senate banking committee you can see her getting her papers ready. i am getting my papers ready. i'm going to take you to washington, d.c. where here cook is on capitol hill. peter: he will say the fed is not planning to raise interest rates for at least the next couple of meetings. it will be determined on a meeting by meeting basis. she is trying to get more flexibility going toward while acknowledging interest rate increases on the way. the committee considers that i'm likely to be economic conditions will be in a target range for the next couple of fomc meetings. she says the committee will

consider increasing the target rate for the fun rate on a meeting by meeting basis. it is an indication that the patient reference will go away. that does not necessarily mean we are looking at an increase in the june meeting. it is going to be meeting by meeting. the fed will look at incoming data. why the hesitation on her part? there are still issues with the u.s. economy despite the recent conclusions. despite the improvement, too many americans remain unemployed or underemployed.

she says she believes inflation will start moving up towards the 2% target, but it is likely to decline in the short term. there are four developments that could pose risks to the outlook. she says there could be upside surprises. the uncertainty could be positive in the end and could be a plus for the u.s. economy. she is trying to buy flexibility. stephanie: do not go anywhere. we have to take a look at the markets. scarlet fu is in the newsroom. what do you see? scarlet: we went from little change to downsn. the s&p 500 trading at record highs. the nasdaq was riding a

nine day street. let's move to treasuries. we are seeing a little bit of a selloff, with yields moving to session highs. small moves, worth noting we saw yields move higher. it moved above 2% last week. the dollar moving up in strength. the dx why is higher. let's give you some headlines. economic data coming out. consumer conference. falling for the month of february, when economists had anticipated a move down to 99.5. this comes on the heels of a revised number for the previous month of january. a does look like consumer confidence is coming in lower than when economists had been looking for.

stephanie: i have special copilots. michael mckee and joe. mightmichael: the comment that it was a to meeting delay has market participants believing the minute they dropped the phrase they will start raising rates. she is trying to address that by saying patients means -- patience means a two meetings. joe: it seems like a halfway step down. she is not expected to take monetary -- to make monetary news.

stephanie: michael, isn't there an argument to be made? how about just doing some fundamental research and investing in countries long-term. >> she did give you a clear signal. she is very positive today on the employment situation. that is why we are getting this reaction. she is sticking to the fed line that inflation is going to rise. she says we're going to raise rates once we judge that him collation -- that inflation is moving back towards target levels.

it comes out of the gdp report. if we get a good one, we will see the course cp giving you a hint that it is coming. then, you will look for the fed to get more aggressive. stephanie: i want to bring back peter cook for a minute. you did not cover one of my favorite topics. why do you think that is? >> this is a testimony on monetary policy. she is afraid of going into that. she knows there are members of the committee that are going to give her a hard time. the chairman of this committee makes clear that he is planning

to make changes. a pretty strong statement from richard shelby. listen for that to come out through the course of the testimony. he will ask questions about the regulatory role, but he will make clear that he does not support auto during -- auditing the federal reserve. stephanie: do you agree? >> she will handle it well. there will be questions and she will be bored by then and unimpressed and give them good answers. she will do a fine job answering the questions. it was funny, a couple of weeks ago, the federal reserve twitter account tweeted fyi, the federal reserve is audited.

it is funny. stephanie: doesn't it make sense the fed is frustrated. it is like you can do no right. anything you say or do not say can be used against you 24 seven -- 24/7. >> all the people who predicted hyperinflation have been wrong. it is part of the territory they are going to have to deal with. >> because republicans control both houses, maybe you will get a snowball rolling. it will be interesting to see the testimony.

is there is anti-fed momentum, it will come from the republican side. there could be some movement. there is more danger than if the democrats were in control of the house. stephanie: balance sheets are strong. people are getting jobs and building houses. >> it makes a good political soundbite for the members of congress. he has come under a lot of criticism. we will see if he follows up on that. stephanie: why did she have to hold wall street's hand. stand on your own.

it lets celebrate it. >> on one thing to remember is that members of congress, the one thing they do not like is anyone in government exceeding what they see as their authority. they have seen it with the president and they think they have seen it from the said. it is not going to pass. listen for taking away some of the power of the new york federal reserve. that has bipartisan support. stephanie: is that not just moving deck chairs? leave them to do their jobs. >> you make a good point. leave them to do their jobs independently and you get better results. that is what history indicates. this is congress. does the administration support

any of these moves, that is the question out there. >> people have been saying what you have been saying, let the fed do their job. >> a win politicians been rational. stephanie: five years ago we were in an economic crisis. the party is over. everyone is fine and back on their feet. >> rage growth -- wage growth is mediocre. there is a feeling that the recovery is largely stacked. it is this populist right-wing that does not represent wall street so much that it is

tapping into and anger among people who feel they have been left behind. as long as there are a lot of people like that, you will have politicians making the case that the fundamental nature of the recovery -- >> it is a question of when do people feel the economy works for them? they are not seen median wages rise in over a decade. stephanie: does it choke the recovery? why couldn't you raise rates just a little bit? >> you can and they will. it is the idea that something has changed in the economy. we have gone from the fed being concerned about us the fact that the economy is not growing as fast as it should, too all of a sudden, things are better and we're going to go to the other

direction. nobody in the markets is worried about a 25 or 50 basis point move. stephanie: when do they raise rates? >> they raise rates this year. >> i agree. you can look at when the fed meetings are. there is a meeting in june and september. those are your two choices at this point. janet yellen: since my appearance before the committee last july the employment situation has been improving along many dimensions. the unemployment rate stands at 5.7%, down from just over 6% last summer and from 10% and its

peak in late 2009. the average pat -- the average pace of job gains pick up. employment rose 260,000 in january. in addition, long-term unemployment has declined substantially. fewer workers report they can find only part-time work when they would prefer full-time employment. it is often regarded as a barometer of worker confidence and labor market opportunities and has recovered to its prerecession level. the labor force per to sit -- the labor force participation rate suggests some

