Transcripts For BLOOMBERG Market Makers 20140716

It is wednesday ear in new york city. I am erik schatzker. I am stephanie ruhle. So much news breaking this morning. It would be a blockbuster all the action is in washington. Janet yellen will be back. Rememberces committee its chair by republicans. It is alive right now. It has kicked off. There will be opening statements. Lets take a few minutes to take in our chief washington correspondent peter cook. Lets talk about the kind of question janet yellen will be facing . Senatorsbecause the are a little more gentle but also because this is a committee shared by republicans who have strong feelings about the fed. That is right. It starts with the chairman who basically spent the last few months as chairman of the committee trying to review the Federal Reserves hundred year history, specifically talking about legislation that would change if they rein in the Federal Reserve. That will be a big focus for them and will likely come up throughout the day. The committee does not like freelancing they think the Federal Reserve has done. Extraordinary Monetary Policy moves that have been done and have been made in the last few years. She has been challenged on the notion the stimulus needs to continue somewhat because the economy in her view has still not turned the corner. This is a committee that specifically propose legislation as member of the committee. It could stray from those rules but only if janet yellen came to explain why. Yesterday, janet yellen asked about it. If we were following a specific mathematical rule, i think performance in this would have been dreadful. We could not have follows in the downturn. We call for negative Interest Rates. The bottom line is she said it would be a terrible mistake to force to follow a rule Going Forward. That is a preview of what we are getting a lot of today. More particularly for the veteran must freelancing. A few things are more important as soon as the member of house vices committee lets move on. The huge news we learned earlier this morning in the media world of course am of the one and only Rupert Murdoch wants to bring time warner in his empire and made an unsolicited a theiondollar offer for company. Investors clearly think the company is in play and the up. Es cropped lets bring in jon erlichman, live nla. Also with us is the Pivotal Research Group Analyst who covers some of the biggest names. N media john, lets start with you. What is the buzz with you . The contest is, our understanding is the conversation took lace between Rupert Murdochs his righthand man and the ceo of time warner, in early june, which led to a from foss, a letter for the business. Of reasons variety to give more power at the box sportsand more power was , and there are clearly a lot of tv rights block the and that gives them a lot more leverage televisiond of cable right now. It talked about how, from the getgo, cnn will be paid for each transaction. There was a lot of talk about what would happen if you were to see somewhere else and here we go. You see the reaction of shareholders from time warner. There is a lot of overlap between the Shareholder Base in time warner and foss. Theyre thinking now that this is out there, you can get some of the overlapping shareholders give the same arguments being put forward. You have been seeking bankers who are on the deal or investors who want to get on it. People understand rupert prettys thinking, it is much, why does this deal not make sense . Even if you selloff cnn, they would have 7 billion of revenueional cable between them. Foss and warner bros. , you would the studio. It would be number one on general cable and entertainment. There are so many reasons to do the deal that they are hoping with 85,000 on the table, that more welcoming. John mentioned the offer was initially in june. Rupert murdoch has not participated in the conversations yet because he was effectively waiting for an invitation for beauty is to comment. Highly discouraging that murdoch has not seen the point of coming in yet. Could the Justice Department be discouraged by this . No. They do not believe so long as they sell cnn, they do not think there is any regulation wrist whatsoever. They would not be this aggressive. They have gone public with an unsolicited offer of 85 in cash and stock and they would not be this aggressive about it. Coverhink the regulatory for this transaction is on the distribution side. At t, directv, it will be relatively easy for these Media Companies to go down to washington and talk to these we, thers and say, content side of this mess, need to bulk up here. You are in paris and it puts you in a great position to answer about the International Side of the deal. There are three led to the stool. Hbo is hugely important to time warner, and asked that Rupert Murdoch would love to have. Foss is pretty good with sports but a distant number two to espn. They would get time warners rights to major league a stall. Also to the ncaa tournament, march madness, we know how important that is. Thirdly, the opportunity to build an international business, not only would they have combined cable revenue overseas, but with more programming in one roof, they would pack a much bigger punch with satellite distributors. Does it make sense to you . Absolutely. One of the worlds. Argest players in a lot of countries, they are not that they are it is interesting. They are rapidly growing. Combining the two entities would allow them to have more of a combined operation. Having a larger entity would make them more competitive. That is in important point. I do not think there are trust issues with respect to Cable Properties in international markets. Early is expected to the timing is right. You have the time spent off. The Balance Sheets are strong and the companies are hitting the numbers. Murdoch wants to deal from a and theyof strength are at a position of strength. Really trimming down, getting rid of cable and time inc. He has laid out a longterm growth plan which focuses on international growth. Growtha big source of for them. Trimming down the company and making it green, it becomes easier. John, this is an issue that jeff will have to confront one way or the other. The stock is trading close to 85. Time warner is is in play. Rupertoes not sell to murdoch, who else is in . What about google . There has been all that talk in of google taking an interest in a media company. Jeff makes an excellent point. He just sits there and has to watch this all unfold. As paul mentioned, when you have been so focused on shareholders and cleaning up the business to make it shareholder friendly, this is all about the stock price. Question, isr anybodys guess at this point. Foss comes forward to make their push because they think they have a strong case. In any situation like this, everybody has got to be thinking, maybe this is our shot. On jeffs side, because he is got to be accountable to shareholders, we could see very interesting the next few days or weeks as a result of how this has all come to light. You cover google in addition to the Media Companies. What do you think . Do you think the interest in media is genuine . Is time warner the property they cover the most . Google has been focusing a lot of Capital Investments away from the media. I really think it strikes me as sensible in some ways. I would not rule it out. They are sitting on cash. Thele could be viewed as eric schmidt diversification portfolio in some regards. Maybe they decide that is a good spend money. M to it does not strike me as thing for them to do first and foremost. But that is it. Toy clearly know they need buy more premium content and having more User Generated Content will not do it. Is time warner for arguments sake. In a bageled battle between google and foss, is it even a contest . They still have to be disciplined in the way they evaluate and bid for assets. Shareholders seem to be able to put up with a lot less discipline from google. What google would have Going Forward is the evaluation. Like brian mentioned, i am not tolly sure google is willing lay that bet on the table, but they had to think long and hard about this because the asset from time warner does not come up that often. If google wants to be a player in content, they have to think about it here. Clear,ou have made it take a hike, Rupert Murdoch, what are you doing . Making other calls . I think he is talking to shareholders