July 22, 2013


WASHINGTON – U.S. Senator Mike Crapo (R-Idaho), Ranking Member of the Senate Banking, Housing and Urban Affairs Committee, delivered the following remarks during the Federal Reserve Bank’s semi-annual monetary policy report to the Congress.  The Committee heard from Ben Bernanke, Chairman of the Board of Governors of the Federal Reserve System:
"Thank you, Mr. Chairman.
"I welcome Federal Reserve Chairman Bernanke back to the Banking Committee to testify at the semi-annual Humphrey-Hawkins hearing regarding the Federal Reserve’s monetary policy and the state of the economy.
"In recent weeks, the prudential banking regulators have been very active on a number of regulatory fronts, including releasing the final regulations to implement the Basel III capital rules and the proposed regulations on capital leverage ratios.
"I thank Chairman Bernanke for addressing the concerns that Chairman Johnson and I raised in our February letter about the unique characteristics of community banks and insurance companies.
"A one-size-fits-all approach regarding capital rules does not work for these two types of entities.
"With regard to monetary policy, we have experienced a period where the Fed has pushed the short-term interest rate down to zero more than four years ago.
"The Fed pursued quantitative easing (QE) in order to suppress long-term interest rates.
"As a result, the Fed’s balance sheet now stands at nearly $3.5 trillion dollars, with an additional $85 billion every month in long-term assets being added.
"Recently released Federal Open Market Committee (FOMC) minutes from the June meeting indicate that several members of the board felt that “a reduction in asset purchases would likely soon be warranted.”
"Several noted economists have called into question whether the benefits of these purchases outweigh their risks.
"The negative reaction by equity markets to the June FOMC statement on tapering indicates that some of the increase in the prices of equities and other assets recently is attributable to the Fed’s balance sheet expansion, and not purely economic fundamentals.
"In fact, June marked the worst month on record for bond fund outflows.
"The reaction indicates that markets are still heavily reliant on government intervention, which is not good for the long-term health of the economy.
"I am interested to hear from Chairman Bernanke to what extent the Fed anticipates the inevitable tapering process will cause additional periods of market volatility.
"Because the official stance of the Fed is that the decision to taper remains data-dependent, I am interested in hearing if the Chairman believes laying out specific data would improve both the Fed’s commitment to the policy and the market’s reaction to it.
"Beyond tapering, which is simply slowing the rate of growth of the Fed’s balance sheet, is the more important issue of winding down the Fed’s massive balance sheet.
"The Fed has indicated that it may continue to rollover its holdings of long-term assets, which means that its balance sheet may not shrink for some time.
"A key element of the exit strategy adopted by the FOMC in June of 2011 is a three-to-five year period over which the Fed expected that it could completely eliminate its holdings of agency securities.
"This was done for the purpose of “minimizing the extent to which the [agency securities] portfolio might affect the allocation of credit across sectors of the economy.”
"Since then, the balance sheet has increased in size by more than 20 percent to almost $3.5 trillion and the Fed’s holdings of agency securities has increased by more than 30 percent to about $1.2 trillion.
"Why does the Fed see the need for such accommodative policy to continue into the future?
"In light of the Fed’s large portfolio increases, the dominant role that the GSEs play in today’s mortgage market, and the recent increases in the level and volatility of mortgage rates, will the Fed revise its balance sheet exit strategy principles? 
"In particular, will the Fed be revising the time period over which it expects to eliminate its holdings of agency securities?
"It is my hope that this hearing gives us additional insight into the Fed’s plans for future reduction of asset purchases and a roadmap for a return to normalized, rules-based monetary policy.
"Thank you, Mr. Chairman."