from bloomberg world headquarters in the york, good morning, here is what we are watching at this hour. we are watching the fed right now, ready for left off. minutes from now, janet yellen will testify before congress as the fed appears to be on the verge of raising interest rates for the first time in almost a decade. draghir it takes, mario extending the program by six months. he says the ecb is willing to do more if the economy needs it. labor market tightening up as employers hold onto workers because they are so tough to find. you will get the jobs report tomorrow. we have some breaking economic news. a slew of economic numbers. goods orders, factory output as

well as the isn services index. market desk where julie hyman has all these. julie: we recently got disappointing news on the manufacturing, but disappointing on the nonmanufacturing front as well. service industries expanding at the slowest pace in six months. we saw the biggest month over reading ofase, a 55.9 for the month, that is worse than estimated in october. again, that's isn non-infection composite, 55 point point -- 50 59, 58 is what economists had estimated. factory orders, excluding transportation in line with estimates, a gain of 2/10 of 1%, then good orders, this is the final reading. we have to limit our numbers and it looks like a reading of 2.9%, an increase of 29% next

there, up half of 1% and we have a capital goods orders numbers as well if you exclude aircraft, you get a decline of nondefense if you exclude nondefense as well, you get a decline of a half of 1%. the number that stands out is that services number coming in worse than estimated. below0 making expectation. is, istral question there anything in the economic data, either today or tomorrow that would dissuade them from their path? betty: it would have to be a drastically different number to get people to think the fed may not go ahead. this morning and it disappointed investors, judging by the reaction. duration ofding the the -- but not expanding the size of the program, which seems to be a disappointment to

investors, if you look at the major averages in the u.s., we did not see much reaction to that, people looking ahead to janet yellen's testimony i had -- testimony, today. we are definitely seeing action when it comes to european assets. if you look at the euro for example, we saw that big spike. lengthld think with the of quantitative using, you would see the euro go down, but because it was relative to expectations, perhaps as ambitious as before looking for, we saw a big spike. we've also been watching the bond markets over in europe. , you get a mapwb of global bond markets and here is a slice of it. price seeing a decline in , increase in yield across the board. if you focus in on germany, in particular, here you have the 10 year in germany and similar

action to what we saw in the euro, that spike in yield just as we saw a spike in the euro. in the u.s., we are not seeing -- we are seeing trajectory the same, just the magnitude was not quite as much. they: the direction is same, but not that drastic reaction that we saw in europe. thank you so much. let's check in now on the bloomberg first word news. bonnie has more from the news desk. chair: federal reserve janet yellen testifying on capitol hill this morning. that is her speaking. she has indicated that the u.s. economy is on track for an interest rate hike this month. she also says the fed needs to review incoming data before making a final decision. we will hear more from the fed when she begins speaking. the head of europe's central bank says he thinks it is -- the

program has been effective. plans to boost inflation and stabilize the confident's economic recovery. the bank is extending and expanding its bond buying program. betty: a warning from secretary of state john kerry who says islamic state cannot be defeated without troops on the ground. picking in belgrade, he called for a political solution that would allow all nations to fight the militants together. in san bernardino, police are trying to determine the motive for the mass murders. in man and a woman dressed in military style gear killed or teen and wounded 17. the suspects were killed several hours later in a shootout with police. man attendeds the the celebration at the center, left, then came back and opened fire. the attorney general discussed the case moments ago at the white house. >> whatever the result of this investigation, we do not know much, but violence like this has

no place in this country and in this nation. julie: authorities have not ruled out terrorism as the motive. federal authorities have been dispatched. police in riot geared toward down a camp outside of minneapolis. the camp was set up three weeks ago by people protesting the killing of a black man by officers. about 50 people were told to leave and their gear was hauled off by city dump trucks. a police spokeswoman says there were a few arrests. that is a look at the first word news. you can get more on these and other breaking news 24 hours a day at the -- at bloomberg.com. to our big story of the day, or another one, what could be the start of the great divergence. janet yellen getting ready to do -- testify before the congressional joint economic committee.

she is making her opening remarks before janet yellen testifies. investors are waiting to hear what she might say about a rate hike later this month. we willa few weeks, -- bring you her testimony as soon as she begins to speak. the european central bank cut its key deposit rate two -3/10 of 1%. that was in line with forecasts. the ecb president outlined additional steps that he is taking to stimulate the eurozone. >> we decide to extend the asset purchase program. in monthly purchase of 60 billion euros under the asset purchase program are now intended to run until the end of march 2017 or beyond, if necessary. in any case, until the governing council sees a sustained adjustment in the path of

inflation, consistent with the aim of achieving inflation rates below but close to 2% over the medium-term. betty: we have team coverage of these major stories. we are live in berlin. is the bloomberg economics editor and joining us from newport beach is pimco managing director yet from cells. -- you come cells. tell us more about these moves because i think investors. ecb was going to overdeliver. maybe they did not quite get it. thisere was a callout morning from goldman sachs that the euro would be about 103 at the end of the day. happen in part because mario draghi appears to have disappointed. what he said is that he had a pretty substantial majority for him on the increase and the duration of time. he did not actually do anything

on the amount of assets they are going to purchase. that is what is leading some of this market pessimism and is why we have this selloff in german. you've seen the dollar almost get up to 1.07. when my colleague in frankfurt asked mr. draghi if you still had confidence on the levers of -- if he still had confidence on the levers of -- here is how he responded. was have theyn been effective enough for us to be confident that we would reach our objectives about inflation within the horizon? we gave ourselves was not enough, so we have to do more. let me say this clearly. we are doing more because it