cyclical weakness persists. considerable progress has been achieved in the recovery of the labor market. the room for further improvement remains. domestic spending and production has been increasing at a solid rates. real gross to mastech product has been estimated to increase. gdp growth is not anticipated to be sustained at that pace. it is expected to be strong enough to result in a further gradual decline in the unemployment rate. consumer spending has been listed by the improvement in the labor market as well as by the increase in household purchasing power. housing construction continues

to lag. activity remains below levels we judge could be supported in the longer run my population growth and household formation. despite the improvement in the u.s. economy longer-term interest rates have moved down significantly since the middle of last year. the declines have reflected disappointed forum grows and changes in monetary policy abroad. another notable development is the plunge and oil prices. this appears to reflect increased global supply rather than weaker global demand. the drop in oil prices will have negative effects on energy producers and will result in job losses in this sector, causing

hardship for workers and their families, it will be a significant overall plus for the economy. the boost will arise from u.s. households being able to increase spending on other goods and services as they spend less on gasoline. foreign economic developments could pose risk to the u.s. economic outlook. the pace of growth abroad appears to have stepped up slightly in the second half of last year area foreign economies confront a number of challenges that could restrain economic activity. in china growth could slow more than anticipated as policymakers address vulnerabilities and manage the transition to less reliance on investments as sources of growth.

inflation has fallen to low levels. a highly accommodative monetary policy should help boost economic growth and inflation. the downside risk to economic activity remains. the uncertainty surrounding me outlook does not -- risk. the recent decline in world oil prices could boost overall global economic growth more than we expect. and i part, the recent softness and the measure of inflation for personal expenditures reflects

the drop in oil prices. the price index edged down and looks to be on track to register a significant decline this quarter. core pce inflation has slowed since last summer. it reflects declines in the prices and pass-through of lower energy costs into core consumer prices. despite the readings on actual inflation, inflation expectations, and has thus far remained stable. inflation compensation is calculated from the yields of treasury securities.

the inflation compensation reflects factors other than a reduction in longer-term expectations. the labor market improves further. other factors dissipate. we will continue to monitor inflation developments closely. the federal open market committee is committed to policies that promote maximum employment and price stability consistent with our mandate from congress. as my description indicates we

have made progress towards a maximum employment. in light of the cumulative progress the objective of the recent purchase program the fomc concluded the program at the end of october. the committee judges behind degree of policy accommodation remains appropriate to foster further improvement in labor market conditions and to promote a return of inflation towards 2% over the medium term. the fomc has continued to maintain target range for the federal funds rate and to keep

the federal reserve's holding that the current elevated level to help maintain financial conditions. the fomc is providing forward guidance that offers information about policy outlook and expectations for the future path of the federal funds. the committee judged that it can be patient in beginning to raise the federal funds rate. this reflects the fact that inflation continues to run below the committee's 2% objective room for sustainable improvements still remain. the fomc's assessment that it can be patient means the committee considers it unlikely

that economic conditions will warrant an increase in the target range for the federal funds rate for the next couple of meetings. if economic conditions continue to improve as the committee anticipates, the committee will begin considering an increase in the target range for the federal funds rate on a meeting by meeting basis. before then, the committee will change forward guidance. it is important to emphasize a modification of the forward guidance should not be read as indicating that the committee will necessarily increase the target range in a couple of meetings. the modifications should he understood as reflecting the committee's judgment. conditions have improved to the point where it will be the case that a change in the target

range could be warranted at any meeting. provided that labor market conditions continue to improve and further improvement is expected, the committee anticipates it will be appropriate to raise the target range when, on the basis of incoming data, the committee is reasonably confident inflation will move over the median turn. he continues to be the assessment that even after inflation, levels consistent with our dual mandate, conditions made for some time warrant keeping the federal funds rate below levels the committee views as normal in the longer run. it is possible it may be necessary for the federal funds

rate to run below its normal longer run level. as factors continue to dissipate, we expect the federal funds rate to move towards its longer level. the committee will adjust the target range for the federal funds rate to best promote the achievement of maximum employment and 2% inflation. let me turn to the mechanics on how we intend to normalize monetary policy when the decision is made to raise the target range for the federal funds rate. the fomc issued a statement on policy normalization, principles and plans.

the statement provides information about the likely approach to raising short-term interest rates and reducing the federal reserve security holdings. the committee will determine the timing and pace of policy normalization. the fomc primarily by changing its target range and not by actively managing the federal reserve's balance sheet. policy continues thereafter.

the primary ways to raise it is to increase the interest paid on excess reserves. the committee will use an overnight reverse repurchasing agreement facility as economic and financial conditions evolve primarily by ceasing to reinvest repayments of principle. it is the intention to hold no more securities than necessary

for the implementation of monetary policy. since the july 2014 or there has been important progress towards the fomc's objective of maximum employment. despite this improvement, too many americans remain unemployed or underemployed. wage growth is sluggish. inflation remains below our objective. the federal reserve remains committed to employing tools to best promote the attainment of its objectives of maximum employment and price stability. thank you. i would be pleased to take your questions.

>> i want to get into the measures of inflation. the federal reserve uses and inflation measure of core personal consumption expenditures which excludes volatile food and energy prices. several alternative measures exist. it includes one that strips out a larger basket of volatile items. could you explain to us the risk of not gauging expectations. >> the objective refers to food

and energy are important in the spending basket and i do not think it would make sense to focus on a measure that strips out these important components. we focus on total consumer prices including food and energy. in order to get a better forecast, we look at so-called core inflation.

trying to understand the factors impacting inflation, we look at a broad -- the formal index, we look at this. >> you have pined on the use of monetary policy rules which would provide the fed with a systematic way. it would give the public a greater understanding of the said's strategy. you have stated it captures our statutory mandate to promote

maximum employment and price stability. you have expressed concerns over the effectiveness of such rules in times of economic stress. would you support the use of a monetary role as the fed had discretion to modify it in times of economic disruption? >> i am not a proponent of chaining it in its decision-making. monetary policy needs to take account of a wide range of factors. in its original paper, it

pointed to conditions such as the 1987 stock market crash that would have required a different response. it would be useful for us to consult the recommendations of the rules and we do have an important input into a decision that require sound judgment. >> richard fisher, the president of the federal reserve bank is suggesting a reorganization of the federal open market committee, specifically advocating a rotating vice chairmanship of the federal open market committee as well as a stronger role in the committee. do you support the proposals?