first and foremost and making a pitch for his plan. We think we can create value with our business plan. Part of his problem though is as john pointed out earlier, shareholders by and large are the same. For both. Ames come up on a share count basis, there is a 70 overlap. To the sameing people chase kerry is talking about. Of a moreestion forceful and persuasive argument. The big thing you are focusing on is one of the synergies of putting these things together . That is an issue. The billiondollar number thrown out, that is a low number when you take a look at the tremendous number of ss between the two companies. Is is a story that aint going away. There you go. Check the rbl. There may be a villa in italy now up for grabs this week. Thank you so much. Brian wheezer, senior Researchers Research analyst. I also want to thank my own partner, who, himself, was on the phone recording all morning. I did not really was. Coming up, we will bring you day two of Janet Yellens testimony. Question yellen is taking testimony. We are now getting ultimate opening statements. You heard some of that yesterday from the banking committee. What matters is the q a. Republicans will be bordering on house bill. Some would say it becomes a highly put a size institution. Continue the conversation about janet yellen and the fed and Financial Markets and how they responded. The global chief Investment Officer, formerly the chief Investment Officer of credit suisse, now responsible for 55 billion in assets at an institution. Isnt Corporate Banking and investment banking, obviously a Private Banking and Asset Management as well. Janet yellen handled herself pretty well before the Senate Banking committee yesterday. What kind of experience do you thek she will happen for House Financial Services committee and more importantly, what could she say that could constitute really Important News . With onelets start important notice. Muchnk there was appropriation and much forward guidance. Yellen is interested in not surprising the markets in a negative way. This was definitely the case yesterday. Marketstility in the everywhere. It also stayed low. Is definitelyce the way to go forward. What are the expectations today when she will clearly get other questions . Yes she will follow that path. No big surprise at all. Cap is clear. It is only a matter of time that we would come back to normalization. On the first glimpse, the economy does pretty well. It is only a matter of time you come up with interestrate hikes. Under the surface, you see it is a mixed picture. Lets take the labor market, for example. Unemployment rate close to the feds target. Participation rate is disappointment. On first glance, everything is ok. She clearly reiterated the statement there it only a matter of time you would come up with rate hikes. This is the judgment of all Market Participants i have spoken to. No one is changed the assumptions when the first interestrate hike would take place. Talk abouts a lot of valuations. Has jan yellen specifically talked about corporate highyield market . Mediad called out social and biotech and she said she does not want to use Monetary Policy as an instrument to of aon against the impact pop in the bubble should the bubble exists. Concerned about the degree to which the fed is inflating the prices of risk assets . It is a balancing act. If we do not see the risk of an equity bubble, for example, but there are risks in some segments. Jenny on is right giving indications that there are some segments that risk reward is definitely not favorable. Themade the comment on technology side, particularly the biotechnology center. Much music has been played there. Many capital flows. In particular, from conservative investors in the last three years. It is the massive surge for yield. It is a big performance problem. But it is a massive surge for yields caused by a fed that kept rates so low. That is right. But where is the alternative . All the problems have to be fixed. No alternative with regards to the Bank Strategy of the fed and having swallowed the same story in europe with regards to the ecb. We now see decoupling. The fed is getting back to a normal path more and more and starts to give the first indications. We now have decoupling story. You say much music has been played. The music has played before. I know it was chuck who famously said, so long as the music is blank, you have got to keep dancing. We know where that brought a spirit of protestant a financial crisis. That is right. Maybe the music is playing for Different Reasons today, but will it have the same ugly and . This i do not know. It can get even more expensive. That is the problem with investors, saying, as long as is playing. They do not feel comfortable with the underlying reality. If they are not wrong and the s p is outperform you, you are sitting there like a chump. It is a good sign, that we have no situation at the market. This is more dedicated to the equity market. I expect a third correction wave over the next weeks and summer months. It would also be pretty understandable. We are only talking about six weeks. Press exactly. What makes me nervous is rather what is happened in the credit much an improving music has been in the credit markets. It is an enormous performance over the last five years. It is quite dangerous. Is dangerous and yet if you look at how highyield are performing, even when the yields are five percent. It seems investors keep on playing. That is definitely right. The relative attractiveness and this is now two more attractive equity markets and also liquidity. Equity markets are much more liquid. The will be much. Etter if something goes sour on a basis liquidity because of dodd frank and who is to blame for that . We will take a quick commercial break. Were counting down to Janet Yellens q and a. Question yellen is speaking right now. We will get questions from lawmakers any minute and take you to the hearing live. It is already been contentious even in the opening statements. Lets bring peter cook back. Peter. The committee is setting the tone from the very start. We have seen the flash point for the hearing. That would force the fed to follow more rules. He has been critical to those opposed to the legislation and setting the tone with a harsh opening statement. We heard from one of the republicans cosponsoring the bill. The pushback will be the flash point here. Toocrats are trying to rally her defense, saying the bill was shortsighted. Contentious debate over the future of the fed and whether it has too much power right now. Stay with us. I want to bring back the managing director, a senior u. S. Rate strategist at credit suisse. Welcome. We are waiting for janet yellen. What do you expect . Contentious, particularly if youre talking about rules. If you use a rulebased model, what do you do . If you use a taylor type role, one of the more popular rules used in Monetary Policy, it would have said you would have Interest Rates at 93 . How do you do that . A rule saying, you have to follow the rules . Also precludes a provision that they have discretion to act outside the rules. They would be dragged up. I suspect what janet yellen will likely say is you do not. Ant to have your hands tied there are sometimes emergency situations where you need to act beyond what a rule would tell you. Halfules also only use data. Used but forecasts into the rules. If they were forced to operate according to the rules, it would be like nothing weve had right now. Ifre we where would we be they were not able to do what they think is justified . Was no alternative to what had been done. They executed in a convincing manner. Dovish instead of two and too hawkish. Classes that a mistake . The fed has much better tools to toht inflation than it does fight jobs. It does. Casestuation is in some structural. There needs to be a fiscal response. We are in a mode right now a fiscal restraint and keeping the budget low, for example. Keeping it low, it is hard for the government to respond to things like monk term unemployment. Janet yellens his testimony is happening right now on capitol hill. Have you had a chance to read and review the legislation . Yes. Yesterday, before Senate Banking, you will find that under this legislation, the fed would not have had for stability to take the actions during financial crisis. During your review of page seven of the legislation entitled, changing market