works, not because it fails. we want to consolidate something that has been a success. >> we don't know how much opposition there was on the 25 member board to increasing the quantitative easing above the 60 billion. the german press -- there is a lot of criticism on the way draghi talks about the economy pessimistically. the german view is actually much stronger and of the low inflation can be attributed to the low price and oil. look at core inflation and the euro zone economy if you look at it through those classes, it is not that negative. that is the german view, and i'm not sure if that is -- had any sway or prevented asset purchases from getting beyond the 60 million. betty: hang on for a moment, i want to get mike's take on this. what the thing happened? -- what do you think happened? banking countries represented

on the council, they decided they cannot vote at the same time. they gone to a rotation of presidents. the germans voted this time at some of draghi's natural allies the crowd didnd not want to expand and push back against mario draghi doing more. he said today, it was not a unanimous decision. that may have been one of the things that happened because it is rare for draghi to let the market get this far ahead of itself. betty: let's bring you in on this. give me the sense of what this will -- the right move by the ecb, even if the reaction at this right seems to be one of at this point -- seems to be one of disappointment? >> monetary policy is 98% coming

occasion and only 2% action. on the action, i would give the ecb a b+. they refused to say that we are at the lower bound. purchases extend the beyond march 2017, he said that, so it is open-ended. this is not bad action, but the communication counts a lot. if you take a step back and look at where we were before the october press conference, the euro, despite today's bounds, is still figures lower than it was in october. anyway, he has achieved a lower euro and i think he will get and support for the dollar the decline of the euro if the fed hikes rates later this month. betty: it does not really change that trajectory, that divergence between the dollar and the euro, between the bonds market in europe and here in the u.s.

what is next, what will we hear from the ecb going forward? >> and made out of change the diversions story, but it may have changed the parity story. expect the ecb will have a series of meetings and we will be looking forward to e -- to what they will have to say in january. of meeting is not until early february. they have six week meetings. we will see whether or not they take stock on a new round of inflation figures. one thing everybody will be looking at carefully, especially in germany for the recovery has been based on consumer spending, somewhat of an oddity, is how season?s the christmas once we get the christmas data, we will have a sense of whether or not there is growing support or whether or not the economy could potentially take off. then we will get year and a data and had this whole discussion

again and get very excited. much, hansk you so nichols live from berlin. let's turn to janet yellen and her testimony. jobs, confident about inflation goals are attainable, making no promise of a december rate hike. there is nothing yet in her testimony that is different, correct me if i'm wrong, from what we have heard before. >> it is the same as the speech she gave yesterday to the washington economic club. there is a danger in waiting too ,ong for rates to go higher setting congress of the same way she set the markets up yesterday. she has to explain to members of congress who do not want the fund to move, why they are doing that. she will get some questions fedt that politics -- about politics.

how the you think the fed and chair yellen have been communicating? >> i think she has been pretty clear. it is likely that rates go up in december, but the much more important message from the fed and janet yellen and her colleagues is that the rate hike path would be very different from furious cap -- from previous paths. along, janet yellen is now beginning her testimony, so let's listen in. >> since the great recession, the unemployment rate, which peaked at 10% in october 2009, declined to 5% in october of this year. at that point, the in employment rate is at the median of participants recent most estimates of its normal level.

the economy has created about 13 million jobs since the low point in early 2010 and total nonfarm payrolls are now almost four and a half million higher just prior to the recession. after a couple of months a relatively moderate payroll -- modest payroll growth, employers estimated 271,000 jobs in october. brought thee average monthly gains in june to about 195,000, close to the monthly pays of around 210,000 in the first half of the year and still sufficient to be consistent with continued improvement in the labor market. at the same time that the labor market has improved, u.s. economic output is measured by inflation adjusted gross domestic product or real gdp, has increased to a moderate pace

during the expansion. over the first three quarters of this year, real gdp is currently estimated to have advanced at an annual rate of two and a quarter percent, close to its average pace for the past five years. many economic forecasters expect growth along those same lines -- lines in the fourth quarter. growth this year has been held down by week -- week net exports which has supplied -- subtracted more than half a percentage point from the annual rate of real gdp growth for the past three quarters. foreign economic growth has slowed, damping increases in u.s. exports, and the u.s. dollar has appreciated scantily since the middle of last year, making our exports more expensive and imported goods cheaper. privateast, total real

domestic final purchases, which includes household spending, business fixed investment, and residential investment, currently represents about 85% of aggregate spending. it has increased at an annual rate of 3% this year, significantly faster than real gdp. household spending growth has been solid in 2015 with purchases of new motor vehicles especially strong. job growth has bolstered household income and lower energy prices have left consumers with more to spend on other goods and services. increases in home values and stock market prices in recent years, along with reductions in debt have pushed up the net worth of households, which also supports consumer spending. finally, interest rates for inrowers remain low, due

part to the fomc's accommodative monetary policy. these low rates appear to have been especially relevant for consumers considering the purchase of durable goods. other components of private domestic final purchases, including residential and business investments, and also advanced this year. gains in real residential investment spending has been faster this year than last year, although the level of new residential construction still remains fairly low. outside of the drilling and mining sector, low oil prices have led to substantial price cuts. business investment spending has posted moderate gains. turning to inflation, it continues to run below the fomc's longer objective of 2%.

