yes. >> good. you indicated the rule would be

out by the end of the year, the end-user rule. just wondering if you're still on schedule. >> i think that correct. that we are. >> a few more head nods? okay. that is very, very good. thank you very much for that. i want to talk a little bit about the assessment, just to give me an idea, and i may have asked this question before and i if i have forth during forgive me. when you look at the incoming information when it comes to the economy and fed funds, labor market is one, gdp is one, seem housing is one of them. what some other indicators you're looking senate. >> well, we're really trying to assess the likely path of the labor market and employment and inflation, which are the two goals congress told us to focus

on, but in trying to make those assessments, we have to look at a huge range of data '. housing, consumer spending, strength of investment spending, what is happening in the global economy, what do we expect will happen to our exports and imports? all of that figures into what will growth be in the economy and then in turn matters like productivity growth and how that translate spies the labor market, and with respect to inflation we're looking at many different metrics. >> of all those things which is of most concern. >> of all of those different metrics? >> yes. the inputs you consider within the economy, what is the most concern? >> at this moment?

>> yes. >> i mean, essentially the committee having looked at all of these different factors, holds the view that we will enjoy moderate growth for the rest of the year and the next couple of years and the labor market will improve, and so while we're concerned -- we're concerned that housing is a sector where we expected to see better recovery. we're not. that's a concern, but it's not quantitatively important enough to cause us to judge that it will hold back the recovery. >> thank you. >> senator. thank you madam chairman for being here. appreciate your work and your interest. you gave speech recently on the importance of a macro tools before a class gets overheated.

the persistent low interest rate environment has caused a reach for yield. the fed is taking the stance that regulatory tools such as increased capital requirements, countercyclical buffers, margining, will improve the resiliency of our financial system. my question for you, rather than preventing asset bubbles from happening, we're now taking the approach that they're going to happen and we're going to deal with them. is that an accurate statement? >> well, i think the steps that you indicated to strengthen the financial system do two things. they diminish the odds that bubbles will develop. for example, these rules diminish the chance that leverage will build up as an economy strengthens. we have taken steps and will take further steps to

diminishing the likely buildup in leverage in the economy. so -- >> you would agree that zero interest rate policy is tending to make people reach for yield now, and is an impetus towards bubble creation in certain asset classes injury it can be and we're watching carefully. >> any area you're worried about now in terms of asset bubble? >> i mentioned leveraged lending and corporate debt markets, especially lower rated companies. i think we're seeing a deterioration in lending standards, and we are attentive to risks that can develop in this environment. for example, that banks may be -- or others may be taking on interest rate risk and if interest rates went -- when interest rates ultimately begin to rise, that if firms or

individuals have taken risks and aren't adequately prepared to deal with them, that can cause distress. among the institutions that we supervise, we're certainly looking at management of interest rate risk. we are using stress-testing in this latest round. we had specific scenarios designed to look at how large banking organizations would fare if interest rates were to increase rapidly. and we're focused on how firms are managing their own interest rate risk. so, i think there are some risks of a low interest-rate environment. i've indicated that and we're aware of them but i think the improvements we have put in place in terms of regulation,

both diminishes the odds that risks will develop, and if there is an asset bubble and it bursts, it will -- we're not going to be able to catch every asset bubble or everything that can develop -- >> i guess that goes to my core question. rather than have a policy that causes bubbles to create, why wouldn't we have a policy that doesn't cause that, one. and, number two, is, it just seems to me now that we're kind of locked in this zero interest rate phenomenon and one of the consequences of that is reaching for yield, and now we're going to try to attenuate the response the zero interest rate rather than change the zero interest rate policy so we don't have bubbles in the first place. >> we have to recognize also that we're dealing with a real problem. the reason we have low interest rates is to deal with the very