>> the current structure and the voting structure was decided on by congress a long time ago. it is something that congress could revisit, but it has worked very well. we have a broad range of opinion that is represented at the table and active debates. the decision to appoint the president of the new york fed as feist chair reflected the reality that the new york fed conducts open markets operations on behalf of the system and has special and deep expertise

pertaining to financial markets and i think that has worked well and continues to be true. >> an article written by two economist proposes reducing the number of federal reserve districts from 12 to five. making the presidents of all banks voting members of the federal open market committee. this would preserve diversity while giving more authority over monetary policy that rotate voting members. it could allow for greater safety and remove uncertainty creating about 19 independent fomc members. do you oppose consolidation of federal reserve districts?

>> this is a matter for congress to decide. the structure reflects choices that were hammered out 100 years ago. i think of the current structure works well so i would not recommend changes. they play important roles in their communities, but it is up to congress. >> my last question, asset threshold for banks. a report by the office of financial report shows disparity and systemic risk between the largest banks and those that are smaller and closer to $50 billion in assets. all banks above 50 billion are subject to regulation regarding -- regardless of where they fall in the systemic importance

scale. using the findings of the ofr should be incorporated, considered in the determination of whether a bank is systemically significant? >> we recognize that the largest banks and -- our difference -- are different in their systemic footprint. we have different measures to help decide on the importance of an institution and there are obviously large differences. in dodd-frank, congress gave us flexibility to tailor our supervision and regulation to make it appropriate to the systemic importance and complexity and size of the bank.

to the maximum extent possible within that legislation we have tried to use the powers that we have two appropriately tailor our supervision and regulation. we recently proposed extra capital charges on institutions and higher leverage requirements. those requirements were not apply to the smaller and additions. there are many other examples. >> do you know any community or regional bank that has risk to our economy? >> it did threaten systemic consequences --

>> you say may have been. do you know of any yourself? can you furnish any for the record where smaller brinks have caused systemic risk to our banking system? will you furnish that for the record? >> i will look into it. i am trying to agree with you that -- >> that they do not -- >> by and large, that has not been the case. >> thank you. senator brown. senator brown: there is no question as reports made clear that it is made for stronger banks. thank you. you mentioned -- you gave a

speech on income. what steps are you taking to incorporate your concerns? >> we are committed to both parts of the mandate. we have been running a montana -- a monetary policy. we are not focusing on any summary measure. the large magnitude of part-time

involuntary workers who want full time jobs, the decline in labor force participation. these are things we are monitoring closely. we are looking at wage growth and the fact that wage growth has not picked up much during this recovery. i take it to be another signal that although the labor market is improving, we have further ago and we want to promote full recovery. senator brown: since the 1970's, productivity has continued particularly in the last 15 years, continue to grow when wages have not. how do you explain this change? chair janet yellen: we have seen

a significant increase in the share of the gdp that accrues to capital as opposed to labor. that occurs when a real wages fails to merit of growth and productivity. that has been occurring for some time and we have seen that occurred during the recovery. real wages tend to rise more rapidly and a strong labor market. i interpret part of that phenomenon as a sign that the labor market is not yet fully recovered. i should say there are longer terms structural factors that may be affecting the shares of the pod that accrue to labor and capital. one of these factors points to

the fact that many labor-intensive activities in the global production chain are being increasingly outsourced and that phenomenon has tended to push down the share of income going to labor as opposed to capital over the last decade or so. there is research on this topic. it is a combination of structural factors and remaining cyclical -- senator brown: that includes the factor of labor being organized? chair yellen: certainly. senator brown: there is a proposal requiring monitoring the monetary policy. what are your thoughts on that? chair yellen: i strongly oppose

audits. the transparency and providing congress and the public was adequate information to be able to understand our operations our financial condition, the conduct of our meeting their responsibilities that congress has assigned to us. audit the fed is a bill that would politicize monetary policy and would bring short-term political pressures to bear on the fed in terms of openness about our financial accounts, we are extensively audited. i brought with me this volume which contains an independent outside auditor's audit of our

financial statements. in the normal sense in which people understand what auditing is about, the federal reserve is extensively audited. what is critical is the fed be able to deliberate on the best way to meet the responsibilities that congress has assigned to us to achieve maximum employment and price stability and that we be able to do so free of short-term political pressures. i would remind you in the early 1970's, when inflation built-in became an endemic problem in the u.s. economy, history suggests there was political pressure on the fed that interfered with its decision-making. it was in the late 1970's that congress put in place the

current feature of law that exempts monetary policy deliberations and decisions. i really wonder whether or not the volker said would have had the courage to take the decisions necessary to bring down inflation and get that under control, something i think has been important to the performance of the u.s. economy. i wonder if that would have happened with gao reviews. the central bank independence in conducting monetary policy is considered best practice for central banks around the world. we are one of many central banks independent and academic

studies, establishes central banks and performs better the economies. they are more stable and have better performance in terms of inflation and macro economic stability. most banks are involved with their communities. they have community development programs. they are really trying to address special needs of their communities. >> i would like to use my time to go over the process with you.