conditions, which reads in part, nothing in construed l be the policy target described under subsection to be implemented if the Market Committee determines such plants can not order should not be achieved due to changing market conditions. I do not believe the language could have been any clearer. Not the intent of the legislation and would certainly welcome any policy feedback from your ex berks to assure it achieves that purpose, but i as clearhe language is as the language could possibly be. Lets talk a little bit about independence. Larry summers, in a famous paper in money credit and banking on centralbank independence measures independence as the institutional relationship between the central bank and the executive. Officialsf government on the Central Bank Board and the frequency of contacts between the executive and the bank, do you agree or disagree with the characterization . I see the Federal Reserve independence. Creature of congress and we have a responsibility to report to congress. You used the term executive branch. Summersd the term larry used in the paper the paper, yes. Ready to congress about our conduct of Monetary Policy in the economy. Let me ask you. Wellestablished. Im under the impression you are semired to appear on a annual basis. Is it true there is a meeting between you and the secretary of treasury question mark many weeks treasury . Many weeks. Matters of mutual concern, but, completely independent from the executive branch. Speaking of mutual concern and dependents, i am not interested in a transcript of a private luncheon, but would you be willing to report to the committee on the matters of mutual concern that were discussed and any agreements between the treasury and the Federal Reserve . I am not willing to report in regular basis in private conversations that i have. Reachedements that were certainly would be in the Public Domain. How they get into the Public Domain . If you do not report them, how did they get into the Public Domain . Agreements between the Federal Reserve and treasury. There was, for example, during the financial crisis, a question as to what is the appropriate role of the federal programs andnding when does the treasury need to be involved, when is there a fiscal component, and those discussions lead to a formal agreement between the treasury and the Federal Reserve. Even after these purchases are ended, the size of these will maintain financial positions and inflation to mandate consistent levels. Is there any current flan or current commitment to reduce the sheet to historic levels, any current commitment or plan to reduce the bounce sheet to historic levels . It was stated in 2012, i believe, we issued a set of exit principles in which one of the principles come over time, we sought to normalize the size of our Balance Sheet and bring it levelo the lowest consistent with the effective conduct of Monetary Policy. Would you characterize that as a current plan or current commitment to reduce the Balance Sheet to historic lows . We are discussing our principles through the normalization policy. I indicated in my testimony that i expect we will be able to give later inlete guidance the year when those discussions are complete. I fully expect we would an intention overtime to reduce the size of our Balance Sheet. Thank you. The chair now recognizes the member. Thank you very much. Byislation offered republicans in our Committee Last week rule would require the federal open Market Committee to issue a rule to disk dictate the course of Monetary Policy. In your view, how feasible would it the to design a rule that would act as an appropriate an independent judgment and discretion in the determination of Monetary Policy, and do you expect such a role could adequately respond to a range of Economic Data that affect an economy on any given day . Fear i feel, congressman, that it would be a great mistake for the fed to commit to conduct Monetary Policy according to mathematical rule. Does that, and i although, under the legislation, we could depart from that rule, the level of shortterm scrutiny that would be brought on the fed, in realtime reviews of our policy decisions, would essentially undermine centralbank independence in the conduct of Monetary Policy. Experience hasl shown we have better macro whenmic performance Central Banks are removed from shortterm political pressures and given the independence to, within a framework in which the goals are clear, and, in our case, are specified by congress, are given operational dependence , and decide how to conduct Monetary Policy. The Federal Reserve is most transparent centralbank to my knowledge in the world. We have made clear how we interpret the mandate and objectives and provide extensive guidance on how we go about making Monetary Policy decisions. A do routinely consult regulation for a variety of roles in thinking about policy. I have indicated previously in speeches i have made that these can be useful starting places for guys to policy. I am not negative in using rules to think through what we do. It is important to understand that had we followed in the aftermath of the financial isis, of recommendations of any the simple rules live the , the outcomes would have been even more disappointing than what we experienced. With the Federal Reserve cost Federal Reserves policy departing substantially from what the rules recommended, we have had a long slow grind to. Et the economy recovery if we had not follow the recommendations of this simple duringlmost every rule 2011 in 2012 would have called for negative Interest Rates, something that is impossible. Began tone reason we buy asset purchases. We needed a further tool. Given the fact that we have had unusual headwinds constraining this recovery, i believe it is utterly necessary for us to provide more Monetary Policy accommodation than those simple rules would have suggested and i think history would show that following any of those simple rules would have given us very much worse performance. Be a mistake,d although those rules, sometimes, timese merit in normal during the great moderation it where there are relatively few shots. Behavioral reserves was very rule like. It corresponded to some of those rules and they can work well. Not always. We cannot be mathematically bound to a simple formula. To thank you for the explanation. You could not be clearer and could not have explained better to this committee why you certainly could not operate with a cookiecutter rule, when as you explained, the headwinds you were confronted with or that the feds were confronted with , absolutelycretion require that you have the flexibility to deal with unforeseen circumstances in happening to make your decision. I want to thank you very much and i yield back the balance of my time. The chair recognizes the general the german from michigan. A quick question. Have you read my bill . I have looked at the bill. Ok. That is good news. I will just refresh your memory and address my colleague from california. We anticipated that might be a concern of yours. On page eight of the bill, under subsection two, the approval of an update, and we will not get into whether there should or the rule, or does the rule go far enough, etc. Theoes say upon determining plans described in paragraph one, cannot or should not be achieved, an explanation shall be submitted, an updated version of the directed policy rule to the controller of the United States and appropriate congressional committees. It goes on to say that if they then determined you are not in compliance with the new role, then you get audited. It does not say you cannot change the rule. It says you have to notify us and notify them. Buff and i went back and did history. We got to where we are today because of the employment act of 1946, where congress felt it needed to lay out what that policy was. In the 70s, they felt congress felt it was too vague and therefore they created a bill that would strengthen and the 1946 act. It has three goals. Congress. Imandate by so, on page three of your paragraph second down, even after the committee and the purchases, the sizable holdings of longerterm securities will help maintain accommodative financial positions, thus supporting financial progress and consistentto mandate levels. Where in the act i am sorry to my colleagues, signed by jimmy carter after the house and Senate Passed the bill, where in the act do we lay out a two