[Joint House and Senate Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 115-149
THE ECONOMIC OUTLOOK WITH FEDERAL RESERVE CHAIR JANET YELLEN
=======================================================================
HEARING
before the
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
__________
NOVEMBER 29, 2017
__________
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JOINT ECONOMIC COMMITTEE
[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]
HOUSE OF REPRESENTATIVES SENATE
Patrick J. Tiberi, Ohio, Chairman Mike Lee, Utah, Vice Chairman
Erik Paulsen, Minnesota Tom Cotton, Arkansas
David Schweikert, Arizona Ben Sasse, Nebraska
Barbara Comstock, Virginia Rob Portman, Ohio
Darin LaHood, Illinois Ted Cruz, Texas
Francis Rooney, Florida Bill Cassidy, M.D., Louisiana
Carolyn B. Maloney, New York Martin Heinrich, New Mexico,
John Delaney, Maryland Ranking
Alma S. Adams, Ph.D., North Amy Klobuchar, Minnesota
Carolina Gary C. Peters, Michigan
Donald S. Beyer, Jr., Virginia Margaret Wood Hassan, New
Hampshire
Whitney K. Daffner, Executive Director
Kimberly S. Corbin, Democratic Staff Director
C O N T E N T S
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Opening Statements of Members
.................................................................
Hon. Patrick J. Tiberi, Chairman, a U.S. Representative from Ohio 1
Hon. Martin Heinrich, Ranking Member, a U.S. Senator from New
Mexico......................................................... 2
Witness
Janet L. Yellen, Chair, Board of Governors of the Federal Reserve
System......................................................... 4
Submissions for the Record
Prepared statement of Hon. Patrick J. Tiberi, Chairman, a U.S.
Representative from Ohio....................................... 34
Prepared statement of Hon. Martin Heinrich, Ranking Member, a
U.S. Senator from New Mexico................................... 34
Prepared statement of Hon. Janet L. Yellen, Chair, Board of
Governors of the Federal Reserve System........................ 36
Response from Janet L. Yellen to Questions for the Record
Submitted by Chairman Tiberi................................... 37
Response from Janet L. Yellen to Questions for the Record
Submitted by Senator Hassan.................................... 38
Response from Janet L. Yellen to Questions for the Record
Submitted by Representative LaHood............................. 39
THE ECONOMIC OUTLOOK WITH FEDERAL RESERVE CHAIR JANET YELLEN
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WEDNESDAY, NOVEMBER 29, 2017
Congress of the United States,
Joint Economic Committee,
Washington, DC.
The Committee met, pursuant to call, at 10:01 a.m., in Room
1100, Longworth House Office Building, Honorable Pat Tiberi,
Chairman, presiding.
Representatives present: Tiberi, Paulsen, Schweikert,
LaHood, Comstock, Maloney, Delaney, Adams, and Beyer.
Senators present: Heinrich, Lee, Cruz, Klobuchar, and
Peters.
Staff present: Theodore Boll, Daniel Bunn, Kim Corbin,
Whitney Daffner, Alaina Flannigan, Connie Foster, Natalie
George, Colleen Healy, Matt Kaido, Paul Lapointe, Allie Neill,
and Alex Schibuola.
OPENING STATEMENT OF HON. PATRICK J. TIBERI, CHAIRMAN, A U.S.
REPRESENTATIVE FROM OHIO
Chairman Tiberi. Good morning, and welcome. I want to
welcome everyone to the Joint Economic Committee's annual
hearing with the Federal Reserve Chair on monetary policy and
the prospects for our economy.
The Federal Reserve is one of the most important
institutions in the country and, indeed, the world. Chair
Yellen served as President of the San Francisco Fed, then as
Vice Chair, then as Chair of the Federal Reserve Board. Her
distinguished service at the Fed encompassed the most
tumultuous period of the United States financial and economic
systems since the Great Depression.
Many books have already been written about the events of
this period, and many more will certainly be written, from
different points of view and with varying assessments. But one
thing is certain: The financial system and the economy have
stabilized. We are no longer debating how to reconstitute them
but, rather, how they might work even better.
This hearing will review the developments since the crisis
and especially since Dr. Yellen became the Chair of the Fed, in
terms of the Fed's dual mandate of maximum employment and price
stability. By the standard measure of unemployment, which is
4.1 percent at last reading, and by the standard measure of
inflation, which most recently stood at 1.6 percent, both the
first and the second goals have been achieved.
Although the standard metrics of unemployment and inflation
are very good, all is not well in our economy. Economic growth
has been slow, to the point that some economists have advised
that we should try to lower our expectation for future growth
by about a third from the average post-war growth rate.
Wage growth has been surprisingly low, as has been business
investment. Labor force participation has remained low, and
various measures of economic dynamism, such as new business
formation, are way down from before the previous recession.
Various explanations have been offered, including an aging
population and decreased international competitiveness of U.S.
businesses that are impaired by taxes and regulation. But money
and banking also seem to have a role. Commercial banks, rather
than issuing more loans, are holding extraordinarily large
amounts of reserves at the Fed, and the Fed has invested
trillions of dollars in mortgage-backed securities and
treasuries.
So we have a condition in which businesses are investing
less, workers are staying on the sidelines, and banks are
lending less than they could. In short, the economy is not
realizing its full potential. The Joint Economic Committee has
devoted several hearings this year to determine why economic
growth has been slow and is interested to hear Chair Yellen's
views.
Taxes and regulation are major reasons for the reluctance
of businesses to invest and hire more workers in the United
States, which is why the current effort in Congress to reform
the tax system is so very important.
Both the House and the Senate versions of tax reform make
critical improvements--in particular, reducing the corporate
tax rate to bring it more in line with those of other countries
that we compete with. We are very interested to know how the
Fed perceives such tax rate alignment and whether its
policymaking will assume that it increases the economy's
productive potential.
In closing, let me express my deepest appreciation for
Chair Yellen's service to the Nation in one of the most
consequential positions for the economy and Americans' welfare.
Chair Yellen, thank you so much.
I will now yield to the ranking member, Senator Heinrich,
for his statement.
[The prepared statement of Chairman Tiberi appears in the
Submissions for the Record on page 34.]
OPENING STATEMENT OF HON. MARTIN HEINRICH, RANKING MEMBER, A
U.S. SENATOR FROM NEW MEXICO
Senator Heinrich. Thank you, Chairman.
And, Chair Yellen, I want to begin by thanking you for your
extraordinary public service. Your leadership at the Federal
Reserve has played a key role in helping the economy recover
from the financial crisis. The Nation owes you a debt of
gratitude for your careful stewardship of monetary policy.
Last year, when you appeared before this committee, I asked
you about how we can get the economy delivering for more
Americans. Unfortunately, the economic situation is probably
even more polarized today. Economic growth, jobs, startups--all
are increasingly concentrated by ZIP code. And while we have
made real progress since the recession, some parts of the
country are still being left behind. Too many rural areas, too
many tribal areas are struggling to get back to where they were
a decade ago before the recession.
I represent a State with an unemployment rate well above
where it was when the recession began back in December of 2007
and that sure doesn't seem to me like we have fully recovered
from this recession.
I know that the Federal Open Market Committee has not yet
made a decision on an interest rate hike next month, but if
analysts are correct, the Fed is expected to raise interest
rates, which would be the third rate hike this year. With many
communities across New Mexico and the country still struggling,
I am concerned that we may be putting the brakes on too soon.
Wage growth remains weak, while healthcare, college, and
child care are less affordable for working families, and this
reality should inform both monetary and fiscal policy. We need
targeted fiscal actions to grow the economy and to help these
areas that have been left behind. But that is not what some of
my colleagues are delivering in the current tax proposals.
The Republican tax bill moving through the Senate adds 13
million to the ranks of the uninsured to pay for tax breaks for
the wealthy and special interests. To hand out tax breaks to
the wealthiest among us, Republicans are not only taking health
insurance away from millions of Americans, but they are wasting
an opportunity to invest in our people and our communities.
There is a lot that we could be doing instead. Congress
should be focusing on important goals such as growing the
economy and driving up wages for working families. For the cost
of the current tax proposals, we could literally provide all
children with early learning opportunities, plus offer students
free tuition at community colleges and public universities,
ensure broadband access for every American, rebuild our
infrastructure, and take bold actions to fight the opioid
epidemic. But we are not going to be able to make those kinds
of investments if Republicans insist on adding another $1.5
trillion to the debt for tax giveaways to the wealthy.
Chair Yellen, as you conclude your term, it is an
appropriate time to highlight the vital role an independent Fed
plays in the economy. This Congress, as was the case in the
last Congress, is considering several Republican proposals to
limit the Fed's ability to independently conduct monetary
policy. These bills seek to change the way the Fed carries out
monetary policy, even going so far as requiring the central
bank to swap its current mortgage-backed securities for
Treasury bills.
There are also proposals to limit the central bank's
flexibility in responding to financial emergencies. This idea
is especially hard to understand, from my point of view, in
light of the critical role that the Fed played in responding to
the financial crisis and preventing another Great Depression. I
am concerned about these attempts to undermine the Federal
Reserve's independence, and I suspect you may be as well.
I would like to close with a point about the challenges of
crafting monetary policy in today's political environment.
Fiscal and monetary policies work best when they are aligned,
but it is difficult to know with any certainty where
Republicans in Congress are ultimately heading with fiscal
policy. For years, they have pledged to reduce the deficit, but
their tax package explodes the deficit.
The disconnect between words and actions is also visible on
infrastructure. President Trump has talked about the need to
invest in infrastructure, but as we wait for a real
infrastructure proposal from the Administration, Republicans
are proposing to eliminate key infrastructure funding sources,
like private activity bonds.
They said they would deliver middle-class tax cuts, but in
2027 nearly 24 million Americans earning less than $100,000 a
year would face a tax increase under the current House
Republican tax plan. And in the Senate bill, half of all
households would see a tax increase when it is fully
implemented.
The chasm between words and policy must make the already
challenging job of conducting monetary policy that much more
difficult.
Chair Yellen, again, thank you for your service to our
country, and I look forward to hearing your testimony today.
[The prepared statement of Senator Heinrich appears in the
Submissions for the Record on page 34.]
Chairman Tiberi. Thank you, Senator.
Rather than give the Republican response, I am just going
to introduce the Chair.
It is with great pleasure for me to introduce Dr. Janet
Yellen, Chair of the Board of Governors of the Federal Reserve
System.
She has long experience at the Federal Reserve, including 4
years as the Vice Chair of the Board of Governors and 6 years
as the president and chief executive officer of the Federal
Reserve Bank of San Francisco.
Chair Yellen previously served as Chair at the Council of
Economic Advisers under President Clinton and as Chair of the
Economic Policy Committee of the Organization for Economic
Cooperation and Development.
She is also professor emeritus at the University of
California at Berkeley. Chair Yellen earned her Ph.D. in
economics from Yale University, has been granted an honorary
doctorate of law degree from Brown University, and an honorary
doctor of humane letters from the Bard College.
Chair Yellen, welcome. You are recognized. Thank you.
STATEMENT OF HON. JANET L. YELLEN, CHAIR, BOARD OF GOVERNORS OF
THE FEDERAL RESERVE SYSTEM
Chair Yellen. Chairman Tiberi, Ranking Member Heinrich, and
members of the committee, I appreciate the opportunity to
testify before you today. I will discuss the current economic
outlook and monetary policy.
The U.S. economy has strengthened further this year.
Smoothing through the volatility caused by the recent
hurricanes, job gains averaged about 170,000 per month from
January through October, a somewhat slower pace than last year
but still above the range that we estimate will be consistent
with absorbing new entrants to the labor force in coming years.
With the job gains this year, 17 million more Americans are
employed now than 8 years ago. Meanwhile, the unemployment
rate, which stood at 4.1 percent in October, has fallen six-
tenths of a percentage point since the turn of the year and is
nearly 6 percentage points below its peak in 2010.
In addition, the labor force participation rate has changed
little, on net, in recent years, which is another indication of
improving conditions in the labor market, given the downward
pressure on the participation rate associated with an aging
population.
However, despite these labor market gains, wage growth has
remained relatively modest. Unemployment rates for African
Americans and Hispanics, which tend to be more sensitive to
overall economic conditions than those for Whites, have moved
down, on net, over the past year and are now near levels last
seen before the recession. That said, it remains the case that
unemployment rates for these minority groups are noticeably
higher than for the Nation overall.
