SBC Hearing with Fed Chair Yellen

Senate Committee on Banking, Housing, and Urban Affairs

“The Semiannual Monetary Policy Report to the Congress”

Tuesday, February 14, 2017

Key Topics & Takeaways

  • Vice Chair for Supervision: Several Republican Senators asked Yellen about the vacant Vice Chair for Supervision position on the Fed Board of Governors. Most questions concerned the responsibilities of any future Vice Chair, and Yellen assured them that the Vice Chair would be responsible for representing the Fed before international bodies, as well as for leading the Fed’s bank-supervision committee. Sen. Pat Toomey (R-Pa.) also told Yellen that he hopes the Fed will refrain from issuing major new regulations until the Vice Chair and vacant Governor posts have been filled by the new administration.
  • Recent Executive Orders: Yellen was asked several times about President Trump’s recent executive orders, specifically the orders entitled “Core Principles for Regulating the United States Financial System” and “Reducing Regulation and Controlling Regulator Costs” (which requires agencies repeal two regulations for each new regulation issued) (“one-in-two-out”). Yellen said she agreed with the “Core Principles” and described lessening the regulatory burden on financial institutions as “a legitimate goal.” Yellen said she did not believe that independent agencies, such as the Fed, are explicitly covered by the “one-in-two-out” order, but that the Fed would look for ways to lower the regulatory burden on the entities it regulates.
  • Comprehensive Capital Analysis and Review: Both Democrat and Republican Senators praised the Fed’s recent decision to exempt financial institutions with less than $250 billion in assets from the Comprehensive Capital Analysis and Review (CCAR) stress test. However, Yellen defended CCAR, despite Toomey noting that it is no legislative mandate for it, claiming CCAR is a critical component of the Fed’s supervisory efforts.


Opening Statements

In his opening statement, Chairman Michael Crapo (R-Idaho) began by discussing the impact of financial regulations on growth and called for an assessment on the impact of all regulations in the aggregate. He also praised President Trump’s Executive Order on Core Principles for Regulating the United States Financial System. Crapo said that it is important for regulations to strike a balance between stability and growth, and said he expects the future Federal Reserve Vice Chair for Supervision to play an important role in achieving that balance. 

Crapo also said that mid-sized and community banks, along with credit unions, have been subjected to unnecessary regulation that has harmed them, and said he hopes Yellen is still committed to easing burdens on these institutions. He thanked the Fed for exempting financial institutions with fewer than $250 billion in assets from the Comprehensive Capital Analysis and Review (CCAR). He also expressed hope at formulating a new systemically important financial institution (SIFI) threshold to replace the current $50 billion level.  Crapo said he believes that reform of the government-sponsored enterprises (GSE’s) (Fannie Mae and Freddie Mac) constitutes “the most significant piece of unfinished business following the crisis.”  Crapo noted it has been nearly a decade since the Fed began easing monetary policy, and that the Fed still holds $4.5 trillion on its balance sheet, including 35 percent of all outstanding agency mortgage-backed securities (MBS). Crapo listed housing finance reform, flood insurance, sanctions, and legislation to boost growth (in that order) as the Senate Banking Committee’s top priorities during this Congress. 

In his opening statement, Ranking Member Sherrod Brown (D-Ohio) stated that the economy is gradually improving and that wage growth has begun slowly growing, enough for the Fed to raise short term interest rates (which it did in December 2016).  Brown noted, however, that economic gains were not evenly distributed, and that minorities especially were still struggling. Brown said that everyone on the Senate Banking Committee agreed there were ways to improve post-crisis financial regulation, and he also praised the Fed from exempting smaller financial institutions from CCAR. He criticized Republicans for wanting to roll back financial regulations that have improved the financial system. Brown closed by thanking Fed Governor Dan Tarullo and General Counsel Scott Alvarez for their service, as both have recently announced their retirements. 


Honorable Janet L. Yellen, Chair, Board of Governors of the Federal Reserve System

In her testimony, Yellen provided an overview of the current economic situation before pivoting to monetary policy. Yellen said that since her last report to Congress in June 2016, the U.S. has continued to make progress towards full employment, and noted that since 2010 the country has added nearly 16 million jobs. She also noted that the unemployment rate is now in line with the Federal Reserve Open Market Committee’s (FOMC’s) median estimates of the normal unemployment level. Yellen also noted that wage growth has picked up relative to previous years. Other signs of economic improvement are rising consumer spending, household wealth, and income. Yellen said that the current inflation rate – approximately 1.6 percent – is still below the Fed’s 2 percent target. She said the FOMC expects the economy to expand at a moderate pace in the near term. 