Percent Inflation rate . Do we do that . Do we lay out exactly which employment rates should be . Bill passed by democrats in the house and senate and signed by jimmy carter, does that mandate what the employment rate should be . The bill uses the term maximal employment and price stability. We do not prescriptive lycee it will be a two Percent Inflation rate target and five or six percent employment. Of type thatuage is in the legislation. Curious how us requesting a rule, a simple step in most peoples view, a simple policy, how is that different than the trimandate that was laid out in Humphrey Hawkins and defended every single day by others in the committee . For what thesking rulers, not telling you what it is, not being prescriptive or even d script of, but just saying, set a rule, and then let us know, so we can have reference we will my rant on oversight. Can get as detailed as the Humphrey Hawkins at, or lack of detail, why can we not have the rule and have you all at the fed except that . If you are not willing to accept it because you are concerned about your independence, i do not want to put words in your mouth, is that one of the reasons why you do not want to sign on to the bill . Not aware of any literature that establishes that adopting a central bank, whether it makes it public or not, that adopting rules is the most desirable way to run Monetary Policy. Theou might want to talk to europeans about that and other economists as well. What they do is the ecb has and given a great freedom they have to find a price stability objective. Here is my last request. If the bill is not good enough, i would like to know when the fed will call for a more time. The time has expired. The chair now recognizes the gentle lady from new york. I would like to ask you about the feds exit from monetary stimulus. As he testified, the fed is currently on pace to wind down its qe3 purchases by the end of october. Right now, the market is expecting the fed to start until theterest rates Third Quarter of 2015. Between october of this year and 2015, whatuarter of are the main tools the fed anticipates using to exit from its monetary stimulus . Thank you. Indicated, if the committee continues to see improvement in and continueset, to forecast ongoing progress in the labor market over time, and inflation moving back toward two percent, it is our intention to wind down our asset versus to include them after the october meeting. Maintainat, we would the quarter percent range for the federal funds rate that we have maintained now for many years. And eventually, as the economy makes further progress, we would begin to raise our target for shortterm Interest Rates. Laid out a specific timeline for doing that, but we principle,a general which is, we will be assessing what our actual progress is and our expected future progress toward obtaining the two objectives of maximum employment and price stability. We will look at how far away our objectives are and how rapidly the jets are closing. Those are matters we cannot be certain about. We make forecast but incoming data causes us over time to change those forecasts. Thennot be specific about timing of the ultimate increase in our shortterm Interest Rates would be. We will be assessing incoming information. Thesearticipants are not fo and the policy statements, but we have provided in the Monetary Policy report and we provide every three months and information about each fomc participants assessments of both the Economic Outlook and their views on the likely path of Monetary Policy. This is each individuals view walking into our june meeting. As a committee, we have to transform that into a single policy. He gives us an indication, i think and, given their expectations of the labor market and inflation progress, at the beginning of our june meeting, participants, almost all of them, thought it appropriate to begin raising our target for the federal funds rate some time during 2015. The median participant saw the federal funds rate by the end of that year standing around one percent. Timinghere is no exact sense5, it is in some roughly consistent with what you but i want to emphasize the actual bit we see in the labor market and inflation and our general assessment of the labor market could change that over time. Will the fed change interest held at access reserves the fed during this time . When we decide to raise our target for shortterm Interest Rates, a key tool will be to raise Interest Rates we pay on reserves. We would only raise the Interest Rates on reserves when we have beginined the time is to raising Interest Rates more generally. Use will be a key thing we next week. Last week, a speech was given in which it was suggested that adding a Financial Stability mandate to the overall mandates of stability regulators could help improve financial loss stability. Can you, and they can you comment . My time has expired. Thank you. The chair now recognizes the gentleman from alabama chairman of our committee. Thank you. Saying this will be my final Monetary Policy hearing that i will dictate and of Congress Since i am retiring at the end of the year. During my 22 years of service on the committee, including my sixyear term as Ranking Member and chairman, i have heard alan, benfrom bernanke, and now yourself. My observation during these times of both posterity and times of financial crisis is that we have leaders and professional staff at the fed who have conducted themselves with honor and to have been true public servants. Let me thank you as well as your professional staff as well as your predecessors predecessors. Important and tremendously demanding position. Thank you, i appreciate that. Where the fed is a key player, exercising the authority granted by dodd frank to designate institutions that are financially or systemically important. As assetncluded managers have been somewhat controversial. There is often a greater resistance to a designation or when the parties feel they have not been consulted or the process is not transparent enough. One of the approaches that is attracting some interest is to require that companies being besidered for designation provided with specific reasons why and also a description of steps so they might not be named. Between thee particular company and the fed and not a public discussion. Do you agree or would you consider that a reasonable approach that would bring Greater Transparency to the designation process . I think laying out a clear methodology actually leads to more certainty and confidence in the this is clearly a very important thing that happened to a company when it is designated. I believe it has to be given every opportunity to understand the fsoc is why thinking that it poses Systemic Risk and every opportunity to present its own analysis of the issues and interact with the and having a very good and frank dialogue and backandforth. I believe that that is a part of the process. The firms are given every opportunity to intensively interact with the committee and its staff. Isore any organization designated. That is completely appropriate. In that process, there is a great deal of confidential information. I dont feel it is appropriate for that to take place in the Public Domain. With you. Agree i am talking about a giveandtake between the parties. I think that that is absolutely appropriate and to the best of my knowledge, ive not served on fsoc when any institution has been designated, but to the best of my knowledge when the institution gets into the latter stages of the process , there is a great deal of backandforth. Thank you. Let me talk about some demographic influences on Labor Force Participation because i know that concerns you, it concerns all of us. Part of it is a rise in the service sector. Parttime employment. Some by choice, some not. Many analysts think that it is being driven in part by aging u. S. Population, particularly as retirees exit the workforce. Does the fed take into , if Labor Force Participation does not pickup in growth does, how does that affect your decision to keep rates low . I absolutely agree with your point. Demographics and an aging population is driving and should be expected to drive the Labor Force Participation rates down. The question is, has labor force thancipation fallen more would be expected based on demographics . My personal judgment is yes it has fallen somewhat more than that, but aging is a very important downward