Joint Economic Committee Hearing with Fed Chair Yellen
Joint Economic Committee
“The Economic Outlook”
Thursday, December 3, 2015
Key Topics & Takeaways
- Interest Rates: Yellen explained that the weak growth in the global economy and the strong U.S. dollar have decreased U.S. exports due to the lesser cost of imports, creating a “drag” on the U.S. economy. She continued that the global economy is “highly relevant” to any decision the FOMC makes.
- Highway Bill Funding: Sens. Coats (R-Ind.) and Klobuchar (D-Minn.) asked about the proposed highway bill’s funding by taking from the Federal Reserve’s capital surplus account in what Coats likened to “an early withdrawal.” Yellen answered that she is concerned by the proposal, saying that attacking the Fed’s resources sets a bad precedent and weakens fiscal discipline without actually creating any new money for the federal government.
- FRTB: Rep. Tiberi (R-Ohio) asked if the Fed will support the Basel Committee’s new rules for the amount of capital required against trading book assets of banks, raising concern that they will make borrowing more difficult, and asked if the Fed will be conducting its own cost-benefit analysis on the rules. Yellen explained that the Fed is participating in conversations with other regulators on the topic but that she is “unaware of capital requirements on those positions” or the idea of changing requirements.
- TLAC: Regarding the recent adoption of capital surcharge and total loss-absorbing capacity (TLAC) proposals, Yellen stressed that the regulations have an “important impact” on the economy as they make the banking system “far safer and sounder” and “less crisis-prone.” Regarding the cost-benefit analysis, Yellen said that there has been analysis on “parts of it.”
Witness
- Janet Yellen, Chair, Federal Reserve Board of Governors
Opening Statements
In his opening statement, Chairman Dan Coats (R-Ind.) said the two percent growth rate of the U.S. economy is “unacceptable” and that the pace is “historically low.” He continued that private sector incentives would spur confidence and certainty with consumers and businesses. Coats acknowledged the recent expansion of the European Central Bank’s (ECB’s) stimulus program, adding that economic challenges among U.S. trade partners will impact the value of the dollar.
In her opening statement, Ranking Member Carolyn Maloney (D-N.Y.) commented on the upcoming Federal Open Market Committee (FOMC) meeting where the decision to raise interest rates will be made and spoke on how far the economy and job growth have come since the financial crisis. She continued that H.R.3189, the Fed Oversight Reform and Modernization (FORM) Act of 2015, that passed the House was “damaging” legislation that would inhibit the Fed from conducting monetary policy.
Testimony
In her testimony, Federal Reserve Chair Janet Yellen said that while the U.S. economy has created 13 million jobs and gross domestic product (GDP) has increased, continued growth has been jeopardized by weak net exports due to decreased foreign economic growth, as it has made U.S. exports more expensive and imports cheaper. She spoke of expected moderate economic growth over the next few years and that the “drag” in inflation caused by imports should lessen next year.
Regarding the Fed’s interest rate, she commented that due to inflation remaining below the FOMC’s goal of two percent, rates remain at their low rates, though it will be appropriate to raise the rates once they pass the FOMC’s objective. Yellen added that increasing the interest rate too soon would cause disruption in the financial market, possibly even causing another recession, though maintaining such a low rate for too long may cause excessive risk taking.
Questions and Answers
InterestRates
Coats asked if global economic weakness is taken into account in the FOMC’s decisions on interest rates. Yellen explained that the weak growth in the global economy and the strong U.S. dollar have decreased U.S. exports due to the lesser cost of imports, creating a “drag” on the U.S. economy. She continued that the global economy is “highly relevant” to any decision the FOMC makes.
Maloney asked about long-term trends that would prevent the FOMC from raising interest rates. Yellen commented that the jobs report will show any trends in job creation, as there has been “slack” in the market.
Rep. John Delaney (D-Md.) asked what impact raising the interest rate will have on borrowing, to which Yellen replied that she did not expect borrowing rates to decrease.
Legislative Changes
Maloney noted the “damaging” FORM Act that passed in the House and asked how it impacts the independence of the Fed. Yellen explained that the legislation would require the Fed to tie short term interest rates to the current level of inflation and level of output, and that while the variables are “useful,” setting rates without a “deeper analysis” would be “extremely damaging.” She added that the legislation would also cause the Fed to set interest rates “well over” two percent, which would also be “damaging.” Yellen stressed that the legislation will “severely threaten” the decision making ability of the Fed.
