effectively address the concerns that people had so that it won't be necessary to repeal the rule. that is my hope. we are certainly trying to do that. >> and what is your time frame on that? once you're confirmed? >> i believe this is something we hope to get out hopefully later this year. >> you say you could do that without changing section 716? >> i believe that that's the case. we are hopeful we'll be able to find ways to address the concerns. we understand the concerns and we are trying very hard. >> do you share chairman bernanke's viewpoint? >> i believe so. the concerns are there and the need to address them. we will be able to address them in the rule. >> thank you. since the start of the qe, the

financial markets have responded to pronouncements by the fed. are you at all concerned that markets are too driven by speeches and official pronouncements from central banks around the world? if the suggestion of tapering can contribute to volatility and asset prices, can we expect more volatility in the future? >> well, the federal reserve, and i think this is true of other central banks, we are trying as hard as we can to communicate clearly about monetary policy. both our goals and our intentions how we carry out programs. this is challenging. we are in unprecedented circumstances. we are using policies that have never really been tried before. and multiple policies, and we are trying to explain to the public how we intend to conduct these policies.

it is a work in progress and sometimes miscommunication is possible, but i think my own view would be we certainly want to diminish any unnecessary volatility. sometimes there's volatility because we all learn news about the economy that changes our views about the course of the economy and the course of policy. and there it's natural to see a response, but to diminish unnecessary volatility, i think we have to redouble our efforts to communicate as clearly as we possibly can. that will be my emphasis. >> thank you, mr. chairman. >> senator toomey. >> thank you. i want to get back to some of

the issues senator corker was raising regarding monetary policy. i think it's important to stress, i know you're well aware of these, but the adverse consequences that we're already experiencing from directly the result of the extraordinary monetary policy is problematic, i think. artificially suppressed cost of funding, it contributes to arguably fiscal imbalances. we are punishing middle class savers for years people who chose to forego consumption because they decided to save and have a little bit of income in their retirement. now they have no income because they earn nothing on their savings, but they watch as it gradually gets eroded even by a low level of inflation when they have no income from it. we have exacerbated the problems of underfunded pension plans.

we've got distortions in financial markets. these are all the things that have been and continue to occur, but what worries me even more is the point senator corker was getting to, i think, what happens when this morphine drip stops to end? at some point, some time we are going to move away from this, i assume. i think everybody believes that. the assumption seems to be the markets will behave benignly when that occurs. yet we've seen some, i think, some worrisome glimpses that that is not a safe assumption. back in june the mere suggestion that some of the members of the fed might be contemplating stepping back a little earlier, and ten-year treasury backs up 100 basis points. yesterday the release of your testimony and the equity markets rally. doesn't this feel like there is something artificial here? isn't it possible that while you have many tools available to begin an unwind, to retreat from this, that the markets may not respond very well, and we could end up creating a real problem as we try to exit from this?

>> senator, you made a number of different points. i think the first point you mentioned is that low rates in a way give rise to fiscal irresponsibility that takes the pressure off congress. >> to make it easy. >> we established low rates in order to get the economy moving which is congress' mandate to us. it's important for congress to recognize as the economy recovers and both short and long-term rates move up, a situation in which the government's funding costs remain as low as they are, if we are successful in achieving our goal of getting the economy back on track, this is a very temporary situation. so i believe members of congress

should be looking out a few years to a time when rates are going to be higher. low interest rates harm savers, it's absolutely true. this is a burden on people who are trying to survive on the income from a cd. there's not much they can get. if you think about how can we get rates back up to normal, i guess i would argue that we can't have normal rates unless the economy is normal. at the moment we have a lot of saving and not very much investment. there are fundamental reasons here why rates are low. i think pursuing a policy of low rates to get the economy moving will best enable us to normalize policy and to get rates back to normal levels over time. in terms of jumps in rates, we

will, as the economy recovers, need to withdraw the monetary accommodation we put in place. we will make every effort to do so at a pace that's appropriate to continue the recovery and to maintain price stability, and to communicate that plan to market. as we have seen, and as you indicated, it is possible for rates to jump. it was not just true now, but in previous tightening cycles like the one we had from '94 and 1995 where long rates moved up over the span of six months over 100 basis points, we do need, we have tried to make sure the financial system is more