real problem, namely, the economy is operating significantly short of its potential. employment is suppressed well below its maximum sustainable level, and inflation is running below our objectives. that's why we are holding interest rates low. and were we to significantly raise interest rates to deal with a set of concerns that you indicated, we should expect even worse performance on those important goals that congress has established for the federal reserve, and if we were to weaken the economy, it's not even clear that we would be mitigating financial stability risks overall, because -- >> we're in the trap. >> there are considerations in both directions. and so we need to be very

attentive to the financial stability risks, and as i've indicated, if they were to become extreme and other tools were not available or were not successful, i wouldn't take monetary policy off the table as a tool to be used. but we should by no means think it would be costless because it could be very costly in terms of achieving other very important objectives, and a weak economy creates its own set of financial stability risks. so it's not even clear that on balance we would be promoting financial stability. so this isn't a simple matter. there are complex tradeoffs involved here. >> mr. chairman, i have additional questions for the record. >> yes. chair notes that the have five members and less than 20 minutes to re -- remaining to vote.

and senator warner. >> thank you, mr. chairman, and thank you, chairman yellen, for your good work. i'll try to macmy questions quick. as one who advocated strongly during dodd-frank that nonbanks could be sifis, i have to tell you, share senator tester's concerns about the transparency was be go through this process. we have to get it right, and my concern is that for the nonbank sifi designation, there's a great question on transparency whether it is size or product component, and the more clarity we can get on this, the better. the two questions i want to get at: one is an issue that has not been raised yet. i know some of us on the side of the aisle have grave concerns around student debt. $1.1 trillion now. greater than credit card debt. i personally believe it is retarding recovery in the

housing industry, careerly retarding the growth and numbers of entrepreneurs. some of us proposed refinancing proposals and looked at income-based repayment plans, there's a bipartisan opportunity out there that would allow an employer to take a portion of an employee's salary and apply it directly to the student debt in pretax the same way we allow for tuition, but is this a subject that at the fed you have look at and want to make a comment on in terms of this rising potential bubble in student debt and its effect on the economy? >> we're certainly looking at and it the growth in student debt has been dramatic. i think there has been some work that documents that it is probably having an affect on the ability of young people to purchase homes, and it certainly is a burden for those

individuals that they'll be carrying through their lives. on the other hand, education is extremely important, and making available the financing necessary in this economy for individuals to acquire an education is the first order of importance. i mean, i would be concerned, of course, that if -- some of the decisions that students are making they may not fully understand the burdens they're assuming and how they will affect their lives, and second of all, they may not be always accurately evaluating what the payoffs are to the training that they're taking on, and especially when there's an adequate information about the performance of the schools, their programs, that they're enrolled in, whether the job finding income prospects --

>> we have some bipartisan legislation that we ought to have a user friendly web site for all institutions the same way in housing, a zillow type site for students so know before you go is the approach we have. i would point out we have seen student debt quadruple to 240 billion in 2003 to 1.1 trillion roughly now. i would urge you and even the fsoc level to look at this and if you have some additional suggestions. i want to use my last moment to get in a question i've asked before but i want to prod you one more time and that's on excess reserves, and when we last -- before you kind of gave me the same answer that chairman bernanke gave and the concern that if you kind of got rid of some of these excess reserves, which you're currently paying 25 basis points and the excess reserves that have gone from 2.4

trim to close to 2.6 trillion, the european central bank has a negative ten basis points on their policy towards these excess reserves. i realize you're concerned the effect it might have mon money market fund rates but with those rates already so low, does understand why re-examining this policy might push our financial institutions to do a little more lending rather than to house these funds at the fed. >> it's a very legitimate question, and it's something that we have considered in and debated and there have been mixed views in the committee on the desirability of doing that. we have been quite concerned about what it might mean, given the structure of our money markets, for money markets -- >> money market funds are already pretty low. >> yeah. we have -- >> my hope would be you continue that debate. this member believes this could