Meanwhile, economic growth appears to have stepped up from
its subdued pace early in the year. After having risen at an
annual rate of just 1\1/4\ percent in the first quarter, U.S.
inflation-adjusted gross domestic product is currently
estimated to have increased at a 3-percent pace in both the
second and third quarters despite the disruptions to economic
activity in the third quarter caused by recent hurricanes.
Moreover, the economic expansion is increasingly broad-
based across sectors as well as across much of the global
economy. I expect that with gradual adjustments in the stance
of monetary policy, the economy will continue to expand and the
job market will strengthen somewhat further, supporting faster
growth in wages and incomes.
Although asset valuations are high by historical standards,
overall vulnerabilities in the financial sector appear
moderate, as the banking system is well capitalized and broad
measures of leverage and credit growth remain contained.
Even with a step-up in growth of economic activity and a
stronger labor market, inflation has continued to run below the
2-percent rate that the Federal Open Market Committee judges
most consistent with our congressional mandate to foster both
maximum employment and price stability.
Increases in gasoline prices in the aftermath of the
hurricanes temporarily pushed up measures of overall consumer
price inflation, but inflation for items other than food and
energy has remained surprisingly subdued. The total price index
for personal consumption expenditures increased 1.6 percent
over the 12 months ending in September, while the core price
index, which excludes energy and food prices, rose just 1.3
percent over the same period, about a half percentage point
slower than a year earlier.
In my view, the recent lower readings on inflation likely
reflect transitory factors. As these transitory factors fade, I
anticipate that inflation will stabilize around 2 percent over
the medium term. However, it is also possible that this year's
low inflation could reflect something more persistent. Indeed,
inflation has been below the committee's 2-percent objective
for most of the past 5 years. Against this backdrop, the FOMC
has indicated that it intends to carefully monitor actual and
expected progress toward our inflation goal.
Although the economy and the jobs market are generally
quite strong, real GDP growth has been disappointingly slow
during this expansion relative to earlier decades. One key
reason for this slowdown has been the retirement of the older
members of the baby boom generation and, hence, the slower
growth of the labor force. Another key reason has been the
unusually sluggish pace of productivity growth in recent years.
To generate a sustained boost in economic growth without
causing inflation that is too high, we will need to address
those underlying causes. In this regard, the Congress might
consider policies that encourage business investment and
capital formation, improve the Nation's infrastructure, raise
the quality of our educational system, and support innovation
and the adoption of new technologies.
I will now turn to the implications of recent economic
developments and the outlook for monetary policy.
With ongoing strengthening in labor market conditions and
an outlook for inflation to return to 2 percent over the next
couple of years, the FOMC has continued to gradually reduce
policy accommodation. The Committee raised the target range for
the Federal funds rate by a quarter percentage point at both
our March and June meetings, with the range now standing at 1
to 1\1/4\ percent.
And, in October, the Committee began its balance sheet
normalization program, which will gradually and predictably
reduce our securities holdings. The Committee set limits on the
pace of balance sheet reduction. Those limits should guard
against outsized moves in interest rates and other potential
market strains.
Indeed, there has been little, if any, market effect
associated with the balance sheet runoff to date. We do not
foresee a need to alter the balance sheet program, but, as we
said in June, we would be prepared to resume reinvestments if a
material deterioration in the economic outlook were to warrant
a sizable reduction in the Federal funds rate.
Changes to the target range for the Federal funds rate will
continue to be the Committee's primary means of adjusting the
stance of monetary policy. At our meeting earlier this month,
we decided to maintain the existing target range for the
Federal funds rate.
We continue to expect that gradual increases in the Federal
funds rate will be appropriate to sustain a healthy labor
market and stabilize inflation around the FOMC's 2-percent
objective. That expectation is based on the view that the
current level of the Federal funds rate remains somewhat below
its neutral level--that is, the rate that is neither
expansionary nor contractionary and keeps the economy operating
on an even keel.
The neutral rate currently appears to be quite low by
historical standards, implying that the Federal funds rate
would not have to rise much further to get to a neutral policy
stance. If the neutral level rises somewhat over time, as most
FOMC participants expect, additional gradual rate hikes would
likely be appropriate over the next few years to sustain the
economic expansion.
Of course, policy is not on a preset course. The
appropriate path for the Federal funds rate will depend on the
economic outlook as informed by incoming data. The Committee
has noted that it will carefully monitor actual and expected
inflation developments relative to its symmetric inflation
goal.
More generally, in determining the timing and size of
future interest rate adjustments, the Committee will take into
account a wide range of information, including measures of
labor market conditions, indicators of inflation pressures and
inflation expectations, and readings on financial and
international developments.
Thank you. I would be pleased to answer your questions.
[The prepared statement of Chair Yellen appears in the
Submissions for the Record on page 36.]
Chairman Tiberi. Thank you so much, Chair Yellen.
The Congressional Budget Office has noted that the United
States Treasury is on track to lose corporate tax revenue over
the next decade because of our high corporate tax rate, and the
worldwide system is encouraging companies to shift income and
even their own headquarters overseas.
Could a lower corporate tax rate and a more competitive
international treatment of our U.S. companies reverse this
trend by making America a more attractive place to invest in?
Chair Yellen. So I think this is an important question for
Congress to consider and to review all of the analysis that has
been done on this topic.
I would say there is widespread concern that the current
structure of the corporate tax system does have the effects
that you have indicated.
But looking at the likely impact of particular proposals
that may be under consideration is something that we haven't
done carefully at the Federal Reserve, and I would leave it to
Members of Congress and the Administration to judge what the
likely consequences would be.
Chairman Tiberi. Okay. Thank you.
One other question: A major criticism in some quarters of
Dodd-Frank has been the regulatory burden that it has placed on
small banks in particular. There is a legislative initiative
that would raise the $500 billion to $250 billion, the
regulatory threshold for heightened oversight by the Federal
Reserve.
Do you agree that overly burdensome regulations have
hindered particularly small-bank lending to the effect of
contributing to maybe the slowness of that economic recovery
that we have both talked about from the last recession?
Chair Yellen. Well, I do agree that community banks face
substantial burdens, regulatory burdens. And it is very
appropriate for the Fed and other banking regulators to look
for ways to reduce the compliance burdens that they face.
We meet with many community bankers and are very aware of
concerns about this. We are really focused on trying to tailor
our supervision so that we find ways to reduce regulatory
burdens. We have put into effect a number of changes that
reduce reporting requirements and recently have a simplified
capital proposal that we think should address some of the
concerns.
But we have long been on record as favoring some increase
in the $10 billion and $50 billion asset thresholds that are
incorporated into Dodd-Frank. In particular, we think that the
Volcker Rule and incentive compensation are things that should
not apply to smaller, less complex banks, and we do think an
increase in those thresholds would assist us in appropriately
tailoring our regulations.
We do think it is important that the Fed retain authority
to impose enhanced prudential standards on banking firms,
particularly in the $100 billion to $250 billion total asset
range, both for safety and soundness and financial stability
concerns. And, in particular, stress-testing we think is a
particularly important component of our safety and soundness
approach and do think it is appropriate for that to apply to
banks, let's say, over the $100 billion threshold.
Chairman Tiberi. Thank you.
I am going to turn it over to Ranking Member Heinrich for 5
minutes.
You are recognized.
Senator Heinrich. Thank you, Chairman.
Chair Yellen, the unemployment rate in October was 4.1
percent, the lowest since late 2000, but that average rate does
not capture the health of the labor market in many areas in
this country. You talked a little bit about that in terms of
demographics as well.
There is a broad expectation that the Fed could raise
interest rates at its December meeting, and I am certainly not
asking you to tip your hand with regard to that. But what could
change between now and the upcoming Fed meeting that could
affect your thinking on that, either one way or the other?
And then, if you would, talk a little bit about how you
take into account those geographical and/or demographic
disparities in the labor market health when making those
monetary policy decisions.
Chair Yellen. So I think it is a very desirable development
that the unemployment rate has fallen to a level that is about
the lowest we have seen since the early 2000s. And I do think
that this is a development that has brought gains and
improvements to almost all groups in the labor market.
That said, there are huge disparities in how different
groups are fairing in the labor market, both in terms of
unemployment rates, where, for example, African Americans
traditionally and still have unemployment rates that are almost
twice those of Whites, but also across groups with different
degrees of education and in different parts of the country.
And I do think a generally strong labor market is helpful
in alleviating all of those disparities, but we don't have a
targeted set of tools that would enable us to address
disturbing differentials across groups.
More generally, labor market experience of different groups
depends not only on employment opportunities and unemployment
rates but also on wages. And we have a multidecade trend of
increasing disparities in income and in wages, with the wage
premium being earned by those with more education that has
continued to increase over time. And we have seen a long trend
of disappearance of middle-income jobs that could be either
automated or outsourced.
So there remains a great deal of pain in the labor market
in spite of the fact that I think we have seen general
improvement spilling over to all groups.
You asked me about our upcoming meeting and our monetary
policy decisions. So we are very focused. We have a dual
mandate; we care about price stability, and we also care about
employment and achieving our maximum employment mandate. At the
present time, even though the unemployment rate is below levels
that most of my colleagues see as sustainable in the longer
run, inflation is running below our objective. And so our
monetary policy has been designed to be accommodative and to
allow the labor market to become tighter. We think that is
actually helpful not only in its own right but in bringing
benefits to groups that are having a tough time in the labor
market.
And there I do see encouraging signs, for example, that in
a very tight labor market, where so many firms are having a
tough time hiring workers, they are beginning to focus more on
training, they are looking for ways to bring on board and help
bring into their workforce individuals who in a looser labor
market they would just put into the reject pile. So I think all
of that is good. And we are not seeing undue inflationary
pressure in the labor market, so our policy remains
accommodative.
But we do think it is important to gradually move our
policy rate toward what I will call a neutral level, which
would be consistent with sustainably strong labor market
conditions. And we want to do this gradually, because if we
allowed the economy to overheat, we could be faced with a
situation where we might have to rapidly raise rates and throw
the economy into a recession.
And we don't want to cause a boom-bust set of conditions in
the economy. I would love to see a sustainably strong labor
market. And we think if inflation is depressed on a temporary
basis, as I believe but we are carefully monitoring, we think
that a gradual path toward a neutral stance is appropriate.
Senator Heinrich. While we have been able to drive down
unemployment in recent years, you know, one of the things we
haven't seen in that tightening labor market has been upward
pressure on wages.
Do you have an opinion on why that might be different today
than in previous recoveries? And what policies would be
important in trying to address that?
Chair Yellen. So it is true, we have seen, I would just
say, maybe modest upward pressure on wages. For example, the
employment cost index, which is a broad measure of compensation
pressures, has moved up a little bit, perhaps half a percent or
so, over the last 3 or 4 years. But wage increases are modest.
One lesson I take from that or moral I draw is that the
labor market and the economy are not significantly overheated
in spite of the fact that we have a very low unemployment rate.
But, importantly, over the long to medium term, the pace of
real or inflation-adjusted wage growth hinges on productivity
growth, that firms are really only able and willing to pay wage
gains that are matched by productivity. And for reasons that
are not well understood, productivity growth has really been
dismally slow in recent years.
And, I mean, I can't tell you exactly what the reasons are
for that. It may partly reflect slow technological innovation,
at least as it spills over into producing measured output that
is part of GDP. We are also seeing signs of less dynamism. The
process of creative destruction of new firms, innovative firms
expanding at the expense of those that are less innovative,
that process seems to have slowed, and I think some
productivity growth is associated with that.
But if you ask for what remedies can there be to this--and
I think to really see a faster average pace of real wage
growth, we need faster productivity--I would point you toward
investments--investments in people, investment in physical
capital in the private sector, infrastructure investments can
be helpful--and policies that facilitate innovation, and, of
course, the education and human capital of the workforce. Those
are the classes of policies that could have a favorable effect
on these adverse trends.
Chairman Tiberi. Thank you.
Vice Chairman Lee, you are recognized.
Senator Lee. Thank you very much, Mr. Chairman.
Thank you, Chair Yellen, for being here. I want to thank
you for your service over the years. I have enjoyed the
opportunity to visit with you as you have appeared before the
Joint Economic Committee during your service as Chair of the
Board of Governors.
Chair Yellen. Thank you.
Senator Lee. We make policy here in Congress. Here in
Washington, there are a lot of people who make policy. Policy
is forward-looking. It requires us to look to the future, to
anticipate events, and to set rules that will govern the
behavior of members of our society.
I assume you would agree with me if I said it is important,
when you are making policy, from time to time to look back and
review what you have done, figure out whether it succeeded or
failed.
Chair Yellen. Absolutely.