overall, consumer price inflation is measured by the change in the price index for personal consumption expenditures, with only one quarter percent of the 12 month ending in october. awever, this number reflects sharp fall in crude oil prices since the summer of 2014. because food and energy prices are volatile, it is often helpful to look at inflation excluding those two categories, known as core inflation, which is typically a better indicator thanture overall inflation recent readings of headline inflation. , which ran at 1.25% over the past 12 months, ending in october, is also well , partlye 2% objective reflecting the appreciation of the u.s. dollar, which has pushed down the dollar of imported goods, placing temporary downward pressure on

inflation. even after taking a count of this effect, inflation has been running somewhat below our objective. let me turn to where i see the economy is likely headed over the next several years. i anticipate continued economic thath at a moderate pace will be sufficient to generate additionally -- additional increases in employment and they rise in inflation to our 2% objective. although the economic out what is always -- outlook is always uncertain, i look for continued activity as very close to balanced. regarding u.s. inflation, i anticipate that the drag due to the large decline in prices for crude oil and imports over the past year and a half will , with lessxt year talent pressure on inflation

from these factors, and some upward pressure from the further tightening in u.s. labor and product markets. i expect inflation to move up to the fomc's objective over the next few years. play ann expectations important role in the inflation process, and my forecast of a return to our 2% objective over the medium-term relies on the judgment that longer-term inflation objective expectations remain anchored. let me turn to the applications of the economic outlook from military policy. in the policy statement issued by the october meeting, the fomc reaffirmed its judgment that it would be appropriate to increase the target range for the federal funds rate when we had seen some further improvement in the labor market and were reasonably confident that inflation that

would -- would move back to the committees 2% objective over the medium-term. that initial rate increase would reflect the committee's judgment based on a range of indicators that the economy would continue to grow at a pace sufficient to generate further labor market improvement and a return of , even following the reduction in policy accommodation. as i've already noted, currently judge that u.s. economic growth is likely to be sufficient over the next year or two to result in further improvement in the labor market. ongoing gains in the labor market coupled with my judgment that long-term inflationary remain reasonably anchored, serve to bolster my confidence in a return of inflation to 2% as the distant for --

recognizeparticipants that the future course of the economy is uncertain and we take account of both the upside and downside risks around our projections when judging the appropriate stance of monetary policy. in particular, recent monetary policy decisions have reflected our recognition with a but -- that with a federal funds rate near zero, we can respond readily to inflation, economic growth and employment. thatasymmetry suggests it's appropriate to be more cautious in raising our target to the federal funds rate than would be the case if short-term nominal interest rates were appreciably above zero. reflecting these concerns, we have maintained our current policy stance, even as the labor

market has improved appreciably. however, we must also take into account the well-documented lags and the effect of monetary policy. for the fomc to delay the start of policy normalization for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently pushed the economy into a recession. moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking, and thus undermine financial stability. unbalanced economic and financial information received since our october meeting has been consistent with our

expectation of continued improvement in the lake market -- in the labor market. continued improvement in the labor market helps strengthen our confidence that inflation will move back to the 2% objective over the medium-term. that said, between today and the fomc meeting, we will receive data on the economic outlook. the data includes a range of indicators regarding the labor market, inflation, and economic activity. when my colleagues and i meet, we will assess all the available data and their implications for the economic outlook in making our policy decision. as you know, there has been considerable focus on the first increase in the federal funds rate after nearly seven years in which that rate was at its effective lower band we have tried to be as clear as possible, but that --

even after the initial increase in the federal funds rate, monetary policy will remain accommodative. it bears emphasizing that what matters the economic outlook are expectations concerning the path of the federal funds rate over time. it is those expectations that affect financial conditions and thereby influence spending and investment decisions. in this regard, the committee anticipates that even after inflation,and economic conditions may, for some time, warrant keeping the target federal funds rate below levels the committee has used as normal a new long run. closing, let me see the economy has come a long way toward the fomc objective of maximum employment and price

stability. when the committee begins to normalize a stance of policy, doing so will be a testament to how far our economy has come in recovering on the effects of the financial crisis and the great recession. in that sense, it is a day that i expect we are all looking forward to. thank you and let me stop there and i would be pleased to take your questions. >> it is a day we have long waited for and hopefully your positive remarks will bear that rightd send us on the trend, a positive trend. as we had discussed earlier in private, i want to raise this in public. trends are moving toward positive territory, the eu trend seems to be moving into negativeterritory with overnight interest and the

positive rates, also -- and deposit rates, and also ways to stimulate the economy. they play a major role in the world economy. we see slowdowns in china and the significant problems in brazil and throughout many emerging markets. how do you is, balance those two issues out relative to their impact on each take and how does the fomc that into consideration in terms of their decision-making? chair yellen: we have seen relatively weak growth in the global economy with different parts of the global economy faring differently, but relatively weak growth. the u.s. has enjoyed stronger growth in labor market performance. shows thegrowth

demand for u.s. exports and it is one factor that has been depressing u.s. net exports. in addition, that difference in strength between the global economy and the u.s. and reflected also in different expectations about the path of monetary policy, as you noted, stimulus anddded has taken additional actions today to provide further stimulus while there is an expectation that the fomc is coming closer to raising rates. that difference in expectations about monetary policy reflecting different underlying strengths has led over the last year and a half to a substantial appreciation of the dollar.

the combination of weak foreign growth and a stronger dollar has both of those things -- they have depressed our export growth and increased import because imports are cheaper. that is a drag on the u.s. economy, but again, we have to remember that consumer spending of business investment, residential investment account for 85%. solidic spending is on a course. the combination of solid domestic spending coupled with a drag from a -- a drag from abroad that has been operative and will continue to be operative, that has led and will continue to lead to growth that is somewhat above trend and on a continuing path of labor market improvement.

