WASHINGTON, July 15 Following are highlights
from the question and answer session of Federal Reserve Chair
Janet Yellen's testimony before the Senate Banking Committee on
YELLEN ON BUBBLES, DAMAGE TO ECONOMY OF RAISING RATES
The slate of regulations put in place "diminishes the odds
that risks will develop. (But) if there is an asset bubble and
it bursts we are not going to be able to catch every asset
bubble that develops."
"Were we to significantly raise interest rates to deal with
(asset bubbles) we should expect even worse performance on those
important goals that Congress has established for the Federal
Reserve. If we were to weaken the economy, it's not even clear
that we would be mitigating financial stability risks overall...
(and) we should be no means think that it would be costless."
YELLEN ON LENDING STANDARDS, INTEREST RATE RISK
"We are seeing a deterioration in lending standards. And we
are attentive to risks that can develop in this environment, for
example that banks or others may be taking on interest rate risk
and, when interest rates ultimately begin to rise, that if firms
or individuals have taken risks and aren't prepared to deal with
them that can cause distress."
YELLEN ON STUDENT BORROWING
"The growth in student debt has been really dramatic... When
you look at the numbers on student debt, it has to be a
YELLEN ON REQUIRING FED TO SPECIFY A POLICY RULE
"No central bank in the world follows a mechanical,
mathematical rule, and I think it would be a terrible mistake to
ask the Federal Reserve to specify a mathematical rule...
"If we were following a specific mathematical rule I really
think performance in this recovery would have been dreadful.
"There are special factors and structural changes that need
to be taken into account that would make me very disinclined to
follow a mathematical rule. But I think it is important that a
central bank behave in a systematic and predictable way, and to
explain what it is doing and how it sees itself as likely to
respond to future economic developments as they unfold, and that
is precisely what we are trying to do with our forward
YELLEN ON MAKING SURE NO FINANCIAL INSTITUTIONS ARE TOO BIG
"We are completely committed with trying to deal with
too-big-to-fail. We have put in place numerous steps and have
more in the works that will strengthen these institutions, force
them to hold a great deal of additional capital and reduce odds
YELLEN ON OTHER POTENTIAL SOURCES OF SYSTEMIC RISK
"Systemic risk in the financial system is not purely a
question of too-big-to-fail institutions... We could have
systemic risk if a large number of smaller institutions are hit
for some reason."
YELLEN ON HEADWINDS AND FISCAL POLICY
"I do agree with the view that there are substantial
headwinds facing the economy. One example would be that we see
in surveys of households that their expectations about their
future finances and growth in their real incomes is
exceptionally depressed and I think that's a factor that is
depressing spending. We see in the housing market were we had
some progress but it now looks like it's stalled... And fiscal
policy has been a factor in my view holding back recovery and
that's what monetary policy has had to counteract and that's in
part why we've needed such an accommodative monetary policy The
economy is making progress But to the extent that even when the
economy gets back on track it doesn't mean that these headwinds
will have completely disappeared"
YELLEN ON REACH-FOR-YIELD, FINANCIAL INSTABILITY
"An environment of low interest rates in general ... (does)
have an incentive to push individuals to look for yield. That is
both a good thing and a bad thing.
"On the one hand we need healthy risk-taking in order to
spur recovery, and low interest rates I think have had a
positive effect on helping the recovery. But of course we have
to be careful about looking for situations where low rates may
be incenting behavior that can be dangerous to financial
stability, particularly ... an area like leveraged lending where
we are seeing marked deterioration in underwriting standards. It
looks like it could be part of a reach-for-yield and we're
trying to deal with that through supervisory means.
"But the kind of broad-based increase in leverage in the
economy and maturity transformation and credit growth that one
tends to see in the situation where there are intense financial
stability risks, I don't think we see those things. At this
point they are more isolated and not more broad-based in
YELLEN ON THE OUTLOOK FOR ASSET PURCHASES
"Purchases would cease after October, but if there were to
be some very significant change in the outlook that we see
between now and October so that we lost confidence that the
labor market will improve for some reason, or that inflation
would move back up to 2 percent, then we would have to rethink
YELLEN ON LONGER-TERM PLAN FOR RATE RISES
"Even after we think the time has come to raise rates, we
think it will be some considerable time before we move them back
to historically normal levels... Of course we need to be
cautious to make sure the economy continues to recover."
"This is not a pre-set course. If we were to judge the
conditions changed significantly, it's not locked in stone."
YELLEN ON WAGE INFLATION
"While rising compensation or wage growth is one sign that
the labor market is healing, we are not even at the point where
wages are rising at a pace that they could give rise to
inflation. In fact real wages have been rising less rapidly than
productivity growth; what we've seen is a shift in the
distribution of national income away from labor and toward
"There is some room there for faster growth in wages and for
real wage gains before we need to worry that's creating an
overall inflationary pressure for the economy. That's something
we are watching closely."
YELLEN ON USING REPURCHASE OPERATIONS TO HELP CONTROL FUNDS
"We've indicated that the main tool we will use is the
interest rate we pay on overnight reserves. The overnight RP
facility that you refer to I think of as a back-up tool that we
will use to help us to control the federal funds rate, to
improve our control over the federal funds rate. I think it's a
very effective and useful tool. We have gleaned that from the
initial testing that we've done. But as you mentioned, we do
have concerns about allowing that facility to become too large
or to play too prominent a role"
YELLEN ON WHETHER CONGRESS SHOULD REQUIRE A FED BOARD SEAT
BE FILLED BY A COMMUNITY BANKER
"I am very positive on the idea of having a community banker
appointed to the board. That said, I don't support requiring it
by legislation... That's a road that could go further in a
direction that would worry me. If we're earmarking, we could end
up earmarking each seat for particular kinds of expertise."
YELLEN ON LONG-TERM UNEMPLOYMENT
"While long-term unemployment remains at exceptionally high
levels and is a grave concern, I do think we are seeing
improvements as the job market is strengthening."
YELLEN ON TIMING OF RATE RISE
The Federal Open Market Committee will be looking at
"maximum employment and price stability... There's no formula
and no mechanical answer that I can give you about when the
first rate hike will occur. It will depend on the progress of
the economy and how we assess it based on a variety of
YELLEN ON ECONOMY, RATE HIKE OUTLOOK
"My reading at the present time is that the (Q1) GDP
decline is largely due to factors I would judge to be
transitory, and I do think that negative number substantially
understates the momentum in the economy. Of course this is
something we need to watch carefully and are doing so....
"The Federal Reserve does need to be quite cautious with
respect to monetary policy. We have in the past seen sort of
false dawns, periods in which we thought growth would speed,
pick up and the labor market would improve more quickly, and
later events would prove those hopes to be unfortunately
"We are watching very carefully. Especially when short-term
overnight rates are at zero so we have no ability to lower them
further, we need to be careful to make sure the economy is on a
solid trajectory before we consider raising interest rates."