be something that could be stimulative to the economy and get these banks taking this capital away from the fed and actually into the economy. thank you, madam chair. >> senator merkley. >> thank you for your testimony today. i wanted to -- i'll try to be crisp in the questions given the time. but insurance advocates expressed concerns that new regulations might be forth coming based on an international standard, influenced by nations that do not have our state guarantee system, and they believe that this may result in new capital requirements that are unnecessary and inappropriate for the structure of the industry in our nation. is there any thoughts you might have to share on that particular topic? >> so, i would simply say that the federal reserve is participating now in an

international association of insurance supervisors, discussing for internationally active insurance firms what might be appropriate capital standards for groups, for essentially consolidated capital requirements for not legal entity insurance, firms that are regulated by the states but the consolidated holding companies. nothing that happens in that context is similar to our participation in the committee '. we're looking to put appropriate understands? place in the united states and nothing is decided in that international group has any force in the united states unless we propose rules, put them out for comment, and finalize them, but i think it's

helpful to get the perspectives ofs could to the extent possible and appropriate, to have an internationally level playing field. >> thank you. i'm going to jump right into the next point which i wanted to double-down on the student loan question because i feel like there's a huge amount of emerging information about the delay in home acquisition and this is certain lay drag in itself on our economy as well as an impact on the quality of life of our young folks. but it also has a significant extended affect through the decades to come because of the slow pace of wealth aggregation for families, if they do not engage in home ownership earlier on and it's actually shocking to see a reversal in which folks who are 25 to 30 who have gone to college are now less likely to own a home than folks who didn't go to college. so i want to -- this issue goes to the heart of the american dream because the cost of knowledge is not only affecting those who went and had this debt

but it's affecting the aspirations of our children in high school who are starting to get advice, particularly in blue collar communities like the one i live in, that maybe you shouldn't risk carrying this mountain of debt in a context of such high uncertainty over jobs that might be able to have a monthly wage that could make those payments. >> i agree with you, that when you look at the numbers on student debt, it has to be a significant concern. just -- for just the reasons you gave. >> i'll look forward to any work the fed does in this area to understand better the impacts on the economy. >> i want to turn to financial reform rulemaking process. i i know you expressed concern with the frustratingly slow pace of some of the rule-making and we have still got quite a long list from dodd-frank here that hasn't been completed on credit rating agencies, conflict of

interest, securitizeddation, the issues that senator levin was so forceful in bringing forward during dodd frank. security based swaps, compensation structures and so forth. how do -- do we have kind of a crisis of confidence in our ability to make the rule-making system function? when we heal a -- have a goal for a rule and sometimes it's a year, two years, and we just can't seem to get the rules completed, and maybe even end up in a never never land, appropriately named because seems like we're never going to get to final rules, is this a change from two decades ago? what do we do about it? >> i know it's been frustratingly slow, it's complicated. and we want to take the time to get it right. we're involved in a lot of

rule-makings that involve multiple agency with different perspectives, and we're also trying to coordinate with other countries to move forward together so we maintain in many areas a level playing field, and this is immensely time-consuming work. i understand your frustration. i guess i see a bunch of rules in the pipeline that i hope will be completed in the not too distant future. the liquidity coverage ratio, qrm, other things that we can expect to come out of the pipeline, and i see a further agenda of rules that i really hope we will make a great deal of progress on this year. so, to me, the glass is more half full than half empty, and i actually believe we have made substantial progress and will continue to push forward. >> thank you. senator hagen. >> thank you, mr. chairman, and

chairman yellen, thank you for your service and for being here today. i wanted to follow up on a letter that i sent to the federal reserve, the occ and the fdic regarding the liquidity coverage ratio standard. i've heard from a number of -- i've heard a number of concerns from communities in north carolina about the exclusion of the municipal securities from the high -- on high quality liquid assets designation and in particular i'm concerned this exclusion of the municipal securities could restrict the ability of state and local governments to raise the capital that they need to finance these public investments in schools and hospitals and roads, airports, and then all the other infrastructure systems, and these projects are really the cornerstone of the u.s. economy. what is the justification for excluding these municipal securities when other types of