of course, it is relevant to our decisions and the strength of the dollar is one factor that means that monetary policy for the u.s. is more likely to follow a gradual path. >> we also have global uncertainty relative to the national security and the world security. who seem to be entering a time where violence in one form or another, whether domestic or , terroristal oriented or connected to other means, what -- you can lay awake at night thinking of scenarios where coordinated terrorist attacks or an acceleration of the kind of violence we are seeing could have a negative effect that i think would have a

negative effect on the economy relative to people's fear of spending going out, enjoying sports, entertainment, other types. going to malls and shopping, etc. how does that factor into the fed's thinking regarding its impact on the economy? chair yellen: those risks are ones we watch very carefully and i would agree that it does have the potential to have a significant economic effect. i would not say i see a significant effect at this point. certainly in the aftermath of the financial crisis, we have seen cautious behavior on the part of households and firms. i think there are many different factors that contribute to that cautious behavior. the crisis itself, the slower growth we have seen, many businesses talk about regulatory

uncertainty. geopoliticalgeo -- risk is a further factor that is causing that kind of cautiousnes . >> my time has expired. call on our ranking member. >> thank you so much. chair yellen, in the speech you gave yesterday at the economic talk and washington, you said many fomc participants indicated in september that they anticipated, in light of their economic forecast at the time, that it would be appropriate to raise the target range for the federal funds rate by the end of the year. trendse the longer-term that you give -- that would give you the most pause when deciding

the timing of liftoff? for example, how would you assess tomorrow's job numbers in long-termt of its trends? chair yellen: the two things we focus on most in our evaluation are economic developments that affect the labor market and also those that affect inflation because our congressional change calls for us to maximum employment and price stability. therefore, in my testimony, i seed to indicate that i do -- we will bewns looking at it carefully -- tomorrow's jobs report. what we are looking to see his a

continuing solid trend of job creation that, while we are close to full employment or maximum employment, at least -- part-time in voluntary employment remains to hide -- too high. nevertheless, i think it is, to some extent, depressed the fact that the job market has been stronger. we want to see the economy on a path where it will continue to erode that labor market slack over time. we will be looking very carefully at that. -- anyot overweight particular number. we need to look at underlying trends in the data.

inflation is also clearly very important. we articulated several years ago that the committee has a 2% inflation objective. inflation has been running significantly below that for some time. want to seeon't persistent inflation about our objective, we also don't want the persistent inflation below our objective. i think much of it is transitory, but we will be looking at data to see if our expectations will move up over time. those are key pieces. >> does go weeks ago, the legislation that would interfere with the fed operations in numerous ways. you wrote a sharply worded

letter to congressional leadership expressing your and ition to the bill request in his consent to place that letter in the record. >> without objection. >> you said that it would severely damage the u.s. economy for it to become law. could you describe why you believe that this legislation would be so damaging to the independence of the fed? chair yellen: briefly, this legislation would force the fed to set monetary policy according to a simple rule, something called the taylor rule or a variant of it. short-termme interest rates to only two economic variables, the current level of inflation and the current level of output. while such rules are useful as reference points in thinking about monetary policy, to set

the federal funds rate in that way without deeper analysis of what is appropriate to the economy would be extremely damaging. at this point, that rule would call for a federal funds rate mightver 2% and while we be close to the point at which we should be raising it above zero, i think if we were to follow that rule, it would be damaging. more important, i want to say that this is an approach to monetary policy that is severely threatening to the independence of the federal reserve in making decisions free of short-term political pressures in the best long-run interest of the economy. it would subject us to regular gao audits of our monetary waycy decision-making in a that congress has decided repeatedly and over many years

it is wise to insulate the operational decisions of the federal reserve from those short-term political pressures. every -- almost all countries around the world have independent central banks. they recognize it leads to stronger economic performance and i believe this would be a's interfering with the independence of the federal reserve. >> thank you, my time has expired. thank you very much. thank you for being here chair yellen. my first question is about income inequality. we've done studies on this. i know you have written

extensively on trends. what do you see as the impact and when you think could be done to reverse the trend? -- and what the you think could be done to reverse the trend? a veryellen: there is disturbing trend toward rising income inequality in this country. economists have looked carefully at many different factors brendan: that might be responsible for it. these are factors that are not recent. we have been in operation since the early or mid 80's. technological change has been biased in the direction of increasing the demand for skilled labor in diminishing -- and -- diminishing the demand for less skilled labor, particularly people who engage in rather routine jobs that can be computerized.

technical change and globalization also appears to have played a role in reducing the number of jobs, especially in middle income jobs, that can omitted.rced or there are other factors that people have studied. let me make clear that these trends are not ones the federal reserve can address. the best contribution we can make is to try to achieve our goals with maximum employment and job it's -- in job markets were people who want to work can you -- can find jobs using their skills. there are many factors to consider, really -- clearly the return to education, the gap in low skilled people is very high. policies that enable individuals to get appropriate education and

training, i think those are important. there are many things that congress could do that would make a positive and debt -- difference. >> thank you, i agree. here, we talked about community banks and we are losing a number of them, -- olidations any ideas on what we should be doing there, because i'm sure you agree we need to have strong competition in the banking market. that smalln: i think community banks really are suffering from regulatory

overload. i think if caboose us to focus carefully on what we can do to try to diminish those burdens. let me say that we recognize how high the burdens are in community banks and for our own part, we are heavily focused on trying to tailor our regulations so that it is appropriate and we are looking carefully for ways that we can make life better for community banks, especially those that are well-managed and have adequate capital. we have raised the threshold under our small bank holding company policy so that now banks under $1 million are not subject to holding companies to our capital requirements. we are trying to do more of our supervisory work off-site and to