Senator Lee. And so, retrospective reviews of policy can be
a good thing. Does the Fed look back and review its monetary
policy choices from time to time?
Chair Yellen. Our monetary policy----
Senator Lee. Yes.
Chair Yellen [continuing]. Choices? Yes, of course. We do.
Senator Lee. And so, in doing that, it looks back and tries
to look at policy decisions it has made and figure out whether
the data support those decisions.
So, if the Federal Reserve already does that, how would a
congressionally mandated, transparent review of those policy
choices be a bad thing? Why wouldn't that be a good thing, to
have congressionally mandated, transparent review of the Fed's
monetary policy choices?
Chair Yellen. Well, we need to be accountable to Congress,
and I completely agree that an independent central bank in a
democratic society needs to explain itself to the public and to
Congress. And appearances before Congress where you ask
questions about our policy choices and how they worked out is
100-percent appropriate.
Nevertheless, I do think that it is very important that the
Federal Reserve, like most other central banks, be allowed to
make independent policy decisions that are shielded from short-
term political pressure.
So you didn't mention any specific legislation or ways of
accountability, but I have long expressed concern about, for
example, ``audit the Fed'' legislation or, more recently, the
CHOICE Act because those acts would essentially bring short-
term political pressure onto the Fed that could affect our
monetary policy decisions by mandating real-time GAO policy
reviews of recent decisions that would second-guess the
decisions made by the Fed and call into question their
legitimacy and credibility.
Senator Lee. I understand that that is your position. And,
at the same time, while we are talking about independence, the
fact that these reviews are undertaken in the first place
suggests to me that making them subject to a transparent review
process would just allow the public to have input. I understand
it is the desire, it is the impulse of any policymaker anywhere
to insulate him or herself from any public review. But we do
live in a republic, in a republic where the people are the
sovereigns, where ultimately the government is accountable to
the people. And you at the Fed exercise a significant amount of
government policymaking authority, and that is why I think
these things are appropriate.
My time is short. I want to get to a couple of other issues
very quickly.
The Joint Tax Committee's analysis of the tax plan pending
before Congress is expected to assume an aggressive response by
the Federal Reserve, one that would effectively assume that
monetary policy would hinder some of the growth that could
otherwise be anticipated from this tax reform policy.
Now, you emphasized in your testimony today that you expect
a gradual adjustment to monetary policy. I would think that a
gradual adjustment from the Fed would look very different and
is certainly described very differently than an aggressive
monetary policy. Do you agree those are two different things?
Chair Yellen. So what I would say is that we are very
focused on our congressionally mandated objectives of
employment and price stability or 2-percent inflation. And we
will try to adjust policy to achieve those goals in light of
changes in the environment, whether they could be due to fiscal
policy or, importantly, many other things that affect the
outlook.
I would say, look, we welcome strong growth. The Fed is not
trying to stifle growth. We are worried about trends that could
push inflation above our 2-percent objective.
As I said, it has been extremely disappointing to the Fed,
as it has been, I am sure, to all of you and to the public,
that we have achieved as much improvement as we have in the
labor market in the context of growth that has been running
only slightly under 2 percent. And if that pace of growth,
consistent with a labor market that is creating jobs for new
entrants, if that rises, we will be delighted to support that
and to accommodate it.
So we don't have some cap on growth that we are trying to
achieve. But in the context of an economy that is close to full
employment, to have sustained higher growth would require that
changes boost productivity growth or growth in the labor force.
Senator Lee. Understood. Understood.
Last year, I asked you about how the Fed's approach to
stress-testing might damage the due process and property
interest of investors, not just big investors but also
investors in the form of school teachers, firefighters, those
who invest in any way, in any amount.
Due process and property rights are undermined anytime you
have a rule of law that is ever-changing, anytime you have a
rule of law that it can't be understood as constant from one
day to the next, that is so unclear, so opaque, or so subject
to constant metamorphosis that one can't rely on what the law
demands.
What can you tell me about what the Fed has done since we
last spoke to make sure that the due process rights of
individuals, of investors are protected?
Chair Yellen. So stress-testing is a very important
component of our supervision and has led to more rigorous,
forward-looking assessments of capital adequacy at large banks
and particularly those that are systemic. So this really is a
key component of supervision.
But I would agree with you that the firms that are
subjected to it need to understand it. And we have done many
things, including putting out for comment proposals concerning
the design of our scenarios. We have put out a great deal of
information about qualitatively what is in the models that we
use. We have given feedback to firms on their models and
comments on their submissions so they understand the
shortcomings we see in their approaches.
And we are currently working on a transparency initiative
that would seek to provide more granular, more detailed
information that would help banking organizations understand
the ways in which specific characteristics of loan portfolios
would affect our evaluation of stress losses.
So I would agree, we would strongly resist publishing the
actual models, for a whole set of reasons, but providing more
information so that banks understand how we are engaging this
evaluation is appropriate and important.
Senator Lee. My time has expired. Thank you very much,
Chair Yellen.
Thank you, Mr. Chairman.
Chairman Tiberi. Thank you.
Representative Delaney, you are recognized for 5 minutes.
Representative Delaney. Thank you, Mr. Chairman.
And, Chair Yellen, thank you for your incomparable service
to our country.
Chair Yellen. Thank you.
Representative Delaney. I think many of us will miss you
very much.
Chair Yellen. Thank you.
Representative Delaney. You gave a very nice overview of
what is happening in the economy in general, on average, if you
will, the macro statistics you opened up your presentation
with, which describe a fairly stable to slightly positive
picture in many ways.
But I wonder, you know, when do you think it is time for us
to start thinking a little differently about the data that we
look at?
Because I saw some data recently where they disaggregated
what has happened to two, kind of, portfolios of the
population, the top 40 percent and the bottom 60 percent. And
they tracked this since 1980. And when you look at that data
you see a very different picture. People in the top 40 percent,
their incomes, on average, are up about 40 percent since 1980,
and in the bottom 60 percent, they are flat. The top 40
percent, on average, used to be worth six times more than the
bottom 60 percent. Now they are worth 10 times more than the
bottom 60 percent.
The top 40 percent used to spend twice as much on education
for their children than the bottom 60 percent. Now they spend
four times as much on, you know, education for their children.
The retirement savings of the top 40 percent, on a relative
basis, compared to what they will need for retirement, have
actually improved since 1980, and the story is very bad for the
people in the bottom 60 percent.
Life expectancies back in 1980 for both of these groups
were actually extending, and now, for the first time in quite
some time, we are actually seeing life expectancies of the
people in the bottom 60 percent going down.
So I am just wondering, when do you think we, as
policymakers, you in your position at the Federal Reserve and
us as policymakers here on the Hill, have to actually start
thinking differently about the decisions we make, based on the
disparities that are starting to grow in our country? And I am
not talking top 1 percent, et cetera. I am talking about large
disaggregation pools, top 40 percent versus bottom 60 percent.
Because it seems to me that that bottom 60 percent is also
particularly vulnerable to two macro trends that are going on:
one, rapid change in the future of work based on automation and
innovation. They are much more likely to have their jobs
disrupted. And then, further, they rely much more on important
government programs that are likely to come under continued
stress.
So, when you make decisions about what to do with monetary
policy, how much have you started, or has the Fed started, to
disaggregate some of this data and make the decisions
differently?
Chair Yellen. Well, you describe in your question a set of
very disturbing long-term trends that the Fed is very focused
on. And, in fact, some of the information that enables one to
document these trends is produced by the Federal Reserve and
our surveys of consumer finances and our surveys of household
and economic decisionmaking.
And, of course, there has been over decades a trend toward
rising inequality of both income and wealth in the United
States that--it is not recent. It is something that has been
going on for many decades----
Representative Delaney. Right. But does it cause you to
change decisions you would have otherwise made, based on what
is happening for the average performance of the economy? Do you
see what I mean?
Chair Yellen. Well, to the extent that these shifts in
income distribution do affect the pace of overall spending in
the economy--for example, if high-income households spent less
of extra income they earn than lower-income households, that
shift in income distribution can make a difference to overall--
--
Representative Delaney. Right.
Chair Yellen [continuing]. Spending, and it is something we
would take account of.
Representative Delaney. Because I would think, hearing your
average statistics, that the position to actually continue
towards a more normal rate environment makes sense. But when
you look at the disaggregated statistics, you would be--I
would, at least, be really scared of how vulnerable this bottom
60 percent is to any kind of shock in the economy.
And I guess, moving on to what we should be doing, I mean,
in your judgment, when we think about fiscal policy, tax policy
decisions, spending policy decisions, how much should we really
have a laser-like focus on programs, whether they be investing
in infrastructure, investing in human capital, creating
incentives in the Tax Code for people to allocate capital to
parts of the country that have been left behind economically?
How high a priority should that be for us in making our
decisions, based on the statistics that you are looking at?
Chair Yellen. So, for us, unfortunately, we don't have
tools that enable us to target particular groups. So our own
focus is, while we take these trends and study them, we really
only have a blunt tool----
Representative Delaney. Right.
Chair Yellen [continuing]. That can't address this. But
Congress and the Administration, you have a much wider set of
tools. And, obviously, it is up to you to formulate appropriate
priorities that----
Representative Delaney. Would you consider it urgent for us
to be addressing these trends?
Chair Yellen. Well, I am very disturbed and have spoken out
for many years about the disturbing trend toward rising
inequality. And the equity of the Tax Code is something that I
think should importantly be taken into account.
And as I said earlier, we are suffering from slow
productivity growth. And here, too, I think it is quite
important that in making fiscal policy and other decisions that
the focus be on how can that be improved. And that does point
to investment in people, infrastructure, also private capital,
technology, education.
So these are squarely, I think, in Congress' court, and I
do think they are urgent to address.
Representative Delaney. Thank you again, Chair Yellen.
Chairman Tiberi. Representative Schweikert, you are
recognized for 5 minutes.
Representative Schweikert. Thank you, Mr. Chairman.
And, look, this may be one of those auspicious days. I
don't know if this will--is probably your last time to come and
do this.
Chair Yellen. Probably.
Representative Schweikert. It is also our chairman's
probably last one. I am going to miss Mr. Tiberi, because he is
one of the few people to tolerate me, so I appreciate it.
Last thing in this, sort of, lovefest: It is an opportunity
to say something publicly that I said to the Chairwoman
privately. Your team around you, particularly your senior team,
has always been very kind to my staff and myself, particularly
when we have had some more unusual data-type questions.
I am still a bit of an advocate of wanting more and more of
the models becoming public, but a lot of that is already
beginning--I mean, like, I live on some of the Atlanta Fed's
data, their GDPNow, and they allow you to look at parts of the
formula. So I believe that openness that you began with has
come a long ways.
Chair Yellen. Thank you.
Representative Schweikert. It would be wonderful one day to
be able to log in and do certain stresses, for those of us in
the policymaking--what would happen if labor force did this,
what would happen if interest rates did this--and sort of
understand what is in sort of the back end of some of the data.
Chair Yellen. So, Congressman, you know, the model that we
use at the Fed for economic analysis of overall economic
trends, we refer to it as FRB/US, Federal Reserve Board/U.S.
This model is in the public domain. It is sitting on our
website. And anybody who wants to perform a ``what if''
exercise--what if monetary policy were different or if the
labor force grew faster or slower--you know, we have tried to
provide access to that tool to the public.
Representative Schweikert. Yeah, and it has gotten so much
better. I mean, I live on the Atlanta Fed's app. I know that is
a snapshot of current time, and a snapshot is not a trend, but
it has been very helpful in removing some of the mystery.
Now, to run through a dozen questions as quickly as I can.
And you actually touched on this. I had the experience of
flying back to Phoenix about a week ago, and I was looking at
something, it was a few years old, and then the current
unemployment. And it was looking at the tables of labor force
participation and what was being predicted a few years ago of
what would happen and what we see happening right now. And it
was talking about the demographic trend; labor force
participation is going to continue to fall.
But yet we see some really interesting things in the last
three quarters. Folks that were being predicted not to be
moving into the labor force are moving into the labor force. We
just saw some recalculations of numbers of Social Security
disability, and, all of a sudden, the longevity of the trust
fund jumped substantially because it turns out a number of
folks who are on Social Security disability moved back into the
labor force.
So there is something in our models that--and I know it is
at the margin, but we are already seeing some of the data that
this substantial economic opportunity that is in the labor--job
opportunities is actually starting to pull people we thought
were falling out of labor force participation.