the first paperwork act submitted to congress states besides reviewing our existing regulations the federal banking agencies work together to minimize burdens resulting from new regulations and policy statements. the report submitted to congress discussed consumer financial protection issues, anti-money laundering issues and included recently adopted rules. including in the register put forward for this process, where we are supposed to be having our financial regulators look for outdated, unnecessary and -- in the system, there was a remarkable number of footnotes of said the agency's engaged

this time around are going to back off. not going to review regulations that go into effect and have clarified the kiev peavy is not going to be a part of the process. my question is, would you not agree that we should have a thorough process that reviews all rules and the consumer regulatory system should be part of the process? before i put the question to you, we had a hearing last week which was dealing with community banks and credit unions. i asked the witnesses and they said in the center for an

regulations they feel are creating unnecessary burden some pressures are rules and regulations coming from the consumer financial arena and from the dodd-frank legislation. that would be exempted from the current agency's review. all of this is outside the scope of the process that the agencies are undertaking. could you respond? chair yellen: in the rules that have gone into effect and will go into effect related to dodd-frank, we have federal register notices, an important part of designing those rules is

considering the cost and burdens of what was the most effective and appropriate way of designing regulations to meet dodd-frank objectives. what it asks of the agencies is something that we have gone through very recently in the process of designing regulations in some places that have not even gone into effect. >>we do not have a rulemaking authority. >> i understand the argument. that is the argument we got from the regulators. it seems to me that is not what

it says. it does not say let's review the rules and regulations that are old. let's review them all. that is what the law was passed to do. if you look at the dodd-frank legislation that has been through the process, the dodd-frank legislation was 848 pages long. the page count of the regulations required has mushroomed to more than 15,000 pages. over 15 million words of regulatory text. the fact that they are new in the implementation process is being completed, i do not think is a satisfactory response. chair yellen: we are holding

public hearings and will be taking public comments. you mentioned community banks. we are focused on trying to find ways to reduce burdens on community banks. we will be sensitive to looking for ways in which we can reduce the burden of regulation. >> thank you. my time is up. i would encourage you to focus on the full intent of agrippa. >> the federal reserve has -- in many areas. it leads back to the new york federal reserve.

several of us have had proposals . can you describe what you have done for greater accountability from the new york fed? >> in the aftermath of hearings held here and the allegations raised about the new york fed we have undertaken an internal review. the question we think is important let me step back. we have a process for supervising the largest banks.

it involves systemwide committees and is led by washington by the board. the reserve banks involved with the supervision of the institutions in that large bank portfolio take part in the process that is a group wide and board led process. the question we thought is important to look at is are we in the group that supervises these banks and makes decisions. to the extent that it was a reserve bank we want to make sure this is in voices are heard and that dissident views can

reach the highest levels for consideration. that is the question we have asked our internal team to look at. the reviewing curt -- the review includes the new york fed and other reserve banks involved because avoiding groupthink and making sure dissident views can be heard at the highest levels is really critical. these are in process and i expect them to be completed this year. stephanie: we are going to break down all of her comments when we return. we are going to take a break. we will have more when we return. ♪

>> live from bloomberg headquarters in new york this is market makers with erik schatzker stephanie ruhle. stephanie: welcome back. my partner erik schatzker is on assignment in athens. right here in new york, we have been following the janet yellen hearing in washington d.c. we will take you back there in just a moment. before we do, i want to get into the bullet for the top business stories of the morning. it is not just about janet yellen even though she is preaching patience and flex ability. the fed chair is testifying

before the banking committee. she says inflation and wage growth are too slow, even if unemployed and gives falling. she signals the fed will not be locked into a timetable to raise rates. >> the modification of the forward guidance should not be read as indicating that the committee will necessarily increase the target range in a couple of meetings. instead, the modification should be understood as reflecting the committee's judgment. the conditions have improved to the point where it will soon be the case that a change in the target range could be warranted at any meeting. >> she also said she strongly opposes efforts in congress to increase federal oversight. >>greece will get a four month extension of a bailout. european finance ministers have approved the package of new economic proposals. now all that is needed is for

the parliament in each of the euro region countries to give the ok. the greek government is promising a crackdown on tax evasion. the bailout has been keeping greece afloat since 2010. it is a fire sale at boeing. the company has lined up buyers for 10 of the early 787 dreamliner's. s. boeing is selling them for less than half the catalog price which is still about $100 million apiece. they were originally bought that because they were so heavy they couldn't fly as far. people familiar with the situation say it one company is expected to buy eight of them. it is a merger that brings together two of the largest brokerages outside of new york city. the price is a cool $150 million

in cash and stock. people has acquired firms and if you other small ones. >> we have been growing because there is a definite void in the marketplace that was created with the financial crisis. we have been adding great other firms to us. we grow organically every day. stephanie: new regulations and tricking margins have opted regulators to close. the problem of viacom tricking ad sales and a smaller audience is causing viacom to determine the size of cuts. comedy central and mtv are down 16% this season. viacom has been more susceptible

to the phenomenon because of its focus on younger audiences. in southern california, a passenger train derailed after hitting a truck on the track. it happened northwest of los angeles in ventura county. three cars of the metrolink commuter train fell on their side. police say there are numerous injuries. they are not saying how serious they are. we have to bring you up-to-date on the markets. scarlet fu is in the newsroom. what do bond investors think about janet yellen's comments so far? honestly i think it has to be confusing. >> it is confusing because she is saying one thing and adding a quick on the other hand it to her remark. for now, that is giving them a reason to bid prices higher which means lower yields.

that extends a trend we have seen over the past week. don't forget, we have a $26 billion auction of notes later today. as for the dollar, it has given up the bulk of its gains. it is now weaker versus the euro. it is flat right now on the dx why index -- dxy index. the s&p 500 and down trending at highs and the nasdaq right now still flat. if it turns positive, that would mark 10 straight days of gains. the stocks 600 index already trending near highs. they continue to power up as we get some resolution on the greek bailout for the next four months and the european central bank has indicated it will support the market. stephanie: thank you so much.