target our exams toward risk areas where, engage with other agencies in the gripper pop -- process in which we are holding hearings and trying to identify things that we can do to reduce regulatory burden. we will be reporting to congress and there will be a number of things that will come out of that review that will enable us to take steps that will be helpful. i do recognize their mark in -- significant burdens and i think it behooves us to address them. >> i will does to other questions on the record. one is an issue that is getting a lot of attention and your views on if the $50 billion threshold can be modified. the other issue is just your views on -- i'm a strong supporter of the infrastructure bill we are about to vote on, but i would imagine you might have concerns on how some of

this was paid for. i wish we had more time, maybe one of my colleagues can ask that question. i will put that on the record, so thank you. >> i will exercise a little bit of discretion here and allow her to answer this question. i know that is on a number of our minds here. we are about to pass a highway bill which is long needed, but part of the pay for his coming from your bank, at the fed. plenty ofs there is profits lashing that is going to come back to the treasury, so why do we take some of it as an early withdrawal, do you want to respond to that? chair yellen: i appreciate for

the opportunity for dude -- to do that. you have bill as i understand it, it will take a large share of our operating surplus is part of the federal reserve's capital. it will not allow us to build it up. this concerns me. financing federal fiscal spending by tapping the resources of the federal reserve sets a bad precedent and infringes on the independence of the central bank. it begins fiscal discipline and i would point out that reproducing the federal reserve's capital surplus does not actually create any new money for the federal government. if you don't mind my quoting what cbo wrote in scoring, this important to note that the transfer of surplus funds from the federal reserve to the treasury has no import for the fiscal status of the

federal government. fall the federal budget accounting does not recognize additions to the federal reserve's surplus account, such additions have the same effect as if they had instead been paid to the treasury and were counted as revenue. the transfer of those funds would have no effect on national savings, economic growth or income, so in effect, by taking our surplus, our holdings of u.s. treasury securities declines. the interest we would turn on those securities would be money that would be transferred every year for many years to come back to the federal coffers. by taking the surplus now, you are diminishing the stream of revenue into the federal budget over many years. a --tral bank differs from

and that the role of capital is different. almost all central banks hold some central -- some capital in -- i believe it enhances the credibility and confidence in the central bank. on those grounds as well, our policy, we don't have a lot of capital, but we have long had capital and surplus that i think creates confidence in our ability to manage missouri policy -- to manage monetary policy. >> thank you. that question is so relevant right now, there is a narrative that this is easy money. i think you've given us a pretty good response to that question. >> we appreciate it. >> thank you for being here.

of the concerns of the income inequality, you have written about the problem of those who are involuntarily working part-time. we have also looked at that. noted that this effect is on the lowest quintile. these are the five quintiles of workers. those recession, most have returned in terms of the average a week,f hours week -- except the lowest quintile which is still lagging way behind. i think this is your data. cbo did a is that the study pointing out the marginal tax rate that the affordable care act essentially puts a marginal tax rate upon the

employer providing employment. if someone is working full-time, you have to pay more to get them insurance and that affects the lowest quintile of workers. would you agree? chair yellen: i take it the data you presented is interesting. i'm not aware we have tried to monitor ourselves, but others have looked at the impact of your portable care act. -- the impact of the affordable care act. i'm not aware of this effect we are talking about. monitoring going forward, it is important to note that the degree of involuntary part-time employment has declined quite a lot as the economy -- >> not in the lowest quintile, is that a fair statement? that data shows it persists in

that lowest quintile. chair yellen: it persists, but it is diminished. high.disproportionately >> let me ask. fromlooking at something the letter and the galley from suggests that rising costs for health benefits may prompt employers to shift towards part-time work to hold labor costs down, possibly intensified by the aci requirement that medium-sized businesses provide health benefits, etc. intuitively, if because of health benefits is added to the wages paid as total compensation, the marginal effect in increasing the cost for health benefits with a lower quintile is going to be greater than the marginal effect on the upper quintile. i'm curious that is much as you

have looked at this, that is not something you have noted. haven't,ve on if you but would appreciate any further thoughts you have. chair yellen: i have not aware of any other estimates of the size of it. most significant size employers have covered and continue to cover their workers. there is been a lot of anecdotal discretion of this. i have not seen this study that shows it is large. >> let me return to something you said earlier -- you implied that the dollar will weaken over the coming year because you said that the price of oil -- you implied would begin to rise. chair yellen: i did not mean to make a forecast, i did not make one. inflationaryf pressure, you thought the downward effect upon inflation the be eased because of return to the norm -- chair yellen: when the dollar

appreciates, while it's moving out, that tends to push import prices down, which cuts conflation. if the dollar simply stabilizes at a new higher level, then inflation is no longer held down. simply stabilizing the value of the dollar, stabilizing at a new higher level -- that will finish that affect. >> does that imply that when it plateaus, intuitively, manufacturing is going to be negatively impacted? the strongn: yes, dollar has been one of the factors along with the activity. if the ecb is planning to stimulate, and we are sending signals that we will raise interest rates, it seems like we creatingng -- we are -- where the dollar will continue to strengthen. you and dissipate that plateau

and or that continuing? if it continues, you mentioned how the downward pressure on inflation eases once stabilized, but if they are stimulating and we are racing rates, we might continue to rise. of thatllen: much expectation is already built into the market and into exchange rates. importantly, why the dollar has risen as much as it has. i would forecast -- i would not forecast for the dollar is heading. >> thank you, i yield back. >> i noticed this morning that the euro actually rose based on the decisions made by the ecb, which surprised me. thatps the thinking was they were taking the right to to get the economy to a better position.