If you had an interest in that, where would you go to find
more information on such a thing? This sort of goes back to
Senator Lee's question of the ability to back-test and sort of
figure out where we have also made mistakes in some of our
models.
Chair Yellen. So, I mean, Fed researchers have done very
detailed modeling of labor force participation trends and that
is published research in places like Brookings Papers and
refereed journals. And my staff could provide you references on
that.
You know, as I mentioned in my opening statement, what we
have seen over the last 3 years is aggregate labor force
participation has been essentially flat. The trend is downward,
and a flat labor force participation with a downward underlying
demographic trend means just what you said. People----
Representative Schweikert. Was contrary to what we were
predicting just 4 years ago.
Chair Yellen. Well, you know, I think a strong labor market
does attract people back in, and people who might have left and
retired are being incented to remain in the labor force. Of
course, we know that more recent cohorts of retirees--although
when people reach retirement age, their labor force
participation falls significantly, younger retirees are working
more than older retirees, and that is a trend as well.
Representative Schweikert. And that is a really interesting
trend, of how many of our seniors are staying in the labor
force.
Chair Yellen. More than they used to.
Representative Schweikert. And I know I am going over time,
but--oh, he just left, so I was going to compliment--I fear
often we fuss at the Fed, but you only have so many tools. And
a lot of the tools are actually sitting here with us, where
some of us may both absolutely agree and disagree
ideologically.
There were some interesting things in the--we will call
them the cross-tabs in the data of trade-school-type jobs, you
know, alignment, to use a previous conversation, and seeing
salary movements in there, but yet we often turn around and
reinforce a university education model.
And it turns out it may be our own misallocation of design
and resources that are actually causing many of these problems
out there, that we have to rethink what we are doing
policywise.
And, with that, I yield back, Mr. Chairman.
Chairman Tiberi. Thank you. Good comments.
Representative Maloney, you are recognized for 5 minutes.
Representative Maloney. Thank you, Mr. Chairman.
I just want to start out by thanking Chair Yellen for your
extraordinary service. As the very first woman to lead the
Federal Reserve, you broke a major barrier, and----
Chair Yellen. Thank you.
Representative Maloney [continuing]. We are so very proud
of you.
Chair Yellen. Thank you so much.
Representative Maloney. And thank you, too, for your record
as Fed Chair. I think your record speaks for itself. The
unemployment rate has fallen to 4.1 percent, the lowest in 17
years. Inflation has been steady. GDP growth is now a robust 3
percent. The Fed also ended the quantitative easing program,
has begun the process of shrinking the $4.4 trillion balance
sheet, and has started to gradually raise interest rates as the
economy improves.
So, in short, I would say your tenure has been an
unqualified success. By every metric, you have been one of the
most successful Fed chairs----
Chair Yellen. Thank you.
Representative Maloney [continuing]. In history.
Chair Yellen. Thank you.
Representative Maloney. So I just want to publicly thank
you for your service, everything that you have done, and say
that I and many of us in this Nation will miss you.
Chair Yellen. Thank you so much. I appreciate that.
Representative Maloney. I want to ask you about regulation.
I think that the Fed has generally done a good job under your
leadership in writing regulations that have strengthened the
safety and soundness of our financial institutions. But there
have been discussions in Congress right now about tailoring
these regulations that were put in place after the financial
crisis. And, as you know, Senate Chairman Crapo has introduced
bipartisan legislation on regulatory relief, a major package
for banks. Some people want to go further than this and really
roll back Dodd-Frank.
So I have two questions. First, do you think it is a good
idea to roll back Dodd-Frank in this post-crisis regulatory
time? And, secondly, what do you think of Chairman Crapo's
regulatory relief package? Do you think it goes too far, or do
you think it strikes the right balance?
Chair Yellen. Well, let me start with the first question
about rolling back Dodd-Frank.
I think that Dodd-Frank provided an excellent roadmap to a
series of changes that have led to a far safer and sounder
banking system and one that has been able--over the last 10
years, there have been stresses of all sorts that have hit the
U.S. financial system, sometimes emanating from abroad, and it
has proven resilient and able to support good growth and a
strong labor market.
And core reforms include more and higher-quality capital;
more liquidity; stress-testing, which I think is very
important; and resolution planning so, if a systemic firm were
to fail, that we would have the tools to be able to deal with
it without its imposing such costs on the economy. And I would
not want to see those things rolled back. I think it would be
very dangerous to do so.
That said, I do believe it is appropriate to tailor
regulations to the systemic footprint of a financial
institution. And so tailoring is an important principle. And we
have long indicated that we would be supportive of raising some
of the thresholds incorporated into Dodd-Frank--in particular,
the $10 billion and $250 billion thresholds--and that would
give us more ability to tailor to the systemic footprint of
particular firms.
Particularly important to us is having the continued
ability to impose enhanced prudential standards on a firm that
might fall under a new threshold if we thought it was justified
by safety and soundness or financial stability concerns.
So the legislation that has been proposed, I haven't had a
chance to study every detail of it, but I would say it
generally incorporates those principles and is a move in a
direction that we think would be good in enabling us to
appropriately tailor our supervision.
Representative Maloney. Thank you.
And, also, the U.S. banking system is the strongest in the
world, but we now have international standards that have raised
the capital requirements for all banks. And I know that you are
having ongoing discussions about capital standards at the
international level. Are you considering lowering the
international capital standards at all in these discussions?
Chair Yellen. You know, we have had a global agreement to
raise capital standards, Basel III. And what is under
discussion now are some details about--a particularly
contentious issue is the use of internal models as opposed to
standardized capital requirements. And foreign firms,
particularly European firms, some of whom rely on internal
models, testing and analysis suggests that they may hold too
little capital relative to what we think would be appropriate
based on what U.S. banks have in standardized models.
So we have ongoing discussions of this issue and, I think,
are coming closer to reaching agreement on this final issue,
which would enable us to finalize Basel III. So this is really
not a question about changing standards for U.S. banks; it is
more about the standards that we would want to see applied to
foreign banks.
But we chose to impose standards on U.S. banks,
particularly systemically important banks, that exceed the
global minimums that were agreed in Basel. Those are expected
to be and intended to be minimum requirements, and individual
countries that see a need and benefit from having higher
standards are fully expected to adopt higher standards.
And, in some cases, particularly with the largest and most
systemically important U.S.-based banking organizations, we
have done that, in imposing higher standards, and think it is
appropriate and warranted by the safety and soundness benefits
for our financial system.
Chairman Tiberi. Thank you.
Representative Maloney. Thank you.
Chairman Tiberi. The gentlelady's time has expired.
Mr. Paulsen is recognized for 5 minutes.
Representative Paulsen. Thank you, Mr. Chairman.
And, Chair Yellen, let me also thank you for your service
to the country----
Chair Yellen. Thank you.
Representative Paulsen [continuing]. And taking the time to
engage with us as policymakers.
You mentioned earlier the importance of having more robust
growth and dynamism in the economy, in terms of investments in
capital, investments in people, employees at different
companies. And, certainly, some of the tax policies that we are
engaged in and talking about right now will and can and should
lead to that, I think, more robust growth that I think a lot of
people would anticipate.
I just want to dive a little bit more into some of the
conversation we had earlier about--you mentioned wage growth
has been relatively modest. And you have this Phillips curve
issue, which the Fed looks at, certainly, in terms of the logic
of it. When you have a tight labor market with low
unemployment, that should lead to more competition for workers.
Then you are going to have higher wages. And some of those
higher wages would get passed on down to higher prices for
consumers, right? So inflation would rise.
But the data doesn't really support that, right? It has
been sort of this mystery. And so I am just curious, from your
perspective, as you look right now at whether the so-called
Phillips curve that depicts this inverse relationship between
unemployment and inflation is no longer valid. I mean, what are
your thoughts around that?
Chair Yellen. So, it is still a framework that I personally
find useful. I think the relationship between unemployment and
inflation has become more attenuated over time, and so the
impact of changing unemployment on inflation has diminished.
And I think that is well documented in many, many studies.
So I don't want to overstate just how strong that linkage
is, but the overall framework incorporates an understanding
that there are other very important factors that affect
inflation. And when you look at the U.S. inflation history over
the last 5 years or since the financial crisis, movements in
oil prices and also movements in the dollar that have
translated into significant changes in the pace of inflation of
imported goods, those things have had very substantial effects
on overall U.S. inflation.
So, if we look back, say, over the last 3, 4 years, 5
years, I don't think it is a mystery why inflation has been so
low. First, we had a lot of slack in the labor market. Then we
had periods when we had falling oil prices that really pulled
inflation down. Starting in mid-2014, the dollar appreciated
substantially; that held import prices down. It really wasn't a
mystery. And we want inflation to be as close to our 2-percent
objective as possible, but of course there is going to be
variation, and these things produce variation.
What is surprising is this year. This year, with a 4-
percent unemployment rate, we are in the vicinity of full
employment. Oil prices have been roughly stable, and the
dollar, if anything, this year has depreciated somewhat,
pushing up import prices. So why has inflation fallen this year
and been so low? That is puzzling. And I have opined on the
fact that there may be a number of transitory or idiosyncratic
factors that explain that, but it is something we are keeping
an eye on and want to look carefully at.
But I would say, generally, a framework that incorporates
the labor market, slack in the labor market, along with these
other factors does provide a pretty good understanding of
inflation in the U.S.
Representative Paulsen. And would you say that some of the
tax reform proposals that have been talked about--and it could
be the corporate side, for large employers, but also for small
employers--that are aimed at increasing productivity, even with
a low unemployment rate right now, would be helpful or
essential in terms of making sure that those individuals in
that 25-to-54 age range, in their prime working years, where
you have a higher labor force participation rate, for instance,
would that higher productivity help change and enter those
people into the labor market again?
Chair Yellen. Well, I think investment spending by private
companies does matter to how well equipped members of the labor
force are to produce, and stronger investment could raise
productivity. And if productivity growth goes up, that can
serve to boost wages.
But the linkages between tax policy and investment spending
are ones that economists don't agree on. And it is important, I
think, for Congress to be trying to evaluate what you think the
likely impact would be. But stronger investment, I think, would
have those favorable impacts.
Representative Paulsen. Thank you.
Chairman Tiberi. Thank you.
Representative Beyer, you are recognized for 5 minutes.
Representative Beyer. Thank you, Mr. Chairman, very much.
I want to add my thanks, too, for your firm hand, your
deeply grounded wisdom----
Chair Yellen. Thank you.
Representative Beyer [continuing]. Your nonpartisan
leadership. And you have fulfilled the dual mission of the
Fed----
Chair Yellen. Thank you.
Representative Beyer [continuing]. Low unemployment;
stable, low inflation--very, very well. So we are really going
to miss you.
Chair Yellen. Thank you, Congressman. I appreciate that.
Representative Beyer. You know, candidate Trump talked
about abandoning NAFTA, and now the Trump administration is
working on prioritizing and modernizing NAFTA with Mr.
Lighthizer. And yet we have seen that the higher perception of
NAFTA risk is driving down the value of the peso, is making
Mexican goods and services more competitive.
Do you agree that stable trade treaties are still the best
way to solve trade imbalances?
Chair Yellen. So, without commenting on the details of
NAFTA or any particular trade treaty, I generally think that,
at least overall, the United States has benefited from a more
open global trading environment. We have gotten the benefit of
a broader range of goods and services available to consumers at
better prices, lower input costs for firms, and the ability to
export to a broader range of markets.
But there are adverse impacts of such developments on
particular groups in the labor force. And it is important for
Congress to keep in mind the need to address dislocations that
may come from trade. But, generally, I think it has been
beneficial.
And from Mexico's point of view, the studies that have been
done suggest, you know, the U.S., I think, enjoyed some
benefits, at least overall, from NAFTA. Mexico, I believe,
enjoyed significant benefits. And, as you have said, there has
been downward pressure on the peso because of the discussions
that are taking place.
Representative Beyer. Yeah. Thank you.
In The Washington Post, there is lots of discussion now
about how much dynamic growth will occur from the current tax
cut packages that are out there. The Washington Post has
suggested, the editorial board, that if the revenue increase
targets are missed that taxes should be restored or
automatically raised. Is this the best way of ensuring fiscal
responsibility?
Chair Yellen. Well, I will say, my understanding is the
idea of trigger is motivated by a concern that some have over
the picture we have of debt sustainability now and into the
future.
And I would simply say that I am very worried about the
sustainability of the U.S. debt trajectory. Our current debt-
to-GDP ratio of about 75 percent is not frightening, but it is
also not low. But when you look at, for example, CBO's long-
term budget projections, it is the type of thing that should
keep people awake at night. And it shows a picture in which, as
our population ages, expenditures on Medicare, Medicaid, and
Social Security grow more rapidly than tax revenues, and the
debt-to-GDP ratio moves up. And this should be a very
significant concern.