we have been listening to janet yellen's testimony before the senate banking committee over the last hour. i want to break down the biggest headline so far. michael keaton is with us and joe weisenthal is watching next to me. >> the biggest headline came in the testimony where she said -- stephanie: didn't we read it? how are we getting big surprises? she is simply reading something in a prepared statement. >> we are not getting surprises. the market is in showing a surprise. in there is always a knee-jerk reaction. you'll see a huge move in equities or bonds in reaction to this which is what janet yellen like to see. they want to prepare the markets for the fact that we are going to be able to be patient which meant two meetings. that is the dilemma they were

in. she tried to artfully find a way out of it. >> the assessment that it can be patient and beginning to normalize policy means the committee considers it unlikely that economic conditions will warrant an increase in the target range for the several funds for the next couple of meetings. >> that means not in a march and if you read it literally, not in june. we will see if it happens when they meet in march. >> i thought she handled the question of audit the fed really well. she said the fed is already audited and the idea to audit them is not an audit in the sense most people understand. it is giving congress some discretion and influence potentially over monetary policy. i like how she tied it in with

volcker. it is sort of like going into the other side and pointing out to the hawks that there could be a situation they wouldn't like the fed had the ability to do whatever it wanted. a lot of people oppose what volcker did at the time. he is like a hero to many right now. stephanie: paul volcker have been rolling around d.c. for ages trying to get people to listen one finally president obama decides to go against wall street and volcker becomes the most popular guy in town. want to bring up what janet yellen had to say about federal regulation and why she thinks it is a bad idea. >> what i think is quickly important is the fed be able to deliberate on the best way to meet the responsibilities that congress has assigned to us to achieve maximum employment and

price stability and that we be able to do so free of short-term political pressures. stephanie: i agree. >> that is best practices. you keep politics out of your monetary policymaking and you will get a better result. >> we are a long way from it. if you want an example of the opposite, look at what is going on in turkey. the president has been slamming the head of the central bank for not cutting rates and he has been saying the central bankers don't understand economics and that cutting rates will mean inflation. it is hilarious what is going on there. stephanie: i love that joe weisenthal added amusing and hilarious to central breaking in -- central banking in turkey. is go back to janet yellen. >> those who are worried about

inflation should look at the last several years. there are few signs of inflation and in fact many economists believe that the chances of deflation are greater than worries of drastic rises in inflation. concerns of deflation are further precipitated by the prospect of the fed raising rates too soon. i think it is prudent of a decision for our broader economy as well as middle class families across the country to wait until wages really begin to rise. first, do you agree it is critical for the fomc to see evidence of consistent wage growth prior to deciding to raise interest rates? absent indicators indicate they are coming well above the 2% market. if the fomc does not wait, what are the potential consequences? >> senator, our objective is price stability, which we have defined as 2% inflation.

as i indicated before beginning to raise rates the committee needs to be reasonably confident that over the medium-term, inflation will move up to its 2% objective. i don't want to sit down any single criterion that is necessary for that to occur. the committee does look at wage growth with not yet seeing hints or significant a cup in wage growth. there are a number of different factors that affect the inflation outlook. we will be considering carefully a range of evidence that pertains to the inflation outlook. we will determine the confidence we feel in our forecast and

fission will move back up to 2%. we are seeing continued improvement in the labor market and that adds to that confidence. it would add to our confidence also that wages will pick up overtime. our objective is to percent inflation and we will look at a wide range of evidence. >> do you feel the worry of rampant inflation above 2% inflation is any greater than the worry of deflation given the flatness of wages? 70% of the economy is wages jobs, broadly defined. >> the committee feels, i think, the inflation is being held down by transitory factors. particularly the decline we have seen in oil prices. we have had considerable slack

in the labor market and it is diminishing overti time. we have seen improvement and we continue to see improvement. it would add to my confidence especially as the impact of oil prices rose back up. >> do you see any indication of inflation moving above 2% right now? >> i don't see any evidence of that. we need to be forward-looking. the committee is forward-looking in setting monetary policy. we see the labor market is improving and we are getting closer to our goal of maximum employment. it is important to remember that monetary policy is highly connotative. we have held the federal funds rate at a zero two quarter

percent range -- zero to quarter percent range. we have an economy that appears to be recovering and we have to be forward-looking in setting monetary policy. i assure you we want to see that recovery. we don't feel the labor market is fully healed and that is a process we want to go on. we don't want to take policy actions that will hamper that. monetary policy is very accommodative. >> thank you. i urge caution. >> >> thank you thank you mr. chairman. let me share a completely opposing view to that from the senator from new york. i can't help but observe what strikes me as a very obvious paradox here.

that is the financial and economic crisis is over. it has been over for years. at least six or seven years. yet we still maintain crisis level interest rates. we have no wave of defaults are massive bankruptcies going on. we have unemployment going from 10% to under 6%. gdp growth has been weak. i think that is easily by the avalanche of new regulations, certainly not monetary policy. consumer sentiment is relatively high. the evelyn c in january described economic recovery as solid -- the fomc in january described economic recovery as solid. the crisis has been over for a long time. it is not as though there is no price to be paid by having this unbelievably accommodative policy. most immediately, i see the problem incurred by my

constituents who may have spent a lifetime working hard sacrificing and saving and for going a vacation that may have taken so they can say for the retirement. use that to supplement a modest pension or social security payment. of course the reward now is they get nothing. that is what they earned on their savings year after year. meanwhile, we have all the risks associated with this and the risk of bubbles forming. i would argue the fixed income markets are in a huge bubble at the moment. we facilitate excessive deficits because they look so manageable with zero interest rate environment. what are the benefits of this? the benefits are at best a timing shift in economic activity. at best, we are moving economic activity that would otherwise occur in the future closer to the present.

if artificially low interest rates led to strong economic growth then everyone around the world would have zero interest rates and every inc. would be booming -- and everything would be booming. i would suggest that the crisis is clearly long over. i think the time for normalization is well overdue. i hope we get there soon. i wanted to ask you a specific wish and that is related. you have said repeatedly that the goal of price stability is 2% inflation. certainly, there is a congressional mandate on price stability. when the fed decides that it is acceptable and the fact that that is met by sabres losing -- sabres losing 2% of their power annually. that means a 30-year-old woman who is saving, by the time she retires, what she saves at that point would have lost half its value. how is that consistent with price stability? >> the federal reserve is the

carrying out congress' mandate to define how we understand price stability operationally. 2% inflation is an inflation rate that we chose largely for two reasons. first of all, it is well known that prices we look at contain upward biases in part because their failure to adequately capture the benefits of new goods and quality improvement so they are hard to measure. nevertheless, upward biases in price emphasis. second of all because deflation is so dangerous and because an environment of very low inflation and one of comparably