debt, including foreign coverage debt, are covered. seems like a strange outcome to me that the debt for foreign countries to be treatedmer favorably than the triple-a rate edit of states like north carolina. >> so let me say this is a proposal we put out for comment, and we will look very carefully at the comments we receive on this, and other topics. the rational for sluicing them is that -- excluding them is we're expecting firms to hold truly high quality liquid assets, and the liquidity of bond is substantially lower than any of the assets included though list. so the absence of liquid markets where those securities are traded was the reason for excluding them, but we will be looking very carefully at comments before we come out with a final proposal. >> i ask that you consider the

impact this exclusion could have on infrastructure investments and the ability of the states and local governments to actually manage their debt. >> we'll look at those comments. >> thank you. and i also wanted to follow up on senator murphy's question concerning the new global standards for the insurance entities. i believe it's important that the insurance companies be protected and that the state model for regulating the insurance also be respected, and as a member of the financial stability board and a participant in these meetings, can you explain a little bit more detail what the federal reserve is doing to ensure that any international regulations do not harm these companies and respect the state-based models of the insurance regulation. >> we're looking very closely and the state regulatears are participating in these international discussions as well. nothing that is under

consideration would affect the way in which legal entity insurance companies are regulated with respect to capital by the states. so, we're looking at separate set of capital requirements that would apply to the consolidated organization and, again, nothing that happens in this international forum has any affect on american firms until we have incorporated the regulations which go out for comment and are ultimately finalized. >> thank you. thank you, mr. chairman. >> senator warren. >> thank you, mr. chairman. and thank you, chair yellen, for being here today. you know, one of the tools that congress has given the fed to combat too big to fail is section 165 of dodd-frank. this is the second that requires large financial institutions to submit plans each year

describing how they could be liquidated in a rapid and orderly fashion without bringing down the entire economy or needing a taxpayer bailout. now, the fed and the fdic must review these plans and if they don't buy that the plan would actually result in the rapid and orderly liquidation of the company, then they must order the company to submit other new plan. and here's the key part. as part of the order to submit a new plan, the fed and the fdic can require the company to simply identify its structure or sell off some of its assets; in other words, break up the bank, so that it could be more easily liquidated and not pose a risk to the economy. so let's consider what happened during the lehman brothers bankruptcy in 2008. that's the one that sparked the financial crisis, nearly melted down the economy and triggered

the bailout by the taxpayers. the court proceedings took three years. clearly not rapid or orderly. but lehman was tiny compared to today's biggest banks. when it failed, lehman had $639 billion in assets. today j.p. morgan has nearly 2.5 trillion in assets. that is four times as big as lehman was when it failed. lehman had 209 registered subsidiaries when it failed. j.p. morgan -- i really almost couldn't believe this when i read it -- j.p. morgan today has 3,300 -- 3,391 subsidiaries, more than 15 times the number of subsidiaries that lehman had whenned failed. three years. ee years, and the f

hasn't rejected any of them as ... recent experience with the bankruptcy of lehman brothers, can you honestly say that jpmorgan could be resolved in a rapid and orderly fashion as described in its plans with no threats to the economy and no need for a taxpayer bailout? >> so the living will process, as i understand it, is something that's intended to be iterative in the sense that the firms submit plans and will receive feedback from the regulators on whether or not we think the fed and the fdic regard these plans as sufficient to enable resolution under the bankruptcy

code. we have given feedback on the first round of plans that were submitted and are working actually to, at this point, to give feedback on the second round of plans. in fact, the firms have now submitted a third round of plans -- >> i'm sorry, chairman. i'm just a little bit confused. jpmorgan submitted a round of plans in 2012, and my understanding is that neither the fed nor the fdic said that those plans were not credible. it then submitted plans in 2013, and neither the fed nor the fdic said they were not credible. and it has submitted plans in 2014. so i'm not quite sure on whether you're saying the plans are not credible and you're continuing to talk with them and asking them to change their plans. is that the case? >> well, we're working to give