So exactly what is the right way to address this, I think,
is a matter for you to decide. My understanding is the trigger
discussion is motivated by that. And I would just say it is
right to be focused on that problem, and I would urge you to
remain focused on it.
Representative Beyer. And you are absolutely right; that is
what stimulates the trigger discussion. Yeah.
And Mr. Paulsen talked about the Phillips curve, and you
talked about low oil prices, the movement in the dollar--
transitory, idiosyncratic factors--and our low inflation.
Others have suggested that technological innovation, the
global disinflationary impulse of integrating China, all these
other low-cost countries, in our global trading system--does it
mean that the FOMC 2-percent target is going to be hard to hit
for the foreseeable future?
Chair Yellen. Well, we are forecasting that inflation will
move up over the next year or two back to 2 percent. And I
think that is a reasonable forecast, although I believe there
is uncertainty about it, which is why we have indicated we are
closely monitoring these trends.
But as important as the trends are that you described--I
mean, they are important trends. And I would point out that our
estimates of the sustainable level of the unemployment rate
have declined very substantially. And the factors that you
discuss that have arguably exposed firms more heavily to global
competition, constraining prices, and restrained bargaining
power of labor, rather than necessarily showing up as chronic
low inflation, these things can instead mean the labor market
can operate on a sustainable basis at lower unemployment rates
than we might have thought of in the past, in the sixties or
seventies or eighties. Currently, my colleagues estimate the
sustainable level of the unemployment rate in the U.S. at just
over 4\1/2\ percent. That contrasts with a 6 or higher we used
to think.
And I think the trends you mentioned have been influential
in meaning, yes. In other words, yes, it is true, it takes a
tighter labor market or lower unemployment to give us 2-percent
inflation. So I don't mean to minimize their importance, but I
think it should be achievable for us, and we do have a low
unemployment rate.
Representative Beyer. Thank you very much.
Mr. Chair, I yield back.
Chairman Tiberi. Thank you.
Representative LaHood is recognized for 5 minutes.
Representative LaHood. Thank you, Chairman Tiberi.
And thank you, Chair Yellen, for your service to the
Federal Reserve and to our country.
Chair Yellen. Thank you.
Representative LaHood. I had a question as it related to
the commercial mortgage market. And we are all aware in 2008,
2009 when we had the financial crisis as it related to the
housing mortgage market, and as we look at the growth of Amazon
and other online retailers across the country, really changing
the business model as it relates to retailers. And we continue
to see traditional brick-and-mortar stores and malls and others
being really obliterated across the country--JCPenney, Macy's,
Sears Roebuck, and large malls. And in a lot of medium-size
markets, there continues to be vacant commercial properties,
and these type of brick-and-mortars become more and more
unproductive.
And as we look at the commercial mortgage market, I wonder
if you could comment on whether there is a possibility, as
these unproductive properties continue this trend, of causing a
financial crisis like we saw in 2008 and these markets going
bad.
Chair Yellen. So I think you are raising an important
question. I don't have detailed information at my fingertips on
these trends. I think that delinquency rates generally remain
pretty low in commercial real estate. There are legacy
properties incorporated in CMBS that have much higher
delinquency rates.
But we are focused on underwriting standards at banks, at
maintaining strong underwriting standards to protect the
banking system against possible weaknesses that could result in
especially commercial real estate. We are seeing overall in
commercial real estate that valuations are very high and we
have highlighted elevated asset prices. Commercial real estate
generally is an area, also, where we do see elevated prices or
low cap rates.
So we are focused on soundness of underwriting standards
and the safety and soundness of banks associated with it, but
in detail, just how this trend is going to play out, I would
like to get back to you on that.
Representative LaHood. And as you sit here today, do you
have any fears or concerns?
Chair Yellen. Well, these are obviously significant trends
that are affecting retail. You know, what they will mean for
banks is something I would like to look at more closely and get
back to you.
[The response submitted by Chair Yellen appears in the
Submissions for the Record on page 39.]
Representative LaHood. Okay. Thank you.
Another topic. I wanted to talk just generally about the
makeup of the Federal Reserve. For the last decade, the Federal
Reserve has had at least one vacancy in the Board of Directors.
And should Mr. Powell become the next Chair after your
resignation, the Federal Reserve Board will only have three out
of seven positions filled.
I understand that the President must nominate and the
Senate must approve each of these appointees and that both
parties are culprits in the gridlock there.
Can you give us examples of how the Federal Reserve does
not function optimally or efficiently without a full Board of
Governors?
Chair Yellen. Well, I do think it is important that the
number of Governors serving on the Board increase, and,
ideally, it would be at full strength at seven. So, you know,
certainly, my colleagues and I would welcome additional
appointments to the Board.
In fact, I don't think there has been any significant
amount of time, perhaps not ever, that the Board has operated
with only three members. That is a very rare and difficult
situation. But let me say, it does not stop the Federal Reserve
from carrying out its mandated activities. And while our
deliberations benefit from having more individuals with a range
of views and, of course, extra pairs of hands to help manage
the various operational and oversight responsibilities that we
have, the Fed is able to carry out its key work even with a
diminished Board.
Representative LaHood. And just lastly, do you have any
suggestions on reform as it relates to this topic?
Chair Yellen. Reform as it relates to the Federal Reserve
in general or----
Representative LaHood. Yeah. Recommendations or reform
measures to help with this problem of only having three or
limited numbers on the Board.
Chair Yellen. Well, you know, I think it is part of the
trend of slower appointments and more vacancies. And I think it
is really--you know, it creates a problem, for it to take so
long to have individuals nominated and confirmed. And this is,
you know, something I think it is important for the Senate to
look at, and the Administration.
And there have been many reports, including one I
participated in myself some years ago by the National Academy
of Sciences, about vacancies and the difficulty of making
appointments to agencies. So I do believe it is a significant
concern, but I don't have suggestions for you on how to improve
that.
Representative LaHood. I agree with you on that.
Thank you.
Chairman Tiberi. Representative Adams, you are recognized
for 5 minutes.
Representative Adams. Thank you, Mr. Chairman.
And let me add my words of thanks, along with my
colleagues. And, certainly, I want to associate myself with the
Congresswoman who made the comments about the accomplishments
you have made as a woman. And hopefully we can find some----
Chair Yellen. Thank you.
Representative Adams [continuing]. Women as smart as you to
fill some of those seats. But thank you very much for your
service.
Chair Yellen. Thank you.
Representative Adams. In my home State of North Carolina,
the unemployment rate in the first quarter of 2017 was 4.2
percent; for African Americans, it was 7.5 percent; for
Hispanics, 5.3 percent.
This unemployment disparity is not a recent or one-time
occurrence. The Economic Policy Institute looked at the change
in the unemployment rates between 2007 and 2017, and their
analysis shows that the White unemployment rate in North
Carolina is now below what it was before the recession, while
the unemployment rate for African Americans and Hispanics is
actually higher than it was before the recession.
So do you believe that the Federal Reserve should ever
consider its full-employment mandate achieved when there is
significant disparity between the White unemployment rate and
the Black unemployment rate?
Chair Yellen. So I find the disparities, which are long,
have been there for many years, between African-American/White
and Hispanic and White unemployment rates to be very disturbing
and to reflect broader problems that minorities and less
skilled individuals also are having in the labor market, and
they are very worrisome and damaging trends.
But I would say that, for most of these groups,
unemployment rates and other measures of labor market
functioning are back to levels that we had pre-crisis. So I
believe it is the case that, since the Bureau of Labor
Statistics started collecting information on African-American
unemployment rates, that it almost never declined below 7
percent. These rates bounce around a lot. In September, the
African-American unemployment rate did decline to 7 percent. In
the most recent reading in October, it moved up about half a
percent. But it is generally at a low level.
So, unfortunately, African-American and other minority
unemployment rates and labor market experience are highly
cyclic. So, when the Great Recession hit and unemployment
nationally skyrocketed, the worst experienced, largest increase
in unemployment and the greatest toll came for African-
American, Hispanic, and other minority workers.
As the labor market strengthened, actually, the African-
American unemployment rate has declined more strongly than that
for Whites. And the disparities now, which are longstanding--
African-American unemployment rates are basically double those
of Whites--were back to something like that again.
Representative Adams. Thank you very much.
The United States makes up about 5 percent of the world's
population, 21 percent of the world's prisoners. In 2014,
African Americans constituted 2.3 million, or 34 percent, of
the total 6.8 million correctional populations.
What do you think is the impact of mass incarceration on
unemployment racial disparities?
Chair Yellen. Well, I think it has a very important and
negative effect. And there have been many discussions about
ways to potentially address that, but, clearly, it is something
that employers will be less willing to hire individuals who
have criminal records. And this is a serious problem and
concern.
I will say that this is anecdotal as opposed to systematic,
but as the labor market has tightened and so many firms now,
almost all firms we talk to, report they are having difficulty
finding workers, I do hear more reports of individuals who may
have a criminal record who are succeeding in finding jobs and
being integrated back into the labor force. But it is clearly a
very significant issue.
Representative Adams. Thank you very much.
And you actually answered the other question I was going to
ask in your response, about the labor force and getting back
into it. So thank you very much.
Chair Yellen. Thank you.
Representative Adams. I yield back.
Chairman Tiberi. Senator Peters, you are recognized for 5
minutes.
Senator Peters. Thank you, Mr. Chairman. And, once again,
thank you for your service. I appreciate your leadership on
this committee and wish you well in all of your future
endeavors.
And, Chair Yellen, I will add my accolades to everybody
else on the committee. We appreciate your tenure as Chair. You
have presided over the Fed during some very challenging times
and have always been a very steady hand, and we appreciate that
steady hand and look forward to following you in your future
endeavors, as well, which I am sure will be equally as
significant.
Chair Yellen. Thank you so much. I appreciate that.
Senator Peters. So, Chair Yellen, in response to some
previous questions, you mentioned--and I would like you to
maybe elaborate a little bit--that the linkage between tax
policy and investment is under some dispute among economists,
that there is disagreement as to whether or not a tax cut would
definitely lead to a level of investment.
Is that because the data is inconclusive? I mean, tell me a
little bit more about this debate and why we can't necessarily
think that there is that strong linkage.
Chair Yellen. So I am not an expert in this topic. Let me
say that at the outset. And it is not one that we are
attempting, ourselves, to independently evaluate. But there is
a literature on this.
I think, empirically, the linkages are not clear, so it is
difficult based on empirical information to draw strong
conclusions.
Theoretically, tax changes that lower the cost of capital
ought to, in principle, incent greater investment. And with
greater investment, there is arguably some passthrough into
wages.
But I would say, empirically, just generally, impacts of
the cost of capital on investment spending are very hard to
detect also in economic data. And while most economists think
there is some linkage, it isn't strong enough or pronounced
enough to come across in a clear way in the economic data.
And then, of course, the entire set of tax changes that are
under consideration matter. So I think this is a complicated
question.
Senator Peters. Well, it is complicated, and that is
because it depends on the investment decisions that are made by
people who receive these tax breaks.
Chair Yellen. Yes.
Senator Peters. And those are human beings. So my
experience has always been it is probably best just to listen
to folks as to what they would do if they get a large tax
break.
In fact, I think it was interesting that today in Bloomberg
there is an article, ``Trump's Tax Promises Undercut by CEO
Plans to Reward Investors.'' So CEOs are telling us something
very different than what we are hearing from the
Administration. In fact, they are telling us that, for the most
part, if they get this tax break, they are going to do share
buybacks. There are probably going to be significant share
buybacks.
Robert Bradway, chief executive of Amgen, said in an
earnings call that he has been actively returning capital and
he is going to continue to do that in the form of dividends and
buybacks. Executives from Coca-Cola, from Pfizer--Cisco's CFO,
Mr. Kramer, said, quote, ``We will be able to get much more
aggressive on share buyback after a tax cut.''
At a November 14 speech to The Wall Street Journal CEO,
counseled by Trump's top economic adviser, Gary Cohen, the
moderator asked business leaders in the audience to show hands
if they had planned to reinvest these tax proceeds. A few
people responded. I think a couple hands went up.
Another provision, according to this article, that would
impose an even lower tax rate on companies' stockpiled overseas
earnings, giving them an incentive to return trillions of
dollars in offshore cash to the U.S., that that money is also
unlikely to spur hiring because companies are already well
capitalized and can bring on as many employees as they need,
according to John Shin, who is a foreign exchange strategist at
Bank of America Merrill Lynch.