extremely low interest rates makes it difficult for monetary policy to respond to our verse -- to adverse shocks. to avoid damaging episodes of deflation, it is wise to have a small buffer that gives greater room for monetary policy to offer. >> thank you. i will run out of time here so i will get to my second question. i urge you to consider the impact of savers losing their impact power. historically, we have changed a level of accommodation through open market activities. typically buying and selling securities to have corresponding changes in the level of cash. you have suggested that in the process of normalizing assuming we get to that process you intend to achieve that by changing the target level of the fed funds and you will do that by increasing the interest on

excess reserves. my question is since that means overtime in a normalizing environment the transfer of tens of billions of dollars from what would go to the taxpayers to big banks, why are you doing that instead of simply selling the bonds which is more conventional ? >> remember that we will be paying banks rates that are comparable to those that they can earn in the marketplace so those payments don't involve subsidies to banks. in addition, remember we have our provision of reserves and longer-term assets on the asset side of our balance sheet. the spread above we have been paying in terms of interest on excess reserves is quite large.

although that will diminish over time monetary as monetary policy is normalized we have had record transfers to the treasury close to 100 billion this past year and 500 billion since 2009. there have been large transfers associated with that policy. >> that situation is likely to reverse if we get into a normalization mode. >> it is likely that our transfers will decline as short-term rates rise. we nevertheless expect the remittances to remain positive. >> thank you mr. chairman. >> senator warner.

>> thank you mr. chairman. i think my colleague from virginia. madam chair, thank you for your service. our economy continues to recover from the damage inflicted by the great recession. gdp is going, employers are hiring, unemployment is falling. it is only natural that some are starting to look ahead to a time when the federal reserve can start withdrawing to monetary stimulus that has been so critical to our recovery. from my view, we still face challenges. most americans are still waiting for the recovery to show up in meaningful income growth. long-term unemployment, while down, is still high. has now for an extended. of time.

it is important not to put the cart before the horse and tight too soon. you said the federal reserve's timetable for raising rates will depend on the data. there are some who say the federal reserve should tighten preventively based on unemployment or which growth or at the first hint of inflation without waiting to find out if it is a statistical blip. what would be the risk if the fed raises rates too soon compared to the risks of waiting? >> if the fed were to raise rates too soon we would risk undermining a recovery that is really just taking hold and is succeeding in improving the labor market. i don't think we are back to maintaining conditions i would

associate with maximum employment or normal labor market conditions. things have improved notably but we are not there yet. we want to see a healthy recovery continue. in addition, inflation is running well below our 2% objective. while we think a significant reason for that is because of transitory factors, the decline we have seen in energy prices we are committed to our 2% objective. just as we don't want to overshoot 2% on the high side we don't want to chronically undershoot 2% on the low side either. before raising rates, we will want to feel confident that the recovery will continue and inflation is moving up over time. there are also risks of waiting

too long to remove accommodation. we have a highly accommodative policy that has been in place for some time. we have to be forward-looking as the labor market tightens. growth and inflation can grow to overshoot our objective and conceivably there could be financial stability risks. we want to be attentive to those as well. this is a balancing of cost and risk that we are trying to make in a deliberate and thoughtful way. >> i appreciate that. it is that balance that you and your fellow board members can get just about right. i can see entering and choking off recovery before middle-class families actually feel its gains.

trapping a too low deflation or inflation set of circumstances. let me ask you another question. i have heard several commentators say the interest rate increase by the fed would signal confidence to the market about the health of the u.s. economy and have a stimulative effect. do you agree with that theory? if so, wouldn't it be confidence more than offset by a rate increase? >> i think it is fair to say that when we begin to raise our target for the federal funds rate, it will not be because be because of our confidence and we are reasonably confident inflation will move back to our 2% objective overtime. that confidence will reside in real improvement that we see in the underlying condition of

households and businesses. where we would not be attempting to somehow bootstrap an improvement in the economy that is purely occurring from a confidence effect that comes from our raising rates. there is reason to feel good about the economic outlook. households have gone through major adjustments in their balance sheets and are in better financial condition than they were. the job situation is improving. even though wages have not been rising in real terms very rapidly, there are more hours of work and more jobs so household income is improving. lower oil prices are boosting household income. housing prices have rebounded. that has helped a lot of households. businesses -- >> in essence, real confidence

not confidence that is spun? >> that's right. there is no spin here. our confidence has improved and when we raise rates, it will be a signal in our confidence of the underlying fundamentals. >> thank you, mr. chairman. good morning and thank you for being here this morning. i would like to talk about the insurance industry. places like south carolina, we have $54 billion of life insurance in place. as we think through the transferring of risk that the insurance industry provides im a bit prejudice in this area because i have spent 25 years in the insurance industry. i appreciate the fact that until the insurance company shows up, the transfer risk is nonexistent. i take very specific interest in

the impact that the fed may have on regulating the insurance companies now that have been designated stomach we systemically important. i think this is for very obvious reasons. you look at the activities of banks with loans and deposits comparatively speaking to the long-term risk that most insurance companies are holding their assets for. it is important to have that delineation and take a different approach to insurance companies than we do other financial institutions. i know from expanse that this is an important consideration. my question to you is what expertise does the fed have or plan to acquire as it begins to supervise insurance companies? how closely are you working with state insurance regulators? >> my answer would be that we have acquired expertise.