Income Inequality and Wages
Sen. Amy Klobuchar (D-Minn.) asked about the impact of rising income inequality and solutions to reversing the trend. Yellen acknowledged that there has been a “disturbing trend” towards rising income inequality, with two major factors feeding it: technological change that has diminished the demand for less-skilled labor and globalization that has reduced the number of middle-income jobs through outsourcing. She said the Fed cannot do anything to address these issues directly, but that Congress should consider its own solutions.
Sen. Gary Peters (D-Mich.) said increases in productivity have typically led to higher wages, but that this has not been the case in recent years as most economic gains have gone to the “top of the income ladder.” Yellen agreed, but added that job growth has been solid for a number of years, contributing to a rise in disposable income. She said she expects upward pressure on wage growth as the economy grows, and that the Fed has seen “welcome hints and tentative evidence” of such upward movement.
Small Banks
Klobuchar commented that the Dodd-Frank Act has harmed smaller banks with increasing regulatory complexity. She asked if Yellen has any ideas to help smaller institutions. Yellen admitted that community banks are suffering from “regulatory overload” and commented that it “behooves us” to think about how to diminish those burdens. She said the Fed is heavily focused on trying to tailor regulation to “make life better” for well-managed community banks, and specifically noted the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) initiative as well as moves towards more offsite examinations. She added that the Federal Reserve will be reporting on its efforts to Congress.
HighwayBill Funding
Klobuchar and Coats asked about the proposed highway bill’s funding by taking from the Federal Reserve’s capital surplus account in what Coats likened to “an early withdrawal.” Yellen answered that she is concerned by the proposal, saying that attacking the Fed’s resources sets a bad precedent and weakens fiscal discipline without actually creating any new money for the federal government.
Sen. Martin Heinrich (D-N.M.) also discussed the funding of the highway bill, noting that small banks were exempted from the included changes to the Fed’s shared dividend rate. He asked what the impact of including small banks would have been on small business lending. Yellen responded that it would clearly have had an effect, but that it is difficult to say how significant it would be.
Monetary System
Sen. Ted Cruz commented that not having a rules-based monetary system “hasn’t been a pretty picture.” Yellen argued that the U.S. has a rules-based monetary policy in that it has a target inflation rate, and that the Fed has strengthened its transparency when it comes to its goals and strategy, as well as providing the public with it policy forecasts.
Global Impacts
Sen. Bill Cassidy (R-La.) asked what impact China’s market stability has on the U.S. Yellen explained that while China has had “rapid growth” and currency linked to the dollar, when China devalued its currency there was a “disruption” in the financial markets creating capital outflows.
Rep. David Schweikert (R-Ariz.) asked if the Fed will be engaging in swap agreements with developing countries. Yellen said that while the Fed has swap agreements with certain advanced countries’ central banks, there are no swap agreements with emerging markets to maintain financial stability in the U.S.
FundamentalReview of the Trading Book
Rep. Pat Tiberi (R-Ohio) asked if the Fed will support the Basel Committee’s new rules for the amount of capital required against trading book assets of banks, raising concern that they will make borrowing more difficult, and asked if the Fed will be conducting its own cost-benefit analysis on the rules. Yellen explained that the Fed is participating in conversations with other regulators on the topic but that she is “unaware of capital requirements on those positions” or the idea of changing requirements.
TotalLoss-Absorbing Capacity
Rep. Erik Paulsen (R-Minn.) asked what the recent adoption of capital surcharge and total loss-absorbing capacity (TLAC) proposals means on a cumulative basis for the industry and the U.S. economy, and whether the Fed has conducted any cost-benefit analysis of the cumulative impact of this and other regulations on the industry and economy.
Yellen stressed that the regulations have an “important impact” on the economy as they make the banking system “far safer and sounder” and “less crisis-prone.” She continued that the regulations will only apply to the most systemic organizations and that the Fed is trying to make sure community banks that are not systemic are not impacted by the regulations. Regarding the cost-benefit analysis, Yellen said that there has been analysis on “parts of it.”