In fact, I think he is quoted as saying, ``Companies are
sitting on a large amount of cash. They are not financially
constrained.'' Shin conducted a survey of more than 300
companies, asking their plans for a tax overhaul, and they said
they are all basically focused on their shareholders and
engaging in buybacks.
So, as the Fed looks at this and they are saying that there
is not a linkage between these tax cuts and investment, in
fact, CEOs are saying they are going to do share buybacks, as
the Fed is looking at that and your policies, are share
buybacks generally--are they going to increase wages?
Chair Yellen. Well, I don't think share buybacks would
increase wages. The usual linkage would be investment in
capital and equipment, if they occurred or to the extent that
they occur, would help raise the productivity of the labor
force and, in boosting their productivity, would likely end up
raising wages. But the linkage occurs through capital spending
and not through share buybacks.
Senator Peters. Yeah. Share buybacks don't do anything.
And, in fact, share buybacks will increase the stock price.
That is really the main reason for that. So, if you have stock
options, boy, you are going to do really well. If you are a
significant shareholder, you are going to do really well. But
the person on the floor of the shop making the products, they
are not going to see much of anything, unless they own some
shares in their mutual funds, perhaps, which would be great.
But it is disproportionally at the very top.
So an efficient way of growing an economy is not to be
engaged in share buybacks. And I would argue--and just your
thoughts--I mean, we talked about the fact that there is less
dynamism in the economy, as well. And there is certainly a
number of economists who believe that part of that lack of
dynamism is a result of an increasing concentration of capital
and fewer and fewer firms.
Chair Yellen. That is true.
Senator Peters. So that is accurate, that because of that--
--
Chair Yellen. Yes.
Senator Peters [continuing]. Concentration, we are seeing
fewer firms, less dynamism, less business formation. Also, that
can slow growth. When you have that kind of concentration,
growth is constrained.
So, if you are a company and you want to increase your
share price, probably the best thing to do is just to do a
share buyback, and, boy, if you get a tax windfall, that is
going to be great.
And how is that going to impact your policy?
Chairman Tiberi. The gentleman's time has expired, but the
Chair may finish answering the question.
Chair Yellen. Oh.
So we will, you know, understand there is uncertainty about
what the impact of policy will be. And, you know, as it
unfolds, you know, and we see what those consequences are, you
know, we will try to evaluate it as it occurs. But there is
tremendous uncertainty, as I said, based on existing
literature.
Senator Peters. Right. Thank you so much, madam.
Chairman Tiberi. Thank you, Senator.
Senator Cruz, you are recognized for 5 minutes.
Senator Cruz. Thank you, Mr. Chairman.
Chair Yellen, welcome. Thank you for your service. Thank
you for your testimony today.
Chair Yellen. Thank you, Senator.
Senator Cruz. You note in your testimony that inflation has
continued to run below the 2-percent rate that the FOMC
considers the most consistent with maintaining maximum
employment and price stability. And you have expressed some
uncertainty as to why this is the case.
One factor that your testimony didn't discuss is that our
labor force participation rate remains at its lowest rate since
1978 at 62.8 percent. How does the historically low labor force
participation rate impact your assessment of the employment
picture that the country is facing right now?
Chair Yellen. Of the employment picture?
Senator Cruz. Yeah.
Chair Yellen. So it is a complicated question because there
are good reasons why labor force participation in the aggregate
is declining in the United States. And it is a trend we expect
to continue, because it mainly reflects the aging of the U.S.
population and the fact that individuals, once they reach their
retirement years, participate much less in the labor force than
before those years. So, even though more recent cohorts of
retirees are working more than their parents did, overall, the
labor force participation rate drops when the population ages.
So this is a continuing trend that is not going to go away.
However----
Senator Cruz. So, if I might, though, what about
discouraged workers and workers who drop out of the labor force
who are of working age, who are not seniors but simply giving
up on hopes of finding meaningful employment?
Chair Yellen. Well, if you look at prime-age workers, their
labor force participation rates have come up as the economy has
expanded. They are not quite back to the levels we saw pre-
recession. But what you do have in the United States is, for
prime-age workers, especially men, chronic, long-lasting,
multidecades decline in labor force participation. And my own
assessment would be that is not about retirement; that is about
working-age individuals who are not participating in the labor
force.
I think that reflects longer-term trends that are adverse
that are affecting particularly low-skilled Americans in the
workforce: the disappearance of middle-income jobs; pressures
on wages at the lower end; the opioid crisis, which partly
reflects that labor market distress but also contributes to
individuals staying out of the labor market and being not able
or willing to work. So I think we do have adverse trends
affecting labor force participation.
I mean, you asked me how does it impact my view of
employment. Well, when I see for the last 3 years the U.S.
labor force participation rate has been essentially stable, I
see that as a good trend showing improvement in the labor
market, because stability is occurring in the face of what is a
declining underlying trend. And so it does suggest that with a
stronger labor market we have individuals who are being drawn
in by greater job opportunities and more ``help wanted'' signs
that they are seeing.
Senator Cruz. I agree with you, the trend, particularly
towards working-age adults dropping out of the labor force, is
troublesome. And we need serious economic policy to address and
hopefully change that trajectory.
One of the factors that I think is important for doing so
is a robust small-business sector. And an ongoing concern is
credit availability for small business.
When Congress passed Dodd-Frank, one of the major bases for
Dodd-Frank was stopping the phenomenon of ``too big to fail.''
I think, as we have seen Dodd-Frank implemented, the big banks
are all bigger now. You made reference to that in your last
answer, that we have seen an aggregation of capital, the giant
banks have gotten bigger and bigger and bigger under Dodd-
Frank. And we have seen small financial institutions, community
financial institutions, going out of business at a record rate.
How would you assess the effectiveness of Dodd-Frank, in
particular, on impacting small and community banks? And how is
that impacting credit availability, in turn, for small
businesses?
Chair Yellen. So, as you point out correctly, community
banks are gradually diminishing in numbers. It has been a very
tough environment for them. And we do recognize that regulatory
burden is something that they are suffering from, and it is
something we are very focused on trying to address and reduce.
So I think that, for us, is and should be a very important
priority.
I mean, there are other things that are making it tough to
be a community bank, including the fact that we are in a low-
interest-rate environment with a pretty flat yield curve, and
that has impacted net interest margins and earnings. So, you
know, that is a completely separate factor.
But in terms of small-business lending, the landscape has
changed a lot. Perhaps community banks are providing less than
they used to; large banks are providing more. Online lenders
and new fintech firms are coming in and filling part of the
void and devising new ways to lend quickly to small businesses
in ways that are perhaps less costly than traditional banks.
But our surveys suggest there are some particularly small
and minority firms that do feel that they don't have adequate
access to credit. Surveys of small firms, like the National
Federation of Independent Business that is somewhat larger but
still small firms, suggest that most firms feel they have
adequate access to credit. They don't feel they are in an
environment where their credit needs aren't being satisfied.
So, as a general matter, I think credit is available. I
think banks are looking to extend credit. When we ask them
regular questions, they tell us they don't see much demand on
the part of small businesses for credit. It is sometimes hard
to disentangle demand, what is driving something, whether it is
demand or supply. But there is evidence that there is weak
demand and it is not simply a matter of weak supply due to
regulations.
Chairman Tiberi. I thank the gentleman. The gentleman's
time has expired. Thank you.
Last but not least, Senator Klobuchar is recognized for 5
minutes.
Senator Klobuchar. Well, thank you very much. Thank you,
Mr. Chairman. And thank you for your service, and good luck.
Thank you, Senator Heinrich.
And thank you, Chair Yellen. I sent out a tweet about you,
about how you have been a strong, trusted, steady presence----
Chair Yellen. Thank you.
Senator Klobuchar [continuing]. You have done good work,
and it is very popular. So always when someone retires, you
know, it is like a good moment. But mostly I want to thank you,
coming in as Vice Chair and Chair at difficult times in our
country.
Chair Yellen. Thank you, Senator.
Senator Klobuchar. And, certainly, in my State, I have seen
your steady hand. And what we have seen with the unemployment
rate--in our State, it is at 3.3 percent. And while I see
issues with the cost of things, I see issues with our debt and
other things that we have to tackle in the Congress, I do want
to thank you for that steady hand. I think it has made a
difference.
Chair Yellen. Thank you so much. I appreciate that.
Senator Klobuchar. So one of the things that I have talked
about in the past I don't think has been talked about too much
here is just the infrastructure issue. And I am so
disappointed, as we look at this tax bill that we are seeing
both in the House and now in the Senate, in that it adds, in
the Senate's case, over $1.5 trillion in debt, but we didn't
put any money into infrastructure, which, if we are going to
start messing around like that, I would think we would want to
really put in an injection of funding into our infrastructure.
Could you talk about how improving U.S. infrastructure,
including our broadband, can benefit our economy?
Chair Yellen. Well, I do think it is one of the factors
that impacts productivity. And when I think about what we can
do to improve living standards and raise productivity, I think
about all sorts of investment. So private investment in capital
equipment is important. That affects many workers. But----
Senator Klobuchar. You and I talked about the depreciation
tax hump that was during the downturn, the depreciation
allowance.
Chair Yellen. Right. But, I mean, infrastructure is
important. And then I would also add to that a focus on
investment in people and human capital, which is--and
especially in light of rising inequality, is a form of
investment, too, that deserves emphasis.
Senator Klobuchar. Right. And that has been a major focus
of mine, some because our State has such low unemployment
rates, especially in our rural areas. Susan Collins and I
introduced a bill to expand apprenticeship programs, and I
think there is much more work we could do.
Could you talk about that issue, is that we have students
that sometimes aren't graduating from high school or are
graduating from even college with degrees and then they can't
find jobs, and yet we have hundreds of thousands of these jobs
that are in welding and trades----
Chair Yellen. Yeah.
Senator Klobuchar [continuing]. And these things and how we
get at that?
Chair Yellen. So, I mean, there clearly is--we have a tight
labor market. Almost every firm that you talk to discusses the
challenges of finding qualified workers. And there is a degree
of mismatch, that the qualifications that people have,
sometimes college graduates but often high school graduates
can't qualify for the jobs. So I think training,
apprenticeships. Other countries, like Germany, seem to do a
better job of matching people with jobs and training for them
than we do.
I have made a practice of my own when I travel around the
country, I am interested in what sort of programs work. There
are a lot of efforts by community colleges and nonprofits,
sometimes partnering up with firms, to try to address that
skill gap.
And what I would say is I have seen many programs I think
are very promising, you know, in 6 months or a year, giving
people the training and credentials they need maybe for a
manufacturing job that requires technical skills, doesn't
require a college education.
And what I am particularly gratified by is that, in the
tight labor market like we have now, firms are really
interested in these programs, and they really want to
participate, because they really need workers. And when they
care about it and they don't have a lot of applications in the
hopper, they are willing to invest in it, too, and partner with
the community college or the nonprofits and guarantee that if
they participate in these training programs, then they will
guarantee that when someone comes out successfully of the
program they are going to at least be sure----
Senator Klobuchar. Right.
Chair Yellen [continuing]. They are going to get a chance
at a job at that firm.
So, you know, this is an area that obviously Congress can
consider investments, but this is private-sector investment
that----
Senator Klobuchar. Exactly. And I think it is just making
it easier with everything from--if tax credits or if it is also
just pilot programs, best practices, those kinds of things.
I was just at Summit Academy in Minneapolis, which is
focused on minority students. Seven hundred a year are getting
these credentials. And they directly go into the jobs when they
graduate, because the companies, like THOR Construction, one of
the biggest minority-owned construction companies that just
worked on our stadium that is going to host the Super Bowl--not
that I am doing hawking up here on stage, Mr. Chairman--in
February--but it was just really--I think these things have to
be encouraged.
Chair Yellen. Right.
Senator Klobuchar. Because, otherwise, we are going to lose
work, if we don't have----
Chair Yellen. Well, I completely agree. And I think these
programs are deserving of emphasis and can be very successful.
We are trying, through our own work, our community
development programs that exist in the reserve banks, to
understand what is best practice in this area and to
disseminate information about approaches that work.
Senator Klobuchar. Thank you very much. Thank you. And I
look forward to seeing you in your new capacity, whatever it
is.
Chair Yellen. Thank you so much. I appreciated it, Senator.
Chairman Tiberi. Thank you.