i don't know if you want to remark on that, but i thought it was -- i fully expected the dollar to strengthen this morning against the euro, and it did not. chair yellen: just watching a little bit of this morning's events, my understanding was that the market expected some actions that were not forthcoming. >> that is always been the problem with the market, isn't it? >> i want to return to this line of questioning with regard to it first -- infrastructure. i want to go to why you thought that it was about idea to pay for things this way. i think it is very important

that we, in our efforts to pay for things as important as infrastructure -- one of the changes that was made along the way had to do with the exemption of community banks of that sort of structure and at this point, that member banks with assets less than $10 billion will be exempted from the changes in the fed share dividend rate that were included in the highway trust fund bill. community banks in new mexico and across the fed share dividend or its solid return on capital investment and i have been very vocal about how misguided it is to ask small community institutions to finance our nation's .nfrastructure you have any thoughts of what the impact could have been, given your previous comments on the regulatory burden on those in. fusion. has that changed not been made -- has that changed up and made?

chair yellen: obviously there would have been a burden on those institutions. something that would have worried me is that it would affect the incentives of many of those institutions to be members of the fed system. i thought that was something that before one makes a change of that significance, it is wise to think through more fully. >> do you think it would have any impact on their ability to -- on the decision-making in terms of lending to small businesses that are on the margin of their business when -- business plan? chair yellen: that is difficult for me to say, there is a tax in that, but i don't know how it is significant. >> shifting gears a little bit.

rates,g back to interest by potentially raising interest rates, the fed would endorse the idea that the economy is on a stable path toward full recovery. i'm interested in how this potential action may signal improving conditions or job ,reation in states like my own given the fact that new mexico and a number of other states have not experienced the same economic recovery as the country as a whole has. there areen: certainly differences across states and localities in terms of how much the recovery has aided employment in those states. my expectation going forward is that the labor market and the economy will continue -- the labor market will continue to improve and eventually, i think all states will see improvements

as that occurs, but of course, the exact industrial structure of the state, they can matter, but they're probably have been improvements, substantial improvements and i think the labor market will continue to improve over time. issue that ato an number of my colleagues have raised, just generally, when you -- looking at tuition where the fomc is looking at increasing interest rates, the actions of other central banks around the world are in a countervailing direction, how do you overall factor in the actions of those other central picture andhe broad how does that impact your whether orking as to not it is the right time to move

forward? chair yellen: we are trying to assess the overall u.s. economic outlook, but we need to factor in all the different elements to determine that. our success in selling goods to the rest of the world and the strength of our imports, that is an important determinant of the outlook and when we had to version monetary policies globally, it often means that there will be exchange rate a company that we have seen that in the last year and a half and as i have said, the combination of the week growth abroad plus the movement in the dollar has been a factor that has been depressing net exports and that has been a subtraction from growth, i think it will continue to be going forward. that is a negative and something that makes us much more cautious

in terms of raising rates. still, 85% of spending on u.s. goods and services comes from consumers investment spending, housing and very good fundamental reasons, there is greater strength there. together, wet all are still seeing an overall picture of slightly above trend growth, ongoing improvements in the labor market. obviously there are risks there. there are risks that come from the global environment that we have monitored carefully and recognize, but overall i would total, overall, it -- we are in a solid course. >>. thank you -- thank you. >> senator peter's.

>> thank you. pick up a limit bit on some of the comments you made on income inequality in a note the fed does not have the ability to alter that, but certainly you have to respond to that in terms of your policymaking and the effectiveness of how your policy may be, given some significant structural changes that are occurring in the economy as a result of the fact that the best majority of the people in this country have not seen increases in wages. the middle class has been stagnant and it seems to be a disconnect from some of the -- when youe theory have increases in productivity, that productivity translates into higher wage levels, we have not seen that and in fact in recent years, we have seen that productivity has gone up significantly more than wage levels.

if you are looking at forming monetary policy and looking at aggregate demand how you get that demand, income and the economy and wages, you mentioned , so consumers are 80% of it the more money the consumers have, the stronger the economy is, yet it is not growing from wages, then it has to grow from them taking on debt. if we look at the fact that wages have been stagnant and that consumers are starting to deleverage, which is a different trend from what we saw the war, you don't have those engines of growth although in her testimony, you mentioned a 3% increase in consumer spending, but i believe that is down from previous years where we saw three and a half or more in consumer spending per year, which led to higher gdp rose. we are seeing this long-term, ,any year trend of lower wages deleveraging of debt, and the -- going to the very

top of the income ladder and the folks at the very top don't spend as much consumer wise as folks in the middle class. there may be more resources available for investment and other types of uses of that cash , but how do you see this long-term trend of income inequality, how is likely to impact the ability of the fed to be as effective as it may have been in past years using these tools when those things were in balance? chair yellen: that is a great question and you introduced a lot different elements into it. clearly the trends in income and having disposable income for households are one of the most important factors determining consumer spending.

