February 27, 2014


WASHINGTON – U.S. Senator Mike Crapo (R-Idaho), Ranking Member of the Senate Banking, Housing and Urban Affairs Committee, today delivered the following remarks during a Banking Committee hearing on the Federal Reserve Bank’s Semiannual Monetary Report to the Congress.  The Committee heard from Federal Reserve Chair Janet Yellen:
Thank you, Mr. Chairman.  Welcome, Chair Yellen, on your first appearance before this committee as Chair of the Federal Reserve Board of Governors.
Today’s hearing is an important opportunity to examine the current state of monetary policy.  Since your confirmation hearing in November, the Fed has begun the process of tapering its quantitative easing purchases.  The pace of quantitative easing purchases has come down by $20 billion.  This is a welcome development for those of us who disagree with the Federal Reserve’s Quantitative Easing policy and prefer to see the QE purchases end entirely later this year. 
By the time the Fed stops expanding its balance sheet, it will hold well over $4 trillion in Treasury and mortgage-backed securities.  Former Chairman Bernanke and others have suggested that the Fed might maintain the expanded size of the balance sheet for some time, rather than promptly reducing it.  This would mean that the reserves created on banks’ balance sheets to purchase those assets would remain in the financial system.  Richmond Fed President Jeffrey Lacker has called these high excess reserves “tinder on the books of the banking system.” The Fed will have to be vigilant to ensure that the tools they have identified to manage the wind down are sufficient to prevent market disruptions.
These unconventional monetary policy tools have failed to produce the promised benefits.  A noted economist recently observed that over the last four years the share of adults who are working has not increased and “GDP has fallen further behind potential as we would have defined it in the fall of 2009.”  All that is to say that despite unprecedented amounts of monetary intervention and record low interest rates, businesses have not responded by hiring new workers. 
Dr. Yellen, in your confirmation hearing you commented on the need to monitor the costs and risks to financial stability that current monetary policy creates.  You also stated that you believe “monetary policy is most effective when the public understands what the Fed is trying to do and how it plans to do it.”  I appreciate your commitment to openness and transparency.
I look forward to your thoughts as to how the Fed will manage a return to normalized monetary policy, and how you will communicate that transition to the public.  I also look forward to learning more about your perspective on the implementation of the Dodd-Frank act, how the different rules interact with each other and their impact on the economy at large.
Because of the size and complexity of these rules, it is paramount that the regulators strike the right balance without unduly harming the economy.  This was evident most recently in December with the final Volcker rule and its unintended and disproportionate effect on community banks with respect to their holdings of Trust Preferred Collateralized Debt Obligations.
The economic impact of the recently finalized Fed rule that imposed heightened capital requirements on foreign banks doing business in the U.S. is yet to be seen.  Early reports indicate that some foreign banks are moving their assets outside of the United States, taking their market activities to “friendlier” jurisdictions.  As you continue with the rulemaking process, I encourage you to do so without placing the U.S. markets at a competitive disadvantage, or putting out of business smaller firms that are no threat to our financial stability.  I certainly hope that you will work with Congress to identify statutory ambiguities in Dodd-Frank that prevent the Fed from doing the right thing.
Lastly, we still have the government conservatorship of Fannie Mae and Freddie Mac, which will create a long-term market distortion in this crucial segment of the U.S. economy.  I look forward to hearing your thoughts on the need for reform and bringing this five-year ordeal to a close.
Again, welcome and I look forward to your testimony.