And I echo the comments of your tenure and your service to
our country. And this being your last hearing, it has been an
honor and privilege to get to hear you.
And, like you, this is my last hearing of the Joint
Economic Committee as the chairman. And I want to thank Ranking
Member Heinrich and Senator Lee and all the members of this
committee for making my term a successful one.
I also want to particularly thank the hardworking staff at
the Joint Economic Committee. And, in particular, I want to
thank Whitney Daffner, who has helped lead the committee, who
is sitting to my back. And for the historical knowledge, I want
to thank Colleen Healy for helping us kind of get through all
the challenges at the beginning of this process.
So it has really been an honor and a privilege to chair
this committee. I look forward to watching it in the future as
a private citizen.
And, again, thank you, Chair, for your distinguished
service.
Should members wish to submit questions for the record, the
hearing record will be open for 5 business days.
With that, we are adjourned.
Chair Yellen. Thank you so much.
Chairman Tiberi. Thank you.
[Whereupon, at 11:45 a.m., the committee was adjourned.]
SUBMISSIONS FOR THE RECORD
Prepared Statement of Hon. Pat Tiberi, Chairman, Joint Economic
Committee
Good morning and welcome. I want to welcome everyone to the Joint
Economic Committee's annual hearing with the Federal Reserve Chair on
monetary policy and the prospects for the economy.
The Federal Reserve is one of the most important institutions in
the country and indeed the world. Chair Yellen served as President of
the San Francisco Fed, then as Vice Chair and as Chair of the Federal
Reserve Board. Her distinguished service at the Fed encompassed the
most tumultuous period in the U.S. financial and economic systems since
the Great Depression.
Many books have already been written about the events of this
period and many more will be written from different points of view and
with varying assessments. But one thing is certain, the financial
system and the economy have stabilized. We are no longer debating how
to reconstitute them but rather how they might work better.
This hearing will review the developments since the crisis and
especially since Dr. Yellen became Chair of the Fed in terms of the
Fed's dual mandate of maximum employment and price stability. By the
standard measure of unemployment, which is 4.1 percent at last reading,
and by the standard measure of inflation, which most recently stood at
1.6 percent, both the first and second goals have been achieved.
Although the standard metrics of unemployment and inflation are
very good, all is not well in the economy. Economic growth has been
slow to the point that some economists have advised that we should
lower our expectation for future growth by about a third from the
average postwar growth rate.
Wage growth has been surprisingly slow, as has been business
investment; labor force participation has remained low and various
measures of economic dynamism such as new business formation are way
down from before the recession.
Various explanations have been offered, including an aging
population and decreased international competitiveness of U.S.
businesses that are impaired by taxes and regulation. But money and
banking also seem to have a role. Commercial banks, rather than issuing
more loans, are holding extraordinarily large amounts of reserves at
the Fed, and the Fed has invested trillions of dollars in mortgage-
backed securities and Treasuries.
So we have a condition in which businesses are investing less,
workers are staying on the sidelines, and banks are lending less than
they could. In short, the economy is not realizing its full potential.
The Joint Economic Committee has devoted several hearings this year to
determining why economic growth has been slow and is interested to hear
Chair Yellen's views.
Taxes and regulation are major reasons for the reluctance of
businesses to invest and hire more workers in the United States, which
is why the current effort in Congress to reform the tax system is so
important. Both House and Senate versions of tax reform make critical
improvements--in particular, reducing the corporate tax rate to bring
it more in line with those of other countries. We are very interested
to know how the Fed perceives such tax rate alignment and whether its
policymaking will assume that it increases the economy's productive
potential.
In closing, let me express my deepest appreciation for Chair
Yellen's service to the Nation in one of the most consequential
positions for the economy and Americans' welfare. Chair Yellen, thank
you.
__________
Prepared Statement of Hon. Martin Heinrich, Ranking Member, Joint
Economic Committee
Chair Yellen, I want to begin by thanking you for your
extraordinary public service.
Your leadership at the Federal Reserve has played a key role in
helping the economy recover from the financial crisis. The Nation owes
you a debt of gratitude for your careful stewardship of monetary
policy.
Last year, when you appeared before this committee, I asked you
about how we can get the economy delivering for more Americans.
Unfortunately, the economic situation is probably even more polarized
today. Economic growth, jobs, and startups are increasingly
concentrated by zip code.
While we have made real progress since the recession, some parts of
the country are being left behind.
Too many rural and tribal areas are struggling to get back to where
they were a decade ago.
I represent a state with an unemployment rate well above where it
was when the recession began back in December 2007. That sure doesn't
seem to me like we have fully recovered from the recession.
I know that the Federal Open Market Committee has not yet made a
decision on an interest rate hike next month. But, if the analysts are
right, the Fed is expected to raise interest rates, which would be the
third rate hike this year.
With many communities across New Mexico and the country still
struggling, I'm concerned that we may be putting the brakes on too
soon.
Wage growth remains weak while health care, college, and child care
are less affordable for working families.
This reality should inform both monetary and fiscal policy.
We need targeted fiscal actions to grow the economy and help these
areas that have been left behind. But that's not what Republicans are
delivering.
The Republican tax bill moving through the Senate adds 13 million
to the ranks of the uninsured to pay for tax breaks for the wealthy and
special interests.
To hand out tax breaks to the wealthiest among us, Republicans are
not only taking health insurance away from millions of Americans, but
they are wasting an opportunity to invest in our people and
communities.
There's so much we could be doing instead.
Congress should be focusing on important goals such as growing the
economy and driving up wages for working families.
We could provide all children with early learning opportunities,
offer students free tuition at community colleges and public
universities, ensure broadband access for every American, rebuild our
infrastructure, and take bold actions to fight the opioid epidemic.
But we're not going to be able to make those investments if
Republicans insist on adding $1.5 trillion to the debt for tax
giveaways to the wealthy.
Chair Yellen, as you conclude your term, it's an appropriate time
to highlight the vital role an independent Fed plays in the economy.
This Congress, as was the case last Congress, is considering
several Republican proposals to limit the Fed's ability to
independently conduct monetary policy.
These bills seek to change the way the Fed carries out monetary
policy, even going so far as requiring the central bank to swap its
current mortgage-backed securities for Treasury bills.
There are also proposals to limit the central bank's flexibility in
responding to financial emergencies.
This idea is especially hard to understand in light of the critical
role the Fed played in responding to the financial crisis and
preventing another Great Depression.
I'm concerned about these attempts to undermine the Federal
Reserve's independence, as I suspect you are as well.
I'd like to close with a point about the challenges of crafting
monetary policy in today's political environment.
Fiscal and monetary policies work best when they are aligned. But,
it is difficult to know with any certainty where Republicans in
Congress are ultimately heading with fiscal policy.
For years, they have pledged to reduce the deficit. But, their tax
package explodes the deficit.
The disconnect between words and actions is also visible on
infrastructure. President Trump has talked about the need to invest in
infrastructure. But, as we wait for a real infrastructure proposal from
the Administration, Republicans are proposing to eliminate key
infrastructure funding sources like Private Activity Bonds.
They said they would deliver middle-class tax cuts. But in 2027,
nearly 24 million Americans earning less than $100,000 would face a tax
increase under the House Republican tax plan.
And in the Senate bill, half of all households would see a tax
increase when it is fully implemented.
The chasm between words and policy must make the already
challenging job of conducting monetary policy that much more difficult.
Chair Yellen, again, thank you for your service to our country. I
look forward to your testimony today.
__________
Prepared Statement of Janet L. Yellen, Chair, Board of Governors of the
Federal Reserve System
Chairman Tiberi, Ranking Member Heinrich, and members of the
Committee, I appreciate the opportunity to testify before you today. I
will discuss the current economic outlook and monetary policy.
the economic outlook
The U.S. economy has strengthened further this year. Smoothing
through the volatility caused by the recent hurricanes, job gains
averaged about 170,000 per month from January through October, a
somewhat slower pace than last year but still above the range that we
estimate will be consistent with absorbing new entrants to the labor
force in coming years. With the job gains this year, 17 million more
Americans are employed now than eight years ago. Meanwhile, the
unemployment rate, which stood at 4.1 percent in October, has fallen
0.6 percentage point since the turn of the year and is nearly 6
percentage points below its peak in 2010. In addition, the labor force
participation rate has changed little, on net, in recent years, which
is another indication of improving conditions in the labor market,
given the downward pressure on the participation rate associated with
an aging population. However, despite these labor market gains, wage
growth has remained relatively modest. Unemployment rates for African
Americans and Hispanics, which tend to be more sensitive to overall
economic conditions than those for whites, have moved down, on net,
over the past year and are now near levels last seen before the
recession. That said, it remains the case that unemployment rates for
these minority groups are noticeably higher than for the Nation
overall.
Meanwhile, economic growth appears to have stepped up from its
subdued pace early in the year. After having risen at an annual rate of
just 1\1/4\ percent in the first quarter, U.S. inflation-adjusted gross
domestic product (GDP) is currently estimated to have increased at a 3
percent pace in both the second and third quarters despite the
disruptions to economic activity in the third quarter caused by the
recent hurricanes. Moreover, the economic expansion is increasingly
broad based across sectors as well as across much of the global
economy. I expect that, with gradual adjustments in the stance of
monetary policy, the economy will continue to expand and the job market
will strengthen somewhat further, supporting faster growth in wages and
incomes. Although asset valuations are high by historical standards,
overall vulnerabilities in the financial sector appear moderate, as the
banking system is well capitalized and broad measures of leverage and
credit growth remain contained.
Even with a step-up in growth of economic activity and a stronger
labor market, inflation has continued to run below the 2 percent rate
that the Federal Open Market Committee (FOMC) judges most consistent
with our congressional mandate to foster both maximum employment and
price stability. Increases in gasoline prices in the aftermath of the
hurricanes temporarily pushed up measures of overall consumer price
inflation, but inflation for items other than food and energy has
remained surprisingly subdued. The total price index for personal
consumption expenditures increased 1.6 percent over the 12 months
ending in September, while the core price index, which excludes energy
and food prices, rose just 1.3 percent over the same period, about \1/
2\ percentage point slower than a year earlier. In my view, the recent
lower readings on inflation likely reflect transitory factors. As these
transitory factors fade, I anticipate that inflation will stabilize
around 2 percent over the medium term. However, it is also possible
that this year's low inflation could reflect something more persistent.
Indeed, inflation has been below the Committee's 2 percent objective
for most of the past five years. Against this backdrop, the FOMC has
indicated that it intends to carefully monitor actual and expected
progress toward our inflation goal.
Although the economy and the jobs market are generally quite
strong, real GDP growth has been disappointingly slow during this
expansion relative to earlier decades. One key reason for this slowdown
has been the retirement of the older members of the baby boom
generation and hence the slower growth of the labor force. Another key
reason has been the unusually sluggish pace of productivity growth in
recent years. To generate a sustained boost in economic growth without
causing inflation that is too high, we will need to address these
underlying causes. In this regard, the Congress might consider policies
that encourage business investment and capital formation, improve the
Nation's infrastructure, raise the quality of our educational system,
and support innovation and the adoption of new technologies.
monetary policy
I will turn now to the implications of recent economic developments
and the outlook for monetary policy. With ongoing strengthening in
labor market conditions and an outlook for inflation to return to 2
percent over the next couple of years, the FOMC has continued to
gradually reduce policy accommodation. The Committee raised the target
range for the Federal funds rate by \1/4\ percentage point at both our
March and June meetings, with the range now standing at 1 to 1\1/4\
percent. And, in October, the Committee began its balance sheet
normalization program, which will gradually and predictably reduce our
securities holdings. The Committee set limits on the pace of balance
sheet reduction; those limits should guard against outsized moves in
interest rates and other potential market strains. Indeed, there has
been little, if any, market effect associated with the balance sheet
runoff to date. We do not foresee a need to alter the balance sheet
program, but, as we said in June, we would be prepared to resume
reinvestments if a material deterioration in the economic outlook were
to warrant a sizable reduction in the Federal funds rate.
Changes to the target range for the Federal funds rate will
continue to be the Committee's primary means of adjusting the stance of
monetary policy. At our meeting earlier this month, we decided to
maintain the existing target range for the Federal funds rate. We
continue to expect that gradual increases in the Federal funds rate
will be appropriate to sustain a healthy labor market and stabilize
inflation around the FOMC's 2 percent objective. That expectation is
based on the view that the current level of the Federal funds rate
remains somewhat below its neutral level--that is, the rate that is
neither expansionary nor contractionary and keeps the economy operating
on an even keel. The neutral rate currently appears to be quite low by
historical standards, implying that the Federal funds rate would not
have to rise much further to get to a neutral policy stance. If the
neutral level rises somewhat over time, as most FOMC participants
expect, additional gradual rate hikes would likely be appropriate over
the next few years to sustain the economic expansion.