the fact that wages have been pretty stagnant for a number of years. compensation has been growing in the 2.5% range. that is something we have had to take account of in forecasting what the strength of the overall u.s. economy has been and it's integral to our forecast. i guess i would say that job growth has been pretty solid now for a number of years, so disposable income, despite the fact that wage growth has remained at that 2.5% range, there has been a lot of job growth that has added to disposable income. the saving rate moved up at the -- after the financial crisis and it remains in positive territory and has been pretty stable, so consumer spending is

largely being supported -- is not being largely supported by taking on additional debt, it is being supported by income that households are earning. as the economy progresses and the late -- labor market strengthens further, i would expect to see upward pressure on wage growth. interest of hourly compensation and earnings, i think we have seen some welcome hints. weis tentative evidence, don't know if it will last, but at least recent data does suggest some upward movement in wage increases, but over the last couple of years, the spending we have seen has been supported by income growth. plays aty definitely role here and of course, we need to see sufficient wherewithal for households to spend any way that generates forecast of

continuing growth. >> thank you. grateful for your testimony today, your presence and your public service. i have just one question and i will submit a second for the record because the limitations on time that we have today. i --ted to say first that by the numbers you had in the -- i guess the first page of her testimony. we have all heard, but we don't emphasize enough. toty: we have been listening chair janet yellen talking to the economic committee. she has been saying that the economic that the economy is struggling, but it is on a growing path and it is appears

that is enough that it appears that the fed is going to raise the federal interest rate. i want to turn now to national security. let's hear from the president who moments ago spoke about the shooting in california. pres. obama: are first quarter is to send him or thoughts and prayers to the families of those killed and pray for a speedy recovery for those who were injured during this terrible attack. i had a chance to speak with the mayor of san bernardino and i think the law enforced -- i think the law enforcement in that city for their timely and professional response. i indicated to the -- to the mayor that the entire country is thinking about that community and thanked him and his office for the way they have been able to manage an extraordinarily difficult situation with calm

and clarity. appreciated the court nation taking place between walk -- local lawn ornament and the fbi investigators. at this stage, we do not yet know why this terrible event occurred. we do know that the two wereiduals who were killed andpped with weapons appeared to have access to additional weaponry at their homes. we don't know why they did it. we don't know at this point, the extent of their plans, we do not know their motivations. fromt received a briefing fbi director call me as well as

attorney general lynch indicating the course of their investigation. at this point, this is an at the eye investigation that has been done in cooperation and consultation with local law enforcement. it is possible that this was terrorist related, but we do not know. it is also possible this was workplace related. until the fbi has been able to conduct what will be a large number of interviews, until we understand the nature of the workplace relationship between his superiors and because he worked with the organization where this terrible until allook place

the social media and electronic information has been fixed what it, we will not be able to answer those questions. what i can assure the american people is, we will get to the betom of this and we will vigilant as we always are in getting the facts before we issue any decisive judgment in terms of how this occurred. more broadly, as i said the prevalenceee of these kinds of mass shootings in this country, i think so many americans sometimes feel as if there is nothing we can do about it. we are fortunate to have an extraordinary combination of law enforcement and intelligence and military that work every single day to keep us safe. we can't just leave it to our

professionals to deal with the problem of these kinds of horrible killings. we all have a part to play. i think as the investigation moves forward, it will be important for all of us, including our legislatures to see what we can do to make sure that when individuals decide they want to do somebody harm, we will make it harder for them to do it, because right now it is too easy. ourselvesve to search as a society to make sure we can take basic steps that would make it harder, not impossible, but harder, for individuals to get access to weapons.

there will be a press conference later today led by the attorney general, the director will continue to brief not only the press but also members of congress about the course of the investigation. our expectation is that this may take some time before we are able to sort it all through. there may be mixed motives. , which makes the investigation were complicated. rest assured, we would get to the bottom of this and in the meantime, i want to offer our deepest condolences to those who have been affected by this and for thosedy who have been injured, we hope that they get well quickly. we help they are able to be back together with their families. thank you very much. again, that was the

president speaking moments ago from the oval office, speaking about the shooting yesterday in san bernardino california where 14 people were killed by two shooters. the president said he would take steps to make it harder for people to access guns. want to bring in our bloomberg washington bureau chief who has been listening along. as far as we know from some of the reports, we believe the shooters did obtain the guns yesterday, legally. what is the president talking about in terms of taking some stronger steps? >> it was a very interesting statement from the president. he struck a very somber and serious tone in contrast to some of the statements he has made in the wake of other mass shootings. i think that is because as he said, we just don't know the motives of these shooters, we don't know if it was terrorist related. what he was saying about steps to make it more difficult for

people to obtain assault weapons and the type of weaponry seen in this type of incident is almost secondary to the issue of we need to get to the bottom of this. he did not letter-size this -- hent as he has done did not politicize this incident has he has done. it is very difficult to bring in new measures to clamp down on people's ability to obtain a wider range of weaponry because of the second amendment. ted cruz is holding a second amendment rally tomorrow. i thought that was interesting, the tone president obama took, cutting it very fine between the two issues of national security concerns, but also thi ongoing -- dozens of mass shootings we've seen in this country which is a very unique american phenomenon. betty: it is, and he has pointed that out and he has been much

more forceful before after these mass shootings and he says we have an epidemic, a pattern in the united states. where does it stand right now in terms of -- we know the lobby group, we know the nra is reimposed, where do we stand now with tighter gun control laws? might we see that lay further in the presidential elections if tragically, we see more of these shootings? >> i think this is the issue going forward and the president got to it at the heart when he says we need to search our soul as a nation and the issue is when he says that, people who , they agreed that there needs to be tighter gun control. of gun owners center needs to be stricter background checks and look at the kinds of weapons available to people. the problem is that the human thatin the nra -- saying

this is a body group that is generated this, it is more than that. it has been supported by a wider range -- a wide range of candidates. leaps forward have continued to be blocked and this is just the latest shooting. the debt for that obama has spoken more than 15 times about mass shootings in his time in office and we have seen no movement in gun control. these incidents cut both ways for both people who support people thatons or say we need to have more freedom about the access we can have. on the other side, he says this is lunacy, we need to do something to cut down on this, whether it's background checks or going through and having s,ople on various watchlist whether it is putting in a waiting period.