resilient, in our stress tests we have tested and continued to do so in this round to make sure banks are appropriately managing interest rate risk. that is a risk we will try to mitigate, but it is inherent in any tightening cycle. >> mr. chairman, i'm running out of time. two quick points i would like to make. one is i'd like to express my concern which is the exact opposite of the concern that was raised by senator berkeley, which is the danger of the implementation of the volcker rule could be too restrictive and increase the cost to corporate bond issuers. i think the decision by congress to exempt u.s. treasuries was an implicit acknowledgement when you ban propriety trading you make them less liquid and more expensive for issuers. i'm told the next rule might exempt other sovereign issuers, which is another implicit acknowledgement of this problem.

this is a problem for corporate issuers in america, and i'm very concerned that we not unnecessarily raise their cost of borrowing. the last point i would make, i'm deeply concerned about the consolidation that's happening in small banks, the lack of new small banks. as you know, we used to routinely launch sometimes hundreds of new community banks, i'm told by fdic there is not a single new community bank launched since 2010. regulatory compliance for institutions with no systemic risk to the economy is way overboard. i hope you will make an effort to diminish that burden. >> i promise to do so, senator. >> thank you. >> senator warren. >> thank you, mr. chairman. thank you, dr. yellen. there's been a lot of talk today about the fed's use of quantitative easing to help the

economy get back on its feet, but the truth is if the regulators had done their jobs and reined in the banks we could have avoided the 2008 crisis all together. so i want to focus on the fed's regulatory and supervisory responsibilities to keep the big banks in check. i'm concerned that those responsibilities just aren't a top priority for the board of governors. earlier the fed and occ reached a settlement with servers that engaged in a long list of illegal foreclosure activities. the settlement was for over $9 billion, directly affected more than 4 million families, but the fed's board of governors never voted on whether to accept the settlement. instead this decision was just left to the staff. now, the fed has smart, hard-working staff, but the board of governor would never allocate critical monetary policy to them. yet even now have the biggest financial crisis in generations, the board seems all too willing

to delegate critical regulatory and supervisory decisions. i think we need to make reining in the banks a top priority for the board. i know the board meets regulatory to discuss monetary policy. do you think the board should have regular meetings on supervisory and regulatory issues, as well? making it clear that both of those are important to the fed? >> well, senator, i absolutely believe our supervisory capabilities are critical and are just as important as monetary policy. we need to take them just as seriously and devote just as much time and attention to them as we do to monetary policy. the board operates under a

variety of restrictions. you may know about the government and the sunshine rule. so when you suggest that the board meet to discuss regulatory matters, our ability to do so outside of open meetings is very limited. so we tend to handle those by meeting individually with staff or meeting in small groups. we have a committee system where committees are put in charge of managing particular areas and making recommendations to the board. i remember in the 1990s that the board did regularly meet to discuss supervisory issues because there there's confidential supervisory information and it's easier for us to have a meeting. i did consider those very valuable. so i think that's a very worthwhile idea. when there are delegations to staff and the board of governors

doesn't vote, that doesn't mean that board members aren't consulted and maybe those with expertise may have played a critical role and had very important input even when there is no formal vote by the board of governors. >> fair enough, but i think it is an important signal here. i'm glad to hear you're thinking about this. and thinking about the question of the appropriate delegation to staff and when it's appropriate to delegate to staff. could i ask you to say something briefly about that, about when it is appropriate to delegate to staff and when you have to retain for the board itself? just very briefly, if you could. i want to get on to one other question. >> i believe there are certain matters under law the board must vote on, supervisory findings, mergers and so forth.

our rule changes. typically we delegate an enforcement matters to the staff in the area of supervision. >> i'm glad to hear though you want to continue to think about that, particularly talking about something this important. >> yes. >> i want to ask you one other fundamental question here. that is, do you think that the fed's lack of attention to regulatory and supervisory responsibilities help lead to the crash of 2008? >> you know, i think in the aftermath of the crisis we've gone back and tried to look carefully at what we should have done differently, and there have been important lessons learned.