force and that is what i expect Going Forward. The chair recognizes the gentlelady from new york. Chair, with the prospect of 0 Interest Rates coming to an end, some have warned that this could unduly hamper Economic Growth. Yet low Interest Rates pose a real threat of creating asset bubbles. What has the fed seen in the markets concerning asset prices and does the threat of a bubble out way any slowdown in Economic Growth . Reserve has been increasingly and intensely stability financial and we understand the maintaining Interest Rates at low levels for a very long time can reach asset bubbles. We are monitoring this very closely. That is in part why i referenced some of these trends in my opening testimony. My general assessment at this point is that threats to Financial Stability are at a moderate level and not a very high level. Some of the things that i would look at in assessing threats to Financial Stability to see if their broadbased, broad measures of asset rices, of equities, real estate, debt. Do they seem to be out of line with historical norms . I think theyre the answer is no. Some things may be on the high side and there may be some see valuationse becoming stretched, but not generally. The use of leverage is not broadbased. It has not increased critically. At alarming levels by any means. Although the economy is recovering at an accelerated pace, many experts have warned of the disconnect between stock market gains in overall Economic Growth. And overall Economic Growth. LowInterest Rates, an environment of low Interest Rates. They are one factor that affect asset prices, generally including equities. Policynterest rate partially accounts for why housing prices have rebounded and also is an influence on equity prices. But it is not the only influence. The economy is recovering but do you find this an issue to be concerning to you . The issue being that Monetary Policy affects asset prices . Yes. Well, the disconnect between stock market gains and overall Economic Growth. A few. Nt have the Federal Reserve does not take a view as to what the right level of equity or asset prices should be. To see ifto monitor they are rising outside of levels consistent with historic norms. As i indicated, in spite of the fact that equity prices have risen substantially, price equity ratios and other measures are not outside of historical norms. I dont know what the right level of prices is. But in that sense, i am not seeing alarming warning signals. Thank you. As we all know, the economy has been creating jobs at an accelerating pace recently, despite fears that tapering the qualitative easing could slow the recovery. In your opinion, is this dong evidence that the economy has turned a corner strong evidence that the economy has turned a corner and can self sustain the recovery . I am optimistic about the economy. That is reflected in the forecasts that are included in the Monetary Policy report. Rate of very Surprising Growth in the First Quarter and that is a number which does not seem consistent with the underlying momentum in the economy and many indicators of spending and production. I do think the economy is recovering and that growth is picking up and we have sufficient growth to support continuing improvement in the labor market. We have seen maybe not progress over many years at a pace that would be ideal, but Real Progress that will continue. Thank you. The chair recognizes the gentleman from new jersey, the chairman of our National Capital submarkets committee markets subcommittee. Finally, after many months, we have got responses to the questions that we put two months ago. To you months ago. We ask you, do you support expanding the feds discount window and access to brokerdeals during turbulent Economic Times . You said, no. You said, i do not favor expanding the discount window to brokerdealers. Instead, you support the application of stringent capital standards and liquidity requirements and you said you support the development of resolution regimes. I get that. Regulations and the resolution regimes do not work, do you then rule out access to brokerdealers of nonfinancial interest editions institutions to the discount window . Under the terms of the dodd frank act, the Federal Reserve is barred from extending discount window lending to an individual firm. We are confined to broadbased facilities. Extendingou rule out 13 three as well . Were general Financial Disruptions and we were in a situation of Systemic Risk similar to what we saw during the financial crisis, where we have a general panic then you would use 13. 3 to allow brokerdealers to have potentia a la the is what you are saying . A broadbased scheme in the situation of Systemic Risk. Possibility. It would have to be very seriously considered. We would be extending the American Public backstop to brokerdealers under your administration. It depends what the circumstances are. That is quite astounding that brokerdealers are on notice that they may have under the right circumstances it would have to be unusual and exigent. Understood. But now we know. Secondly, secretary jack lew was questioninger much and answering, we asked him what is the process and he says they do not act with consensus matter and we said, did you consent to of specificion lovely systemic firms and he said, yes, he did consent to them. My question to you is, did you agree with secretary lew . Lets drink it in. We have been listening to this testimony for 30 minutes. Ira, lets start with you. Nothing too surprising. It is interesting how contentious some of the questions of been. Whenthing too surprising janet yellen was allowed to speak. [laughter] comments about the economy in particular were completely consistent with what she has said in the past. A call for more rules. Isnt that asking for more gridlock . Not in the same sense, but it would be a real problem for the fed. They have made their case for decades that they do not want to be hamstrung by rules because the situation does not always fit. If you had had a role in place in 2008, you would have been raising rates into the face of a recession instead of cutting them. On earliergly was this morning and made a good point. These hearings are an opportunity for youtube moments, for members of congress to sound tough, to take on the witness because then they get a nice video clip that they can show to their constituents and supporters. It is not something that is going to happen and will not go anywhere in the senate. It does show there is a continuing threat to fed independence though. Forf congress wanted to ask all of the models that the fed does use, they could. Is Congress Going to know what the heck to do with a bunch of the models that the fed uses . If me a break. In general, not. You talk to the staff of the Monetary Policy committee and you bring in the staff from the fed who makes these models and presents these models to the fomc. Congressional staffers are going to understand how these models worth . Economists. Hem are i went to school with a few. It would not be outside of their general purview and what they do. Whether or not their bosses understand would be a different question. If you want to know what the fed looks at, just ask for it. Anytime you use a model, you are subject to the old staying saying of garbage in, garbage out. [laughter] details know all of the of the economy. Millions of interlocking pieces. No rule can take all of them into account. Used some sort of role before hand or some sort of model, you never would have predicted that the entire country would at the same time have suffered a housing crisis. It had never happened before. A model would not have captured that. It would have told you there are regional problems which is what they were telling various fed officials. You cannot just tie your policy to that. You have to have someone who can step back and say, here is what one model is saying, here is another. I have not read all the legislation. Whenever you create something that hasnt out, you will always use the out. Congress does it all the time. In this particular case, if im not mistaken, i have read the bill, if the fed were to use that provision, the fed chair would have to explain the rationale for using the provision before congress. You dont want to do that. You dont want the abuse. But it falls under the question of whether or not they would understand. It shows the disaffection with the fed is still