Of course, policy is not on a preset course; the appropriate path
for the Federal funds rate will depend on the economic outlook as
informed by incoming data. The Committee has noted that it will
carefully monitor actual and expected inflation developments relative
to its symmetric inflation goal. More generally, in determining the
timing and size of future interest rate adjustments, the Committee will
take into account a wide range of information, including measures of
labor market conditions, indicators of inflation pressures and
inflation expectations, and readings on financial and international
developments.
Thank you. I would be pleased to answer your questions.
__________
Response from Janet L. Yellen to Questions for the Record Submitted by
Chairman Tiberi
Chair Yellen, given the large amount of excess reserves that banks
hold, they have little need for interbank lending at the Federal funds
rate to avoid potential shortfalls in required reserves. This renders
the Federal funds rate largely moot, except for lending by government-
sponsored enterprises (GSEs) that are ineligible to earn interest on
reserves. Hence, there is no other practical means for the Fed to
control short-term interest rates than to pay interest on bank
reserves, as you recently explained.\1\ Would you please answer the
following and provide your reasons:
---------------------------------------------------------------------------
\1\ ``Fed interest payments to banks are here to stay, Yellen
says,'' By John Heltman, American Banker, November 21, 2017.
---------------------------------------------------------------------------
a. Should the current method of controlling short-term interest
rates by setting the IOER rate at or above the Federal funds rate
become permanent or should the Fed use it only in transition until the
level of banks reserves declines to where banks once again may want to
exchange reserves among one another as they did prior to 2008?
As noted in the addendum to the Policy Normalization Principles and
Plans issued in June of 2016, the Federal Open Market Committee (FOMC)
currently anticipates reducing the quantity of reserve balances, over
time, to a level appreciably below that seen in recent years but larger
than before the financial crisis; the appropriate level of reserves
will reflect the banking system's demand for reserve balances and the
Committee's decisions about how to implement monetary policy most
efficiently and effectively in the future.
The FOMC discussed a range of considerations related to the long-
run policy implementation framework at the July and November FOMC
meetings in 2016.\2\ At the November 2016 meeting, FOMC participants
noted that the present approach to policy implementation was working
well and would likely remain appropriate for some time. Moreover,
policymakers expected to benefit from accruing additional information
before making judgments about a future implementation framework;
policymakers emphasized that their current views regarding the long-run
policy implementation framework were preliminary and they expected that
further deliberations would be appropriate before decisions were made.
---------------------------------------------------------------------------
\2\ Summaries of the discussion of those topics was included in the
minutes for those meetings (See https://www.federalreserve.gov/
monetarypolicy/fomcminutes20160727.htm and https://
www.federalreserve.gov/monetarypolicy/fomcminutes20161102.htm).
---------------------------------------------------------------------------
b. IOER has consistently exceeded other short-term interest rates
such as 3-month Treasury and commercial paper rates. Does that inhibit
banks from lending more and encourage them to hold large excess
reserves?
The level of IOER has been slightly above the level of the Federal
funds rate over recent months but below many other short-term interest
rates such as 1- to 3-month commercial paper rates. Treasury bill
yields have been somewhat below IOER and most other short-term rates
over recent months. In part, the relatively low level of yields on
Treasury bills reflects the strong demand for these securities by
global investors and the Treasury's debt management decisions which
have tended to keep Treasury bills in relatively short supply.
c. The Fed's professed goal to shrink its balance sheet can have a
contractionary effect on the economy. Does raising the IOER rate, as is
anticipated, not make it more difficult for the Fed to shrink its
balance sheet?
The Federal Reserve initiated its plan to normalize the size of its
balance sheet over time beginning in October of last year. Under the
plan, the Federal Reserve will scale back the extent to which it
reinvests principal payments on its existing securities holdings. As a
result, the balance sheet will gradually decline over a period of
several years.\3\
---------------------------------------------------------------------------
\3\ For more details on the likely path of the Federal Reserve's
balance sheet, see the Annual Report of the System Open Market Account
at: https://www.newyorkfed.org/medialibrary/media/markets/omo/
SOMAPortfolioandincomeProjections_July2017U pdate.pdf.
---------------------------------------------------------------------------
The gradual runoff of the Federal Reserve's balance sheet is
projected to put some upward pressure on longer-term interest rates
over time. For example, based on some estimates, the Federal Reserve's
elevated holdings of longer-term securities is currently keeping
longer-term interest rates about 90 basis points lower than would
otherwise be the case.\4\ As the Federal Reserve's balance sheet
declines, this effect on longer-term interest rates will gradually
decline as well. Of course, there are many factors affecting the level
of longer-term interest rates and many observers have projected that
longer-term interest rates will remain quite low for many years to
come.
---------------------------------------------------------------------------
\4\ See Borris et al. at https://www.federalreserve.gov/econres/
notes/feds-notes/projected-evolution-of-the-somaportfolio-and-the-l0-
year-treasury-term-premium-effect-20170922.htm.
---------------------------------------------------------------------------
The gradual normalization of the Federal Reserve's balance sheet is
a factor that the FOMC must take into account in adjusting the level of
the Federal funds rate. All else equal, the reduction in the Federal
Reserve's balance sheet and the corresponding gradual increase in term
premiums embedded in longer-term interest rates are factors that would
result in a flatter trajectory for the target range for the Federal
funds rate than would otherwise be the case. That is one of the reasons
the FOMC has noted in recent statements that it anticipates that the
level of the Federal funds rate is likely to remain, for some time,
below levels that are expected to prevail in the longer run.
__________
Response from Janet L. Yellen to Questions for the Record Submitted by
Senator Hassan
1. We had a hearing in this committee in July on the number of open
jobs in our economy right now. And at that time, there were over 6
million open jobs in the U.S. It would seem to me that if there are
that many open jobs out there, we would see an increase in wages in an
attempt to attract talent. But we have seen a lot of wage stagnation.
Do you have an opinion on why that might be? Or what we could do to
address that?
Although the step-up in wage growth has been modest thus far, we
are hearing more anecdotes about emerging labor shortages among our
contacts. Employers reportedly are responding to these shortages by
broadening the range of workers they are willing to hire, providing
more training to new employees, increasing workforce flexibility, and
in some cases raising wages, all of which are favorable developments.
If the labor market continues to tighten, we would expect wage growth
to pick up somewhat further.
That said, one likely reason for the sluggish pace of wage growth
in recent years is that productivity growth has been disappointing for
quite some time, and a continuation of this pattern would tend to
temper any further pickup in wage growth. Thus, a very high priority
for the Nation should be to boost the pace of productivity growth; this
is essential for ensuring that standards of living improve at a more
satisfactory pace. While there is disagreement about what policies
would most effectively boost productivity, a variety of policy
initiatives would likely contribute. More investment, both through
improved public infrastructure and more encouragement for private
investment, would likely play a meaningful role. More effective
regulation likely could contribute as well. And better education, at
all grade levels and including adult education, could both promote
productivity growth and contribute to higher incomes not just on
average, but throughout our society.
2. Generally speaking, corporations are doing better than ever. Our
unemployment rate is low. But workers' wages have not gone up. Broadly
speaking, in your opinion what are some of the potential implications
of a corporate tax cut right now? Will it/how will it impact the
decisions of the Fed on monetary policy?
Over long periods of time, productivity growth is a key determinant
of wage growth, and thus one likely reason for sluggish wage gains in
recent years is that the pace of productivity increases has been quite
slow for some time. Corporate tax changes that reduced the cost of
capital and led to higher business cash flows could boost investment
and the capital stock, which, in turn, could raise labor productivity
and wages. However, a persistent increase in Federal Government debt
associated with tax cuts could put some upward pressure on longer-term
interest rates, which could tend to mitigate some of the boost to
investment and productivity. That said, corporate tax policy is just
one of many factors potentially affecting the economic outlook that
informs decisions about appropriate monetary policy.
__________
Response from Janet L. Yellen to Questions for the Record Submitted by
Representative LaHood
1. ``Chair Yellen: At the hearing, we had an exchange on CMBS and
you said you'd get back to me with more information on your concerns in
that area. Can you comment more on your concerns in this space?''
Hearing exchange:
Representative LaHood. I had a question as it related to the
commercial mortgage market. And we are all aware in 2008, 2009 when we
had the financial crisis as it related to the housing mortgage market,
and as we look at the growth of Amazon and other online retailers
across the country, really changing the business model as it relates to
retailers. And we continue to see traditional brick-and-mortar stores
and malls and others being really obliterated across the country--
JCPenney, Macy's, Sears Roebuck, and large malls. And in a lot of
medium-size markets, there continues to be vacant commercial
properties, and these type of brick-and-mortars become more and more
unproductive.
And as we look at the commercial mortgage market, I wonder if you
could comment on whether there is a possibility, as these unproductive
properties continue this trend, of causing a financial crisis like we
saw in 2008 and these markets going bad.
Mrs. Yellen. So I think you are raising an important question. I
don't have detailed information at my fingertips on these trends. I
think that delinquency rates generally remain pretty low in commercial
real estate. There are legacy properties incorporated in CMBS that have
much higher delinquency rates.
But we are focused on underwriting standards at banks, at
maintaining strong underwriting standards to protect the banking system
against possible weaknesses that could result in especially commercial
real estate. We are seeing overall in commercial real estate that
valuations are very high and we have highlighted elevated asset prices.
Commercial real estate generally is an area, also, where we do see
elevated prices or low cap rates.
So we are focused on soundness of underwriting standards and the
safety and soundness of banks associated with it, but in detail, just
how this trend is going to play out, I would like to get back to you on
that.
Representative LaHood. And as you sit here today, do you have any
fears or concerns?
Mrs. Yellen. Well, these are obviously significant trends that are
affecting retail. You know, what they will mean for banks is something
I would like to look at more closely and get back to you.
Response:
Changes in the retail sector, such as the growth of online sales,
have been generating stress on existing retail properties for quite
some time. That stress is evident in slower price appreciation of
retail properties relative to other property types and higher default
rates for legacy properties in the commercial mortgage-backed
securities (CMBS) market. Default rates for CMBS loans secured by
retail properties, as well as default rates for commercial real estate
(CRE) loans at held in bank po1ifolios, are significantly higher than
loans backed by non-retail properties. As of June 2017, the average
default rate for CMBS loans secured by retail properties was 0.83
percent over the previous year while the default rate for CMBS loans
backed by non-retail properties was 0.54 percent. The comparable rates
for CRE loans held at banks with assets more than $50 billion,
including construction loans but excluding owner-occupied loans, were
0.15 percent for loans backed by retail properties, and 0.09 percent
for loans backed by non-retail properties.\1\ That difference in
performance reflects stronger underwriting standards at banks, which
are in part due to Federal Reserve regulatory and supervisory programs
that are intended to promote the resiliency of individual banks and the
financial system as a whole. Further, the annual stress test evaluates
the ability of large banks to continue to support the economy while
undergoing significant stress. In the 2017 Dodd-Frank Act Stress Test
exercise, the Federal Reserve projected that the 34 participating banks
had sufficient capital to absorb $493 billion in losses (including more
than $56 billion in losses from domestic commercial real estate) under
the supervisory severely adverse scenario.
---------------------------------------------------------------------------
\1\ The default rate is defined as the share of loans that are
current in the previous quarter transitioning to a default status in
the current quarter. Loans more than 90 days delinquent, in special
servicing (for CMBS loans), or identified as non-accrual or in
remediation (for bank loans) are considered in default.
---------------------------------------------------------------------------
As I mentioned at the hearing, banks are reportedly tightening
standards and terms on a range of CRE property types. Most responses to
the July 2017 Senior Loan Officer Opinion Survey (SLOOS) indicate that
lending standards on all types of CRE loans are either at or somewhat
tighter than the midpoint of the range of standards and terms for these
banks between 2005 and mid-2017.
Nevertheless, CRE borrowers and lenders potentially face the
prospects of additional losses. We believe that the market is aware of,
and is responding appropriately to these long-term trends in the retail
space. Our focus in financial stability at the Federal Reserve is
ensuring that the system can absorb such events rather than amplifying
them, so that households and businesses with no connection to this
industry suffer in the form of reduced access to credit. We will
continue to closely monitor trends in the retail market and their
potential impact on the stability of the banking system as a whole and
at the individual bank level.