we have massively revamped our supervision, particularly of the largest institutions, which we now organize through a process called lsk where we simultaneously reviewing all the largest institutions simultaneously. the federal reserve system works jointly on these reviews. we no longer delegate to individual reserve banks the supervision of one or say two of these large institutions. it's also become an interdisciplinary matter. economists and lawyers and others are involved in. we learned a lot there of that supervision. i would say one of our top priorities now is ramping up our monitoring of the financial system as a whole to detect financial stability risks. i think that's something we weren't doing in an adequate

basis before the crisis. so we missed some of the important linkages where by problems in mortgages would remember through the financial system. >> thank you very much. i want to say, dr. yellen when you're confirmed, and i very much hope that you are confirmed, that i'm very glad to hear you will make it a top priority for the federal reserve to engage in the supervisory and regulatory responsibilities that help keep our financial system safe. and that cannot be something that is merely an after thought but has to be a primary effort on your part. >> thank you, senator. i completely agree with that. >> good. thank you. >> thank you very much, mr. chairman. governor, you demonstrate your wisdom early going to the brown university in providence, rhode island.

i am sure when you are confirmed as federal chairman it will be consistent with your record of wise choices. many times our fiscal policy and monetary policy has been working in cross purposes. the federal reserve has been quantitative easing, trying to get an expansive policy in place and we have been contracting, shutting the government down, we anticipate, i hope we can avoid this, but we are going to end unemployment insurance abruptly december 31st. how would your job, and obviously the size and scope of your portfolio and everything else, maybe the question has been asked today, be affected if our fiscal policy was

complementary to your monetary policy? >> well, senator, i agree that fiscal policy has been working at cross purposes to monetary policy. i recognize the importance of the objective of putting the u.s. deficit and debt on a sustainable path. congress has worried about that and i think it's important to do so, but some of the near term reductions in spending that we have seen have certainly detracted from the momentum of the economy and from demand, making it harder for the fed to get the economy moving, making our task more difficult. it certainly would be helpful going forward if it were possible for deficit reduction efforts to focus on achieving gains in the medium term horizon in addressing those aspects of fiscal policy that give rise to concerns about debt

sustainability over the medium term while not subtracting from the impetuous we need to keep a fragile recovery moving forward. >> such a fiscal policy would help you in terms of what we all anticipate is the point at which you have to begin your tapering because basically this balance would allow you more flexibility and more confidence that when you start to taper it wouldn't lead to a reverse to a poor economy, is that fair? >> i think that's fair, senator, because we are worried about a fragile recovery. a fiscal policy that had less drag that did no harm would make life easier. >> let me switch gears slightly.

that is that we were a few weeks ago discussing the possibility of default on our debt. and the markets were beginning to react. given the central role that treasury securities play, not just in funding the government, but also the tri-party repurchase markets, the collateral markets across the globe, were you beginning to see in the fed ominous signs of potential catastrophic impact of default? >> senator, i do believe a default on the u.s. debt would be catastrophic. we did see some signs in the run-up to the debt ceiling that suggested that financial markets were taking notice, and that there were preemptive protective actions that market participants were beginning to do to protect themselves from what could have been catastrophic consequences.

more generally, i think we did more generally, i think we did see an impact on consumer and business confidence that isn't helpful to a general willingness to make investments in the economy. >> just the final point, we've been talking a lot about the size of your portfolio, but essentially, and i don't want to oversimplify, the benchmarks that typically you're looking at is inflation and deflation and unemployment. i think for a while under chairman bernanke, there was in '09 and '10 deflation, which would have been had adverse consequences. we've avoided that. we avoided inflation with

pressures, and what we have not yet done is got the employment numbers at a suitable level. so i think the focus should be on those measures rather than the absolute size of your portfolio. is that sensible? >> i think that is sensible, senator. we are very focused on achieving our dual mandate, which is we absolutely want to avoid deflation. we have a 2% price stability objective. we're trying to get the economy back to full employment. i do think we've made progress, but we're not there yet. on the other hand, you know, we recognize from the outset of the asset purchase program there are costs and risks associated with a large balance sheet. >> thank you. >> senator johanns. >> chairman, thank you. it's good to see you again. thanks so much for stopping by the office the other day. i felt like we had a good

conversation. i'd like to continue, if i could, with a few questions along the lines of what we talked about in my office. i found your testimony about asset bubbles to be interesting. just before the chairman turned to me, i looked at where the dow is at. it's about 15,850. in an economy that quite honestly most everybody would recognize has too much unemployment, an economy where people continue to struggle, an economy where it's kind of hard to see where the growth is going to be, we're now starting to see real estate bidding wars just like the old days.