For more information on this hearing, please click here.
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Joint Economic Committee
“The Economic Outlook”
Thursday, December 3, 2015
Key Topics & Takeaways
- Interest Rates: Yellen explained that the weak growth in the global economy and the strong U.S. dollar have decreased U.S. exports due to the lesser cost of imports, creating a “drag” on the U.S. economy. She continued that the global economy is “highly relevant” to any decision the FOMC makes.
- Highway Bill Funding: Sens. Coats (R-Ind.) and Klobuchar (D-Minn.) asked about the proposed highway bill’s funding by taking from the Federal Reserve’s capital surplus account in what Coats likened to “an early withdrawal.” Yellen answered that she is concerned by the proposal, saying that attacking the Fed’s resources sets a bad precedent and weakens fiscal discipline without actually creating any new money for the federal government.
- FRTB: Rep. Tiberi (R-Ohio) asked if the Fed will support the Basel Committee’s new rules for the amount of capital required against trading book assets of banks, raising concern that they will make borrowing more difficult, and asked if the Fed will be conducting its own cost-benefit analysis on the rules. Yellen explained that the Fed is participating in conversations with other regulators on the topic but that she is “unaware of capital requirements on those positions” or the idea of changing requirements.
- TLAC: Regarding the recent adoption of capital surcharge and total loss-absorbing capacity (TLAC) proposals, Yellen stressed that the regulations have an “important impact” on the economy as they make the banking system “far safer and sounder” and “less crisis-prone.” Regarding the cost-benefit analysis, Yellen said that there has been analysis on “parts of it.”
Witness
- Janet Yellen, Chair, Federal Reserve Board of Governors
Opening Statements
In his opening statement, Chairman Dan Coats (R-Ind.) said the two percent growth rate of the U.S. economy is “unacceptable” and that the pace is “historically low.” He continued that private sector incentives would spur confidence and certainty with consumers and businesses. Coats acknowledged the recent expansion of the European Central Bank’s (ECB’s) stimulus program, adding that economic challenges among U.S. trade partners will impact the value of the dollar.
In her opening statement, Ranking Member Carolyn Maloney (D-N.Y.) commented on the upcoming Federal Open Market Committee (FOMC) meeting where the decision to raise interest rates will be made and spoke on how far the economy and job growth have come since the financial crisis. She continued that H.R.3189, the Fed Oversight Reform and Modernization (FORM) Act of 2015, that passed the House was “damaging” legislation that would inhibit the Fed from conducting monetary policy.
Testimony
In her testimony, Federal Reserve Chair Janet Yellen said that while the U.S. economy has created 13 million jobs and gross domestic product (GDP) has increased, continued growth has been jeopardized by weak net exports due to decreased foreign economic growth, as it has made U.S. exports more expensive and imports cheaper. She spoke of expected moderate economic growth over the next few years and that the “drag” in inflation caused by imports should lessen next year.
Regarding the Fed’s interest rate, she commented that due to inflation remaining below the FOMC’s goal of two percent, rates remain at their low rates, though it will be appropriate to raise the rates once they pass the FOMC’s objective. Yellen added that increasing the interest rate too soon would cause disruption in the financial market, possibly even causing another recession, though maintaining such a low rate for too long may cause excessive risk taking.
Questions and Answers
InterestRates
Coats asked if global economic weakness is taken into account in the FOMC’s decisions on interest rates. Yellen explained that the weak growth in the global economy and the strong U.S. dollar have decreased U.S. exports due to the lesser cost of imports, creating a “drag” on the U.S. economy. She continued that the global economy is “highly relevant” to any decision the FOMC makes.
Maloney asked about long-term trends that would prevent the FOMC from raising interest rates. Yellen commented that the jobs report will show any trends in job creation, as there has been “slack” in the market.
Rep. John Delaney (D-Md.) asked what impact raising the interest rate will have on borrowing, to which Yellen replied that she did not expect borrowing rates to decrease.
Legislative Changes
Maloney noted the “damaging” FORM Act that passed in the House and asked how it impacts the independence of the Fed. Yellen explained that the legislation would require the Fed to tie short term interest rates to the current level of inflation and level of output, and that while the variables are “useful,” setting rates without a “deeper analysis” would be “extremely damaging.” She added that the legislation would also cause the Fed to set interest rates “well over” two percent, which would also be “damaging.” Yellen stressed that the legislation will “severely threaten” the decision making ability of the Fed.