we have hired individuals who have experienced in the insurance industry and are trying to build our expertise there. we consult closely with the neic and state insurance regulators and the federal insurance office. we are gaining insurance because we are now in our fourth annual supervision cycle of savings and loan holding companies, many of which have significant insurance activities. we areseveral insurance companies are under our supervision as well. we are taking the time in doing the work that is necessary -- stephanie: you are listening to janet yellen speak. we will have more on her

testimony when we return. time to take a quick break. i will be back with a bloomberg tv all-star team. stay with us. you're watching a special edition of "market makers." ♪

stephanie: welcome back. we will take you back to janet yellen's testimony. she is responding to questions from senator tim scott. >> certainly very different scenarios between the fed and banks. $4.5 trillion in the way that you wind it down would reverberate throughout the economy in a way that no other financial organization would have impact. the path of fred is incredibly important -- the path for it is incredibly important. >> one of our plans is that we

want to wind down our balance sheets in an orderly, gradual, and predictable way. we have decided to use as our main tool of policy when the time comes for normalization something that is much more familiar both to us and to markets and that is variations in short-term interest rates. of course an alternative to that would be to say when the time comes to say we want to tighten monetary policy, we could begin to sell assets. that would be another way of going about doing business. we have more experience and markets have much more experience with variations in short-term rates. we want to proceed in that way that is familiar to us, familiar to market participants, and the public and to let our balance

sheet play a passive role to gradually diminish in size mainly through ending reinvestment of ensuring principal. >> thank you. >> senator warner. >> thank you. we're coming down to the home stretch your. appreciate all your good work in this incredibly important balance down this path of unwinding. i like many of my colleagues share with an inflation of such a low rate that getting the timing right is important. one thing we talked about is the status of the u.s. economy. i want to raise three quick points. one -- after the january meetings, one of the readouts on the items you mentioned were international developments. obviously disruption in europe

with the ongoing struggles with greece and china's slowing economy how will these international developments affect the fed's decision on monetary policy? >> there are a broad range of international developments that we monitor and they do affect the performance of the u.s. economy and factor both into our economic forecast and our assessment of risks. growth in europe has been very slow. growth in china is slowing. the huge decline we have seen in oil prices has had repercussions all over the globe. in some areas very positive in another areas negative -- very positive and in other areas negative.

the attempts of many central banks to add monitoring policy accommodation is pushing down longer run interest rates in many parts of the world. that is spilling over to the united states. there are many channels through which these global development affect the u.s. outlook in ways both positive and negative. all in all, factoring all those things both positive and negative stemming from global developments, we still think that the risks for the u.s. outlook is nearly are nearly balanced. we have grown in domestic

spending in demand by consumers and businesses. the recovery looks to be on solid ground. we just mentioned we had a strong growth in the second half of the year. looking forward and analyzing the factors likely to impact domestic spending, we are saying perhaps not as strong as we just had. nevertheless, above trend growth. that factors into account all the global consideration. >> these international factors will affect your decision. i want to associate my comments with senator corker's comments that i would like to make sure we deal with currency manipulation. it could appear as monetary policy to another. as we have seen in japan and europe moved to more monetary

easing, speak to that for a moment and let me get the last 30 seconds at the end if you could. >> i think we should be on guard against currency manipulation. the g7 have agreed. our administration in dealing with foreign countries really tries to crack down on currency manipulation. nevertheless, it is a certain principle agreed in the g7 that monetary policy oriented to domestic goals like price stability or price stability and maximum employment, this is a valid use of a domestic tool for domestic purpose. it is true the use of that tool can have repercussions on

exchange rates. i really think it is not right to call the currency manipulation and to put in the same bucket as interventions and exchange markets that are geared to changing the competitive landscape to the advantage of a country. >> mr. chairman, i want to make the point that one of the things that has been absent from this discussion today has been our work and we need to address our own fiscal policies. i was up late point out that because of the extraordinary remittances from the fed's expanded balance sheet, we have seen north of $420 billion in net additional revenue that has diminished our deficit. that is not something that can be projected onto the future. as we talk about the times of

rising interest rates and trying to get back to normalize, a 100 point basis increase as $120 billion a year on debt service. projections at this point will show debt service with our current debt will exceed total defense spending or total domestic discretionary spending in 10 years and that is not a good business plan for our country. >> that is true. >> thank you, mr. chairman. >> thank you for being here. wall street banks can improve handsomely and that is why any leak of any confidential information from the fed results in serious penalties for the people who are responsible. apparently, there have been no consequences for the most recently leak.

according to multiple reports someone was put in charge of a leak from a september 2012 meeting of the federal open market committee. nearly 2.5 years later, the results of this investigation have not been made public and no action has been taken. on february 5 congressman cummings and i sent a letter to mr. alvarez requesting a briefing from him in advance of your appearance today. so far, we have not received one. can you assure us that the congressman and i will get a briefing soon? >> if i might say by way of background -- >> i just need a yes or no. i just want a briefing after two years and there has not been any briefing. >> we are trying to work on your staff on a process. >> i will take that as a yes. >> yes. >> thank you.

as you know, this past december house republicans successfully blew a hole in got frank protections. that reveal which was written by citigroup lobbyists will allow the biggest banks in the country to continue to receive taxpayer protection for some of their riskiest derivatives and swaps. a month before the repeal, mr. alvarez spoke at a conference at the american bar association, an organization that includes many lawyers who represent the banks that are affected by the fed's enforcement of dodd-frank. mr. alvarez openly resized the swaps push out rule saying you could tell it was written at 2:30 in the morning and so it needs to be i think revisited to make sense of it.

to sir oliver is also criticized the new rules dodd-frank put in place to address conflicts of interest at credit agencies. said restrictions on the agencies did not work and it doesn't work and it is more constraining than i think is helpful. let me start by asking, does mr. alvarez's criticism of these two rules reflect your view or the view of the federal board of governors? >> let me just say that over the years we have had feedback that we have given on various aspects of dodd-frank. >> i appreciate that but the question i'm asking now is that these are specific criticisms he has made of the dark frank -- the dodd-frank rules. to his criticisms reflect your criticisms or the criticisms of

the federal board? >> i personally and the board consider dodd-frank to be a very important piece of legislation that has provided a roadmap for us to put in place regulation. >> i appreciate that madam chairman but i need a yes or no here. it is criticisms reflect your criticisms? >> i am certainly not seeking in any way to alter dodd-frank at this time. it is framework -- >> let me ask it differently. do you think it is appropriate that mr. alvarez took a public up position that is not reflect the public position of the fed board especially before a board that has a direct interest in how the fed enforces its rules? >> i think the fed's position and my position is that we are able to work very constructively