now, that's confined to cities and certain areas of the country. we're now starting to see private equity firms who i think are very good at looking where will the economy is headed. lo and behold, they're buying single-family houses. that was a shocker to me, having owned a few rentals in the past. i was kind of amazed that they would do that. but obviously they see something there. so dr. yellen, i kind of look at these factors, and i think i could go on and on with some other items. i must admit, what am i missing here? i see asset bubbles. i think if you were to announce today that over the next 24 months you're going to bring that balance sheet down from $4 trillion to zero or 1 trillion, i think if you even said over

the next four years, we're going to bring it down from 4 trillion to zero, i think we would see how big those asset bubbles are. wouldn't you agree with me on that? >> so i think with respect to real estate, you mentioned real estate markets. we certainly are seeing, as you mentioned, private investors coming in to invest, and often in all cash, in certain markets in the country. is that evidence of an asset bubble? so if you look at the markets where that's occurring, it's some of the hardest hit markets where prices went up the most, like las vegas or phoenix, in my part of the country that had the biggest crashes where you have the largest number of foreclosures with houses being put on the market and borrowers,

who many of these housing markets where these investments are taking place are ones where you have a substantial fraction underwater borrowers and individuals who have lost houses, whose credit is impaired who are not in a position to be buying houses, and these investors are purchasing these houses often at very low prices for cash and appear to be in the business of renting them out over a reasonably long period of time. i'd say, you know, we have to watch this very carefully, but i don't see that as an asset bubble. i see that as a very logical response of the market to generate a recovery in very hard-hit areas --

>> dr. yellen, i don't want to be rude and interrupt you, but i'm also running out of time. here's what i would offer. i think you would agree with me, although you probably won't want to agree with me in a public hearing setting, but i think if i were to say to you, why don't you announce today that you're going to draw this down over the next 24 months from 4 trillion to zero, i think you would see the impact of your policies on the value of real estate all across the united states, not just in the hardest hit areas. i think the real estate that i own and others own would go down in value. i also think that the stock market would have the same sort of reaction that it has had when chairman bernanke just suggested

that there might be a phase down here. here's what i'm saying, because now i am out of time. i think the economy has gotten used to the sugar you've put out there, and i just worry that we're on a sugar high. that is a very dangerous thing for the little person out there who is just trying to pay the bills and maybe put a buck away for retirement. last thing i'll say, the flip side of your policies that you're advocating for are very, very hard on certain segments of our society. you know, explain to the senior citizen who is just hoping that cd will earn some money so they don't have to dig into the principle, what impact you're having on a policy that says

we're going to, for as far as the eye can see or foreseeable future, keep interest rates low. they are hurt by that policy. >> senator, i agree, and i understand that savers are hurt by this policy, but you know, if we want to get back to business as usual and a normal monetary policy and normal interest rates, i would say we need to do that by getting the economy back to normal. that's what in policy, i hope, will succeed in doing. the other thing i think that's important is to recognize that savers wear a lot of different hats. they play many different roles in the economy. they may be retirees who are hoping to get part-time work in order to supplement their income. they may be people who have children who are out of work and suffering because of that or grandchildren who are going to college and coming out of

college and hope to be able to put their skills to work finding good jobs and entering the job market when it's strong. i think when those people who worry about our policy thinking about themselves as savers take into account the broader array of interests they have in a strong economy, they would see that these policies, even though they may harm them in one respect, are broadly beneficial to them as i believe they are to all americans. >> my time is expired. thank you, mr. chairman. >> thank you. senator heitkamp. >> thank you, mr. chairman, and thank you, dr. yellen, for hanging in there with us. those of us at the end of the desk would love an opportunity to ask you some questions as well. i want to get back to the fed goal of full unemployment. i want to ask quick questions. give me a number on what you consider full unemployment -- or