Income Inequality and Wages
Sen. Amy Klobuchar (D-Minn.) asked about the impact of rising income inequality and solutions to reversing the trend. Yellen acknowledged that there has been a “disturbing trend” towards rising income inequality, with two major factors feeding it: technological change that has diminished the demand for less-skilled labor and globalization that has reduced the number of middle-income jobs through outsourcing. She said the Fed cannot do anything to address these issues directly, but that Congress should consider its own solutions.
Sen. Gary Peters (D-Mich.) said increases in productivity have typically led to higher wages, but that this has not been the case in recent years as most economic gains have gone to the “top of the income ladder.” Yellen agreed, but added that job growth has been solid for a number of years, contributing to a rise in disposable income. She said she expects upward pressure on wage growth as the economy grows, and that the Fed has seen “welcome hints and tentative evidence” of such upward movement.
Small Banks
Klobuchar commented that the Dodd-Frank Act has harmed smaller banks with increasing regulatory complexity. She asked if Yellen has any ideas to help smaller institutions. Yellen admitted that community banks are suffering from “regulatory overload” and commented that it “behooves us” to think about how to diminish those burdens. She said the Fed is heavily focused on trying to tailor regulation to “make life better” for well-managed community banks, and specifically noted the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) initiative as well as moves towards more offsite examinations. She added that the Federal Reserve will be reporting on its efforts to Congress.
HighwayBill Funding
Klobuchar and Coats asked about the proposed highway bill’s funding by taking from the Federal Reserve’s capital surplus account in what Coats likened to “an early withdrawal.” Yellen answered that she is concerned by the proposal, saying that attacking the Fed’s resources sets a bad precedent and weakens fiscal discipline without actually creating any new money for the federal government.
Sen. Martin Heinrich (D-N.M.) also discussed the funding of the highway bill, noting that small banks were exempted from the included changes to the Fed’s shared dividend rate. He asked what the impact of including small banks would have been on small business lending. Yellen responded that it would clearly have had an effect, but that it is difficult to say how significant it would be.
Monetary System
Sen. Ted Cruz commented that not having a rules-based monetary system “hasn’t been a pretty picture.” Yellen argued that the U.S. has a rules-based monetary policy in that it has a target inflation rate, and that the Fed has strengthened its transparency when it comes to its goals and strategy, as well as providing the public with it policy forecasts.
Global Impacts
Sen. Bill Cassidy (R-La.) asked what impact China’s market stability has on the U.S. Yellen explained that while China has had “rapid growth” and currency linked to the dollar, when China devalued its currency there was a “disruption” in the financial markets creating capital outflows.
Rep. David Schweikert (R-Ariz.) asked if the Fed will be engaging in swap agreements with developing countries. Yellen said that while the Fed has swap agreements with certain advanced countries’ central banks, there are no swap agreements with emerging markets to maintain financial stability in the U.S.
FundamentalReview of the Trading Book
Rep. Pat Tiberi (R-Ohio) asked if the Fed will support the Basel Committee’s new rules for the amount of capital required against trading book assets of banks, raising concern that they will make borrowing more difficult, and asked if the Fed will be conducting its own cost-benefit analysis on the rules. Yellen explained that the Fed is participating in conversations with other regulators on the topic but that she is “unaware of capital requirements on those positions” or the idea of changing requirements.
TotalLoss-Absorbing Capacity
Rep. Erik Paulsen (R-Minn.) asked what the recent adoption of capital surcharge and total loss-absorbing capacity (TLAC) proposals means on a cumulative basis for the industry and the U.S. economy, and whether the Fed has conducted any cost-benefit analysis of the cumulative impact of this and other regulations on the industry and economy.
Yellen stressed that the regulations have an “important impact” on the economy as they make the banking system “far safer and sounder” and “less crisis-prone.” She continued that the regulations will only apply to the most systemic organizations and that the Fed is trying to make sure community banks that are not systemic are not impacted by the regulations. Regarding the cost-benefit analysis, Yellen said that there has been analysis on “parts of it.”
For more information on this hearing, please click here.