within the framework of dodd-frank to tailor rules that are appropriate for the institutions we supervise and we are not seeking to change. >> i appreciate that. we know that the fed's staff plays a critical role in shaping dodd-frank rules and enforcing them. in the case of the swaps push out, congress passed a law in 2010 but the fed and occ delayed the effective date of the rule until 2016, giving citigroup and other big banks time to the rule repealed before everett went into effect. did mr. alvarez provide input into the fed's decision to delay the effective date of the push out rule? >> i don't know. where usually have phase ins for

competent roles that require adjustments by financial firms. this has been true of all of the dodd-frank rules we have put into effect. >> i think this might be worth looking into. the fed is our first line of defense against another financial crisis. the fed's general counsel or anyone at the fed's staff should not be picking and choosing which rules to enforce based on their personal views. i urge you to carefully review this issue and ss whether the -- and assess whether the leadership staff is on the same page as the federal reserve board. thank you, mr. chairman. >> mr. chairman, thank you. always last. hopefully not least. chair yellen, i want to thank you for your patience and your responsiveness. i was to tempted to ask her

definition of patients. i won't do that today. instead, i will look to the future. senator warner outlined one of the concerns i have. we always seem to be fighting the last economic war in the united states congress. you are a very astute and very respected student of the american economy. is what you do every day. i will give you a chance -- you have received a lot of advice from this panel. i will give you a chance to give us some advice. when you look at leading and lagging indicators, especially leading indicators, what troubles you and what keeps you awake at night about the american economy in the next 10 to 15 years? what advice would you give to the congress to address those

concerns you have looking right now at those indicators? >> i said on a number of occasions that the rise we have seen in inequality in the united states is a great concern to me. >> we discussed this last time you were here. you offer no solutions to that problem. you might recall. >> i think there are a variety of different things congress could consider and policy measures that might be appropriate. this really is a domain for congress to consider. that is one of the concerns i have. >> snow advice on the income tax credit for tax rates? >> i will not weigh in on things that are really in your domain to evaluate. i think that is important. i would say something also when congress is' domain is with longer issues of the federal

budget, i think congress has made painful decisions that have now really stabilized and brought down the deficit very substantially for a number of years that the gdp ratio. eventually, the gdp will begin to rise and deficits will increase again as the population ages and medicare and medicaid and social security get to be a larger share of gdp under current programs. there are a lot of ways in which these are problems we have known about for a long time. i also worry that if we were to again be hit by an adverse shock, that there is not much scope to use fiscal policy. it was used in the early years after the financial crisis.

we ran large deficits. in the course of doing that, the gdp ratio rose. were another negative shock to come along, it is questionable how much scope we would now have to put in place even on a temporary multi-your basis expansionary fiscal policy. is important to deal with these issues and congress to do so. >> your concern about scope does not lead you to believe that -- stephanie: we are having a technical problem. i does one hear from producers. we will take a break and i will talk to my two partners to see what they think. sounds like we will take a break because our producers are worried that didn't elizabeth warren sound like she was -- it means like we have to

take a commercial. we will be back with more special coverage of janet yellen. will be back. ♪

stephanie: welcome back. you are watching bloomberg television. we have been listening and watching janet yellen's hearing

before the senate banking committee. peter cook is live on capitol hill. next to me, michael mckee and joe weisenthal are watching from new york city. peter, let us start with you. i personally believe one certain special lady has been the toughest on janet yellen. what do you think? >> i would imagine you're talking about senator elizabeth warren of massachusetts who in her normal aggressive way has been pressing the chair about an internal fed issue in the roles of the general counsel. it is something right in her wheelhouse. it is not something that will move the markets all that much. she has been aggressive. this is something we talked about beforehand and getting her

to weigh in. she doesn't necessarily support changes to the way the fed is structured. she will find there are some republicans and democrats on the hill who do not feel that way. the news we are hearing so far has to be on the guidance or belief that the changes and guidance that she set for that the fed will be raising rates soon. you have to listen to it meeting by meeting. that is how the fed will decide this going forward. take a listen to how careful she was stressing that the data will decide this going forward. >> the modification of the forward guidance should not be read as indicating that the committee will necessarily increase the target range and a couple of meetings. instead, the modification should be understood as reflecting the committee's judgment that conditions have improved to the point where it will soon be at

the case that the change in the target range could be warranted at any meeting. stephanie: peter, i want to turn to michael and joseph. what do you guys think? >> one of the more interesting changes was with senator chuck schumer. he asked if you see any sign of the inflation moving back to 2% is coming true? she said i don't see any evidence of of that right now but she gave a monetary policy clinic in noting that you are supposed to be forward-looking. they have to make projections and where the economy is going to be. policy works with a lag. that is why they think they will have to move sooner. he didn't like that. he said you need to exercise caution. that was a window into the way the fed is thinking. she was asked what keeps her up at nigh and she said that the balance sheet is so highly government has a deficit that if

we have another recession, it will be hard for the fiscal and monetary policy authorities to respond. stephanie: because they don't have any tools left? >> they have tools but not the big tools that they had. with the balance sheet so high, widow have as much scope for qe to have an effect. congress will not be able to do anything to stimulate the economy fiscally if they are worried about the deficit and long-term projections. >> i was kind of on that senator questioned about the second half. she asked yellen what keeps her up and i and one of the things she said was inequality but then she declined to offer any suggestion about what she would do about it. it interesting because i think in the past, chairs have been comfortable veering out of the land and offering their take on policy.

she was like let me do my job and you guys you do your job. stephanie: that you feel like she has to be that way right now? we are putting so much weight on every single thing she says. she has no up upside in going out of her lane. >>twice i agree, that's smart politics. she knows that she runs the risk at -- >> i agree, that's smart politics. she knows she runs the risk of making political enemies, no need to make them when he doesn't need -- when she doesn't need to. >> this goes back to alan greenspan. he got badly burned by saying that we would have high surpluses. no chairman wants to now give them aggressive advice. ben bernanke came out and said that you should do something to help the economy along and to not let the contractions that we were seeing in sequestration go forward, but he did not say what is typically.