the indications are that these weapons were obtained legally, at least for now. before we go, as we've noted and as the president noted, it is possible it is terrorist related, they do not know yet. the fbi is conducting their investigation, but in the meantime, are we going to see any further measures coming up from the department of homeland security in order to up the this turnso speak if out to be something that is terrorist related? cuee will have to take our from the president who was a recall -- who was very calm. he talked possible mixed motives in that shooting. he says it will take some time to sort out. we are still weeks away from the horrific events in paris.

we have had a series of deadly incidents in the u.s. president does not want to unnecessarily alarm the public, however there is no rush and that it did find evidence this was connected to a terrorist related incident, if there are broader measures planned -- there is obviously going to be a significant ratcheting up of the terror level. i think in that statement you saw, he was urging patience and caution. betty: thank you so much for joining us on that analysis. another event that is happening in washington is fed chair janet yellen continuing her testimony. let's return to that discussion. >> but the committee know whether or not you agree with that assessment. i want to switch to a different fed chairman who said in a speech before the committee last think we canw, i

agree that the absence of an official rules-based, cooperatively managed monetary system has not been a great success. -- more international destructive in impeding economic stability and growth. he went on to say the u.s. in particular in the 1970's had happy -- had an unhappy decade of inflation. there was a banking crisis in that decade, then the really big and damaging asian crisis. of the decade later, it was cap ped by the financial crisis of the 2007, 2009 peri and the great recessionod. not a pretty picture. you have said it would be a grave mistake but he fed to commit to conduct monetary policy according to a mathematical rule.

do you agree with the chairman's that theization absence of an official rules-based cooperatively managed monetary system has not been a great success and not a pretty picture? chair yellen: you pointed to a large number of every damaging when mitchell crises -- very damaging financial crises. is important for us to take steps and have a stronger financial system, one that is less crisis prone. i don't think the former chairman was proposing a rule-based monetary policy in the sense of following a simple mechanical rule, and i guess i countriese that many , monetaryrule-based

policy in the sense that most countries adopt -- have inflation targeting regimes and transparent monitoring policies for the central banks are independent and spelled out and are accountable to achieve an inflation objective. in the federal reserve, we have strengthened our transparency as to whether -- what our goals are, what the strategy is for trying to achieve those goals and provided the public with very detailed forecasts of what policies we think are appropriate to achieve the goals that congress has assigned to us, including a 2% inflation objective in over the last 20 years, inflation has been highly stable around 2%.

in that sense, even though we may not follow the rule or some simple mathematical formula, i believe we do have a rules-based monetary policy in the u.s., or at least a systematic policy. one final question. began payingfed interest on reserves. in the seven years since then, do you know how much an interest rate that has paid for banks under that policy? set at 25 basis points, i don't have the exact numbers, but i want to say it is a critically important tool of monetary policy. it is a tool that almost certainly advanced countries

have and rely on as a key tool of monetary policy. has the impact been up paying billions of dollars to those banks in the last seven years? chair yellen: it has helped us to set interest rate at levels we thought were appropriate for economic growth and price stability in the country. >> thank you. >> senator cassidy. >> i get to go again. a lot of turmoil in china. there was a lot of discussion about how foreign markets are how we adjust -- our growth. china may be desiring their currency, it looks like they begin their currency. i could go on on things you know better than i. how does that impact us? china has grown

very rapidly for a very long pe riod of time. in recent years, it has been on a general slowing trend for reasons that are entirely understandable, namely slower labor force growth, a reduction in the pace of investment growth they have, which is in their own interest and one that they are economy rebalance from such heavy dependence on trade as a source of growth to domestic consumption. as they move toward the technological frontier, further progress in adopting technological changes tend to slow. >> are they truly attempting to

increase domestic consumption? i've always had the sense that they try to encourage savings and use those to prop up their stock market. the rhetoric says they are attempting to increase domestic consumption, but the policies do not seem to reflect it. chair yellen: my impression is that they are trying to rebalance their economy. consumer spending is a smaller share of their economy that consumer spending is of ours. it has been growing rapidly, in tryingchallenges to boost it, but i believe that is the course they are on. we would agree. subjects, by the way, you feel the turmoil we are

currently seeing and the threat that they might devalue their specific,just to be you don't feel like that threatens our economy, are the it byting to game increasing their exports by devaluing their currency? chair yellen: there was disruption last summer in financial markets when they made a decision to devalue their currency by a couple of percents. to put that in context, remember that the u.s. dollar has been rising significantly over the last year and a half. the chinese currency has been linked to the u.s. dollar, so during that period the chinese currency had been strengthening, rather substantially relative to many of its trade partners and

they made a modest adjustment of their exchange rate, but in a way that was arguably not well communicated and proved disruptive and they solve very large capital out lows. i think they recognize that stability of their exchange rate is probably in their best interest, but ultimately, would like to move to a more market-based and flexible system of exchange rate determination. >> i wish you were there central banker. i hope you are right. in january of this year. . , the economy slowed and growth became negative it was attributed to slow down and the energy market because oil prices have fallen, so energy states that produce a lot of jobs and by the way, jobs for those lower income, less skilled workers we spoke of today. it seems that fell, oil production rose a little bit for

. variety of reasons my state has been impacted by this, any comments of on -- on thethis chatting of jobs in exploration and production component of the energy industry is going to impact our economy?s going to impact our comic? chair yellen: we have seen a huge decline in oil prices for reasons pertaining to huge increases in supply and perhaps some slowing and demand. it has had an enormous impact on capacity and jobs net sector and that has been one of the things that has been holding back growth. >> so even though we've gotten some benefit for consumer spending, going forward, as those jobs are further shed