there, a product of the times we are in. It goes cyclically. Was quotingembers henry gonzalez, who was a liberal democrat chairman of this committee who was very antifed. All of that one away. Greenspan went away became the hero. We go back into their period, where they do not trust the fed. Is there a reason for the republican members to feel this way about the fed quest mark fed . Is there a good reason for them to want more predictability . I think it is a bit of grandstanding. This is not the first time. The fed is not really understood the general public, how they operate. It is just some big behemoth. People think that the way things were before was better than the way they are now are the way they are going to be. A bigdea that having Balance Sheet makes the fed too important. To the not remember what it was like under Alan Greenspan no, they dont. Have aairness, we do not smaller Balance Sheet. Interest rates have been zero for almost seven years. No Interest Rate has ever been at the same level for that long. Before that, they were raising rates 25 basis points a meeting. Has been aity hallmark of the fed throughout the last couple of years. Stay with us. We need to pay the bills and go to a commercial break. Stay with us. This is market makers. Of janetyou day two yellens testimony before congress. As an input during the time period that i was referencing, in the 1995 statement, that was the socalled great moderation. There actually had been quite a lot of literature looking at the different ways to run Monetary Policy that established the simple rules like the taylor rule really could do quite a good job, maybe not the best possible, but quite a good job of delivering good economic performance. Wasvior during that time not bound by rules, but it was good policy and it had the characteristics that pretty systematically, as the labor market tightened, the stance of policy became tighter and as inflation rose, policy became tighter and tighter enough that real Interest Rates, the nominal Interest Rates were raised with inflation. These are sensible ways to conduct Monetary Policy and policy was not bound by a formula. It did not adhere exactly to a mathematical formula. There were sometimes other factors that were important and factored in. But it was sensible. In the more recent period and i remain, i continue to think it is useful to look at simple rules and think about the recommendations what i oppose is tying Monetary Policy to a rigid mathematical formula to any rule and we have now lived through it period were those rules would have performed just miserably and if we had followed them, we would have had dreadful , even more dreadful Macro Economic performance than the disappointing recovery we have enjoyed. If the kinds of analysis that have been performed earlier that showed that these rules work well, if you rerun that type of oflysis through the period the last 67 years, you would find that they would not have performed well. Even so, i hope that if the economy becomes more normal and as Interest Rates become more normal levels, that the world will be less volatile and i continue to think that the recommendations of such rules are worthwhile to look at. A number of speeches in recent years in which i have discussed those rules and the recommendations explicitly. It is something i would not do if i did not think there were some value in it. On the other hand, i have tried to explain in a number of speeches why i think they would not have worked and would not have been appropriate. I dont mean to be rude, but what i am hearing you saying is that the rules structure is not totally unacceptable in the fed scheme. Without rigidly tying our hands to something. It is useful input. Forecasts, as, number of inputs into the policy process. Rules, a collection of them, do provide useful input and we do take it into account. I just would not go further than that. Thank you. I guess my time has expired. The chair recognizes the gentleman from massachusetts. I want to ask unanimous consent to submit a report for the record by americans for financial reform dated july 10, 2014 which i will refer to. Without objection. Thank you. Welcome madam chair. Thank you for your willingness to participate here and your patience. Last month, the federal government give a speech in boston and he described the stress tests for major banks is the cornerstone of the regulatory response to the recent financial crisis. Do you tend to agree with that . I think they have been very up orton important. Of the stress tests as i understand them, the value in that annual stress test is that we inspect the capital reserves, the Risk Management policies within the banks, and when they pass the stress test, there is value in passing that stress test because they have a stamp of approval. Is that the idea . It is really something more than what you just said. Ruling using our own models and judgments to take a very detailed look at all of the Asset Holdings and transactions and exposures of a large Financial Firm and we are attempting to assist in a well specified, highly adverse stress scenario. An economic scenario that is extremely difficult. We are making our own very detailed assessment of whether or not that bank would have sufficient capital to continue to meet the lending needs of the economy and to continue to function. And on top of that, we are insisting that the firm demonstrate to us that they have the ability to do that kind of and judgingmselves their Risk Management capabilities. You put a much better than i could, but i agree with everything you just said. Offeredslation that was called the Federal Reserve accountability and transparency fed told require the publish, to give the information to the major banks that are being tested, all of your methodologies, i will read it here, all of the hypothetical excuse me all of the alternatives that are, in Public Notice and comment and detailed exact models, the methodologies and assumptions to be used in the stress test. You would have to give that to the banks. You would also have to allow them to comment and to help design the tests that you are going to give them. , if you are to give the people the answers to the test, if youre going to let them design the test, wont there be an assumption that they can now game this test . Precisely. That is exactly what we dont give them the models. We want them to show us their work and show us that they have the capacity in their organizations to make well reasoned judgments about the risk that they face. We absolutely do not want to give them the answers. Answers, thenthe you dont get to see the work that demonstrates that the student has learned the material and can apply that kind of logic in the unique circumstances that will face that firm, as opposed to just the scenarios that we have laid out. Able torms need to be analyze their own unique and specific risks that they face. Scenarios a couple of and we do detailed analysis. But what are the unique stresses that could afflict it but to firmher a particular with particular characteristics . We want them to have particular models to analyze those situations. They cannot just use our models for that. They need to show us that they understand what the unique stresses are that could hit those firms as well. Thank you. I yield back. The chair recognizes the gentleman from georgia. Thank you for being you. I want to follow up on one of the things that mr. Garrett pointed out. You said that mr. Tarullo is the Federal Reserve representative to the Financial Stability board. You are his boss. You are the chairman of the Federal Reserve. Thate to really believe the gentleman asked on his own without any direction or oversight from you . I think the congressman garris that should congress men garrett referred to decisions about globally systemic important banks and that occurred before i was chair. Im sure that he consulted with chairman bernanke he. Ok. So he is not independent. No. The chairman obviously has responsibility. Just go back to the independence part of the Federal Reserve from the executive branch, im sure that you are of the 15 chairman in the feds history, that 10 of them have either served at treasury or the white house. It seems to be a revolving door type policy. Between the Federal Reserve and the Treasury Department. It continues today. The fed staff is going back and forth into the Treasury Department, including