Turing to monetary policy, Yellen said that the FOMC kept interest rates unchanged throughout much of the year to boost inflation and the labor market, but raised rates in December when there were signs of the labor market tightening. Yellen defended the Fed’s gradual rate increases, saying that a rapid rise in rates could disrupt financial markets and the economy.  Yellen also said that the FOMC believes the neutral federal funds rate – the rate that is neither expansionary or contractuary – is well below pre-crisis levels, though it should rise gradually over time. Finally, Yellen said she believes that the Fed’s monetary policy is “accommodative” and that the reinvesting of proceeds from maturing Treasury securities and maturing MBS will help maintain this accommodating posture.

Question & Answer

Vacant ViceChair for Supervision Position

Crapo noted that while Dodd-Frank created a Vice Chair for Supervision position at the Fed, Barack Obama never nominated anyone to fill this role. Instead, Governor Dan Tarullo has taken on many of the responsibilities of this position, including representing the Fed at the Financial Stability Board and the Basel Committee. Crapo asked if a future Vice Chair for Supervision would have Tarullo’s responsibilities, and Yellen replied that any future Vice Chair would have those responsibilities. 

Sen. Richard Shelby (R-Ala) asked a similar question about the Vice Chair’s specific responsibilities, to which Yellen replied that the Vice Chair and their committee would craft rulemakings that would be submitted to the full Board of Governors. 

At the end of his questioning, Sen. Patrick Toomey (R-Pa.) made a statement on the vacant Vice Chair for Supervision position, saying that while there is currently a de facto Vice Chair (Tarullo) he hopes that the President will soon fill all the vacancies on the Fed’s Board of Governors, including the Vice Chair for Supervision post. Toomey also said he hopes that the Federal Reserve will refrain from issuing major new regulations until these positions have been filled.  

Executive Orders

Crapo asked Yellen if she would work with newly confirmed Treasury Secretary Mnuchin on implementation of President Trump’s “Core Principles” for regulating the financial system of the U.S. Yellen said she agreed with these core principles and looked forward to working with Secretary Mnuchin and the whole Financial Stability Oversight Council (FSOC) on regulatory issues. 

Brown asked Yellen if President Trump’s “one-in-two-out” executive order applied to the Federal Reserve, and if this executive order would make the financial system sounder. Yellen said that independent agencies are not explicitly covered by the executive order, but that the Fed would look for ways to lessen the regulatory burden on the entities it regulates. Yellen described reining in regulations as “a legitimate goal.” 


Toomey voiced his concern that CCAR may increase systemic risk and that the implicit risk weighting is different from the weighting used by banks themselves and from the weighting used in Basel III. He continued that CCAR is “very costly” and not mandated by legislation, and asked if Yellen would consider “putting it to an end.” Yellen replied that CCAR is a “cornerstone” of efforts to improve supervisions, especially of SIFIs. She continued that the assessment by the Government Accountability Office (GAO) found that stress tests have been useful and that the GAO did not recommend ending them. Yellen also stated that the Fed was given recommendations by the GAO and they are working on them. 

Shelby asked about CCAR as well, specifically about the Fed using a $250 billion asset threshold to exempt financial institutions from CCAR. Yellen said that the Fed did a five-year review of CCAR and found that banks under that threshold could be adequately reviewed through normal supervisory processes, making CCAR unnecessary. Yellen said the Fed wanted the regulatory burdens of different firms to fit their institutional risk profiles. 

Dodd-Frank Act

Brown asked Yellen if the U.S. banking system has become safer and more resilient since the 2008 crisis. Yellen emphatically replied that the system has become safer, and that this was due to heightened capital and high-quality capital requirements for banks. She also noted that there is much more liquidity available to banks today than existed pre-crisis. 

Brown also asked if bank lending to businesses is currently too low. Yellen cited a study by the National Federation of Independent Businesses which indicated that only 4 percent of businesses struggled with bank financing and access to credit. Yellen also assured the committee that U.S. banks are able to compete with their foreign counterparts and are generally considered to be well-capitalized. 

Sen. Elizabeth Warren (D-Mass.) noted President Trump’s vow to dismantle Dodd-Frank and his recent executive orders on financial regulations, and asked Yellen how business lending has changed since Dodd-Frank was enacted. Yellen explained that commercial and industrial (C&I) lending has grown, as well as total loans held by commercial banks, with C&I loans growing over 75 percent since Dodd-Frank. 