members of the current administration. Do you believe that this revolving door poses any risk whatsoever to the feds independence . I think the feds independence is extremely important. I have never, in my many years in the fed, seen anything occur that led me to believe that it. Ad at any time been threatened while i understand the point youre making, it is essential that the Federal Reserve remain independent. Ok. I appreciate it. That leads me to the next question. We here in congress have been having various political debates about Infrastructure Spending and Unemployment Benefits to continue. In your senate testimony, you dived into this political debate , expressing your support for more Infrastructure Spending in response to questions from senator menendez. To another letter senator, you expressed the virtues of extending Unemployment Benefits. We will continue to debate the merits of this, but do you have any reservations that carrying the water for the democrats on this fundamentally political issue risks the feds , impartiality, and its credibility . I dont think it is appropriate for me to weigh in on these issues. Why did you . I do not interpret what i said about infrastructure to have been telling congress what i think it should do. I commented, as i recall, to sender senator menendez on the stance of fiscal policy and the way it had been affecting the economy. You dont think we need to spend on infrastructure . That was not what you meant by your comments . I believe it is entirely appropriate for congress to debate and decide that. Ok. To evenppropriate just talk about it . Did you not answer senator menendez that that is up to yall, that is not up to me . I believe that was the spirit. Although i did comment on the fact that fiscal policy had posed a significant drag to Economic Growth over the last several years. , the chairmans staff and the Committee Staff discussed the Federal Reserve role in operating a Payment System for the Treasury Department with the new york fed staff . Im sorry, what system . A what type of system . Operating a Payment System for the Treasury Department. Payment. Ok. They discussed it with the new york fed staff who operated that system and the staff of the new york fed described the feds role as treasurys agent and described the Treasury Department as the trip saids client. Yes or no, is that a good characterization of your relationship . The Federal Reserve is the fiscal agent of the government. In that sense, that is correct. The chair recognizes the gentleman from georgia, mr. Scott. Thank you, mr. Chairman. Im over here. A secondto just take briefly in another direction. We dont operate in a back room in the United States. To what extent are the developments in various parts of the world that have taken place now in ukraine, you have the , thetion in iraq israelipalestinian situation, syria, the world is a flame. To what extent will this have on andglobal Economic Growth especially the United States Economic Outlook . Something that is going and little but unnoticed is another situation and that situation is he around. Iran. Deadline and there is a decision and agreement that is supposed to come out. In collaboration with all of these other hotspots, what would be the Global Impact in terms of Economic Growth and where would . He United States be treasury is the enforcement of our sanctions. They are based largely on the wellbeing of the United States economy. If theyld happen sunday dont come up with an agreement and ask for an expansion or they do come up with an agreement that has nothing to do with the dismantling and israel would not accept it . Presents a very timely issue and i thought we might benefit from your thoughts on thingsncluding the other that are happening in iraq, syria, and so forth, israel. Certainly come of developments that you are talking about present risks to the United States through any number of different channels. In trying to focus simply on the ofential Economic Impact these developments on the United States, i would be thinking particularly about Energy Markets that we have seen some disruptions in Energy Supplies and there could be much larger disruptions in Energy Supplies. Such developments clearly would have an impact on the United States and in the global economy. Also look at whether or not there are significant direct financial exposures, for example , of our Banking System to particular regions that are troubled. In the case of the countries you mentioned, my assessment would be that the direct financial implications for our Banking System would not be large. ,ut in times of global unrest it is very normal to see disruptions in risk aversion rise in Financial Markets generally and that would certainly, were that to occur, have spillovers to the United States into our outlook. Thank you. Now let me ask a question on your asset purchase program. Jobink it has done a good in two important areas. Played a major contribution in lowering the , andloyment, creating jobs very significantly in the housing market. In terms of reducing Mortgage Rates. Is that true . Is that much . I believe it has made positive contributions in the ways it that you have mentioned, yes. And understand you are going to end that Program Within a couple of months. The issue is, would that have a downturn impact on the progress we have made in both unemployment and the Housing Program . Are continuing to purchase assets, so in that sense we are continuing to add. ,ven if we stop our purchases our Large Holdings will be supporting lower longterm Interest Rates and keeping Mortgage Rates lower and will continue to provide a positive for the housing market. If we liked confidence that the labor market and the economy weld continue to improve, probably would not have been comfortable winding down the asset purchase program. I do think the economy is improving, the labor market has improved. Thank you very much. Mr. Mchenry. Allen chair yellen, thank you for being here. I know these days are long. I want to ask you about something that i care about. Of. Frank. Part d. Frank. Frank. Nk dodd there is a mandate that no less than annually, there will be an toertaking by f sock fsoc review financial designations. You and secretary jack lew pledge that you are committed to the process and i assume that remains the case. The question i have is what metrics are you going to use for review . Ive not been involved in that. Soc yet. T come to f i assume they would look at some of the same metrics and whether. R not those have changed i would appreciate if you would follow up with me on this. This is the fouryear anniversary of dodd frank. For us to not have an annual review process we are taking a quick break from Janet Yellens testimony before the House Financial Services committee. It is a short one. Stick around. Welcome back to market makers. Of janetng you day two yellens testimony. Lets take you back. We will work with the fdic to give these firms feedback on what we want to see them do to facilitate resolution. Of course, that is the objective. We are close, we have not even finalized feedback to the firms on their second round submissions. The chair recognizes the gentleman from texas. Ranking member of our investigation subcommittee. Good morning. Welcome again to the committee. I have three questions. Each of which could easily consume five minutes of your time. I do not believe that i will get through all three. I will ask, if possible, that you give an answer to each. You have used the term unusual headwinds. I have noted that the term fiscal policies of been associated with this. Would you explain some of the unusual headwinds that we have faced or are facing . Tight fiscal policy is one of them. Also there was stimulus for a number of years. In more recent years, fiscal policy in addressing deficits and attempting to reduce deficits has created drag on Economic Growth. That is unusual in times like these. In addition, the system of Housing Finance and the willingness of Residential Mortgage lenders to provide the standards should have escalated, they have escalated. Case that become the any borrower without a pretty pristine Credit Rating finds it awfully hard to get a mortgage. I think there are a number of reasons for it coming out of the crisis. Think that is a headwind Credit Availability for some purposes is diminished relative to historical norms. Coming out of this crisis, we also see that households have unusually depressed expectations about their own future income gains. I think that weighs on their financesabout their and is holding back consumer spending. Those are some of the things that i would see as headwinds from the crisis. In addition, productivity growth has been really slow for a number of years. Myi am going to abandon other two questions because i have a followup. You indicated that these fiscal policies are unusual for times such as these. To beould you expect usual fiscal policy to be four times such as these . I think historically when the economy has been weak, fiscal policy has been on average providing greater stimulus. I understand there are reasons that congress has chosen this course. Simply what i would see as a , the degree of drag from fiscal policy in a high unemployment situation has been unusual. Could you kindly give an example or two of the kinds of fiscal policies that historically have been employed in times such as these . Typically, there would be tax ,uts and increases in spending allowing automatic stabilizers to go into effect in circumstances where unemployment was high. In, it has been very rare notpostwar period, we have had a recession that has been as long and as deep as this one, so it has been an unusual period. I will take one more question. I will just ask you about indicators. We have leading indicators, lagging indicators, and coincident indicators. I try to follow these. But i would like from you is as you look at them in general, could you give me just an assessment of where these indicators seem to indicate we are going . I see most indicators that i look at in the economy as suggesting improvement. I look at things like industrial production, the labor market, auto sales, what is happening in the housing sector. That may be an exception, that we dont see a lot of improvement there. Most measures of spending in the economy, consumer and business those,es, through all of i think we see positive signs. Thank you very much. I yield back. The gentleman from wisconsin. Mr. Duffy. Madam chair, thank you for being here. I want to commend you for the last time you were here, staying for as much time as we would need to have everyone on the committee ask you questions. I thought that was fantastic. I was hoping that would be a continual policy, but maybe it was not as pleasurable for us as it was for you. On june 18, represented a perl with 84 of i along our colleagues wrote a letter to the president asking that he appoint someone to the Federal Reserve banking experience. I would ask that b submitted to the record. That you are asked about this issue and you indicated your support that you would support having someone banking experience, Community Banking experience, on the fed board. Yes i would. It is fair to say that your role has expanded. Traditionally, you are doing with Monetary Policy, but through dodd frank, you have had an increased role in the regulatory side. Correct . Yes. We are familiar with your dual mandate of maximum unemployment. It is almost fair to say that there is an unwritten third mandate that would bring us to protecting the country from Systemic Risk . I think that is fair to say for the Federal Reserve. Although, it is not something that applies specifically to Monetary Policy. We have a number of different tools and i interpret that as an unwritten third mandate with the Federal Reserve. Talking about that, the Monetary Policy side and you have the regulatory side. Side forod government us, we get concerned, not about your blackout period during the fomc meetings, we agree that you should have the blackout period. We do get concerned in congress when you take the blackout period that applies to Monetary Policy and when we ask you to come in and talk about the regulatory side, you use the argument of Monetary Policy and the blackout. We have no blackout period that applies to anything other than Monetary Policy and the economy. There is no blackout period with respect to supervision and regulation and it is conceivable that you ask someone to testify and they had a problem with, i dont know what specifically you have in mind here. The blackout period does not apply to supervision and regulation. Thank you. I agree with you that it does not apply. I would reference the december 2012 meeting. We wanted to have a hearing on , but weor volcker did not get a witness because the blackout period was sighted. We want to make sure that there is a blackout period that does not apply. It does not apply. This side of the aisle gets concerned about the debt. That is why the chairman at our hearings will put up the fact that we have a 6 trillion debt. Policy, weour, data have had historically low Interest Rates. You would agree. We will pay 227 billion per year to service our debt. You would agree we pay historically low Interest Rates on the debt. Yes. Have you taken a look at what it would cost to service the debt if Interest Rates go to historic norms . I dont have those calculations in front of me, but certainly the congress should be thinking about the fact that over time as the economy recovers, Interest Rates will move back up to more normal levels. The cost to service that debt does not fit 230 billion. Even if we were able to hold it at 17. 6 trillion, the cost to service that debt is going to increase dramatically when Interest Rates go up, correct . It will certainly increase. Yes, higher Interest Rates will increase the cost of servicing the debt. 550 brings us to around billion. Or per year. Thatditional 300 billion does not go to, whether we are building the fence, food stamps, the social good of the country. Important that the country understand that there is a consequence for the spending binge that this town has gone on and that we will pay it as rates go up and that it will have a Significant Impact on our budget in our out years, which might start next year. Testimony andyour your honesty and your honesty actually answering the questions. I appreciate that you read it is nice and refreshing. Thank you. The chair recognizes the gentleman from missouri. Thank you. Thank you for being here. I want to talk about unemployment. That continues to be a major concern of mine and a major concern in the district that i represent. Macro Economic Situation is driving. Unemployment,to particularly for minorities, it is still almost in recession levels. Wondering if you think that that is some kind of a structural unemployment issue or do you believe. I think the labor market is afflicted by weakness in the overall economy and so things should broadly improve as the economy strengthens and the Unemployment Rate and other broader indicators come down. On top of that, there are also structural factors that are currently and have for a long time been creating problems for many, Many American families. Tends to refer to technology and we have seen a widening of the income distribution, the wage distribution in the United States going back to the mid80s. Economists have been debating the causes. They do see technological changes that have favored skilled workers as being one of the causes of a widening income distribution. To some extent, globalization also plays a role and there may be other factors. When we think about all of the middle and lower income families in the united some of itfacing, comes from the generally weak economy. I think that is the part the Federal Reserve can contribute to. There are deeper adverse trends at work on top of that. Perhaps, they have even been exacerbated. Some economists seem to believe that as technology expands, that it will create more jobs than it will destroy. Do you embrace that economic theory . I think the total number of is not justeconomy determined by technology, it is determined by Macro Economic policy. Haveld not believe people for centuries worried that advancing technology for example would destroy jobs and people would become unemployed just morese Technology Enables to be produced with fewer workers. Time and time again we have seen that is not the case, and that even with productivity growth and improving technology we can have jobs with appropriate policy for people that want to work. I do not endorse that. But, patterns of change could favor some groups in the labor market and disfavor other groups in the labor market, and many economists have been writing about the fact that socalled skillsbiased technical