Warren then asked if bank capital requirements are reserve requirements or if the capital can be used for lending, and how U.S. banks perform compared to foreign competitors. Yellen replied that it is not a requirement for banks to put capital requirements “in a safe place where it cannot be used.” She continued that U.S. banks have higher market values relative to book values than foreign competitors, and that she sees well-capitalized banks as “safe, sound, and strong.” 

Federal Reserve Balance Sheet

Crapo noted that the Fed’s balance sheet has expanded to $4.5 trillion in assets and that it contains an enormous amount of outstanding MBS. He also noted that several Fed Presidents have called on the Fed to begin shrinking its balance sheet. Crapo asked about the benefits of letting the balance sheet “run off” as opposed to relying on short-term rate hikes to tighten monetary policy. Yellen said that the Fed bought longer-term assets to bolster the economy, as extraordinary support was necessary during and immediately after the crisis. Yellen said the FOMC wants to shrink the balance sheet, and that she anticipates the balance sheet will be “substantially smaller” than it is today, though she declined to name a timeframe in which this would occur. Yellen also said the FOMC wants the balance sheet to return to being mainly Treasury securities. 

Yellen defended the use of the short-term interest rate for tightening monetary policy, as markets understand it. She also said the Fed has great confidence in its ability to tailor interest rates to meet its objectives. Yellen said that when the need to provide substantial accommodation to the economy is lessened, and the federal funds rate has reached a level where the Fed can reduce rates again, then the Fed will begin allowing the balance sheet to shrink. Yellen said the FOMC would discuss reinvestment strategy in the coming weeks, but that it would not change its current policy until the economy has normalized. 

Fiscal Policy

Sen. Bob Corker (R-Tenn.) asked Yellen if the change in administration and Republican control of Congress would affect the Fed’s decisions on future interest rate increase. Yellen noted that the administration and Congress’ new economic policies could affect Fed policy, but that the Fed would not base interest rate decisions on “speculation.” Yellen also said that the Fed is not sure what fiscal changes will occur or how dramatically they could affect the economy. Yellen went on to say that the country’s fiscal situation is unsustainable, and that the Congressional Budget Office (CBO) estimates show the federal deficit increasing over a ten-year window. Yellen said that policies that raise deficits could negatively impact economic growth, and said that fiscal sustainability is a long-standing problem. 

Housing Finance and the GSE’s

Crapo asked Yellen whether a legislative solution is needed “urgently” for Fannie Mae and Freddie Mac’s continued government conservatorship, noting that the two entities continue to dominate the domestic mortgage market. Yellen replied that Congress should deal with the GSE’s and explicitly define the government’s role in the housing market. 

Diversity and Inclusion

Sen. Robert Menendez (D-N.J.) noted that there have not been any minority presidents of regional Federal Reserve banks and stressed his hope that that will change. Yellen replied that increasing diversity is a “critical priority” for the Federal Reserve. In his questions for Yellen, Brown asked a similar question. 

Small and Community Banks

Sen. Tim Scott (R-S.C.) asked for recommendations on ways to mitigate the regulatory burdens on small and community banks. Yellen stressed the importance in looking for ways to mitigate regulatory burden, and suggested Congress consider exempting community banks from the Volcker Rule, as well as certain incentive compensation provisions. She continued that the Fed is trying to make it clear which regulations apply to community banks and ways to reduce the frequency of compliance exams for banks that are well-managed and low-risk. 

Sen. Thom Tillis (R-N.C.) noted that there has been a decline in community banks since Dodd-Frank regulations have been implemented. Yellen replied that community banks have been “under pressure” and that the Fed is committed to finding ways to mitigate the burden on community banks.  

Incentive Compensation

Sen. Heidi Heitkamp (D-N.D.) asked Yellen for her view on the current incentive based pay on Wall Street. Yellen stressed the importance that firms put in place compensation that does not lead to inappropriate risk taking, as well as the need to strengthen incentive compensation practices. 

Climate Change
Sen. Brian Schatz (D-Hawaii) asked to what extent the Fed takes climate change into account when determining future economic risks. Yellen replied that the Fed recognizes that different risk events and severe weather can have an impact on the financial system, and that the general approach since the financial crisis has been to build resilience among banking institutions so they can deal with such events. 

Interest Rates

Sen. Dean Heller (R-Nev.) asked if the FOMC plans to raise interest rates in the March or June meetings. Yellen explained that there are eight meetings each year, and that the committee will “probably” increase the rate during some meetings and not others, but that she is unsure when such actions will be taken. 

Border Tax

Heller asked Yellen if she supports the proposed border tax, to which she declined to comment. 

For more information on this hearing, please click here.