bernardino, california. the police chief says four people including two students were wounded in an apparent murder suicide. qe bc reports that law-enforcement and fire crews from across the region responded and that the situation has been contained. a senior u.s. official says the united states has concluded that russia knew in advance about syria's chemical weapons attack last week. a russian operated drone flew over a hot little in syria as victims of the attack were rushing to get treatment. hours after the drone left, a russian-made fighter jet on the hospital. they believe it was an attempt to cover up the usage of chemical weapons. sevenn ministers from the industrialized nations are in italy for an emergent a meeting to discuss a unified response to the chemical attack in syria. borisreign secretary johnson talks about the tougher case against syria and russia.

>> the united states have .mposed extra sanctions we will be discussing the possibility of further sections on some of the syrian military figures and on some of the russian military figures who ine been involved coordinating the syrian military efforts. johnson has canceled a planned trip to moscow over the conflict. it russians call the decision to cancel absurd. egypt, the president is ramping up the fight against terrorism after deadly bombings at two christian churches. ,t least 43 people were killed the islamic state claimed responsibility. a three-month state of emergency in a new anti-terror unit with sweeping powers. global news 24 hours a day powered by 2600 journalists and analysts in over 120 countries. this is bloomberg.

>> live from bloomberg world headquarters, i'm vonnie quinn. max i'm joe weisenthal. >> u.s. stocks are trying to hang onto small gains. joe: the question is, what'd you miss? vonnie: investors looking for forward guidance. livell take the remarks from the university of michigan at 4 p.m. a four-way race in france. withing up with republican less than two weeks before voting begins. a major player in energy, the deputy minister opens up to

bloomberg about the nation's oil development deals. stay tuned for that exclusive interview. let's look at where the major averages and. it julie hyman is standing by. the major averages hanging on to gains. we have seen a little bit of bouncing between gains and losses today. we see a balancing act between energy shares which are going higher and financials which are turning a little bit lower. many of the individual components are going throughout the session. decline,st percentage they are all lower. in a morgan stanley's betsy graseck said the forced quarter earnings are going to be a bumpy ride. slower loanbout growth as well as originations

and the reason why. we have three of the big banks kicking things off. that, theport on markets blog. it may have been getting cheaper. here is an index ratio of the price-to-earnings ratio versus the s&p 500. goes, the cheaper u.s. banks are versus the broader s&p 500. we have seen a drop in the past couple of weeks ago in into earnings season. it coincided with the slowing of the reflation trade that has been in effect since the election. this chart goes back to october and comes from and why here. which isar breakevens a market reflection of inflation expectations in the tent to five year treasury yield spread, both have been trending lower and about the lowest we have seen this year.

market, coming back to the banks, not necessarily good news for earnings outlook. it will be interesting to see what the banks have the say. not just about last quarter, but the outlook as well. joe: we will stay on that team. the cio of the loophole group join us to talk about a key piece of hard data for equity. he's in minneapolis. julie there was talking about some of these postelection reflation moves that we saw fading. high in early march and they have been doing nothing since then. what will break us out of this ?ery quiet slumber us market goodink you will get very first quarter earnings. and they were really good. more back up to operating margin

at the s&p 500 of 9.2%. that is with the major sector. energy very depressed. there have only been a handful of quarters that have been higher than that. i think it will be stronger in the first quarter. i think a stronger earnings, the technical position is very strong. virtually every important bellwether group and sector and index probably other than the utility stocks join the s&p 500 at the latest high. we just don't see any signs of the traditional distribution that normally accompanies an important bull market top. distribution that process has even started. >> we have a chart from goldman sachs pointing out that negative earnings revisions in 2017 are really impressive. earnings so far, they always get

revised down throughout the year. is this really the key thing to watch? we talk about the hard data, the soft data, fiscal policy, geo policy, uncertainty. should we just focus on this line to sort of explain everything? think earnings are going to be ok. not great this year like some of the bulls are arguing. mentioned, there is the broad market strength that is very bullish. and i also think what may overwhelm a weaker or middle-of-the-road earnings performance is just a return in confidence. rate think, you know, rises historically, when you get three of them. three steps and the stumble has been negative for the market. when you are coming from crisis levels, i think a return of short-term rates to more of the

normal level. getting to one handle here on short-term treasury instills confidence in economic players. i know that you are dividing the year and to have, on that front, the bull market to keep going until the mid-part of the year. weird you stand now? the bloomberg shows us high data versus low stocks. -- is thatferred crowded trade? is that played out? think it is crowded now but in hindsight, it probably was at year-end. the energy work has faded. it would not recommend overweight currently.

with tech and financial at the top of that list, it is appealing a relative valuation. the lowball marking time here moving sideways, it is still very expensive. the high dividend trade, the bond like stock appeal. they are historically very inflated multiples. i would continue to avoid the low volatility areas. what do you like about tack? what parts of tech and why? summer in that high beta sector, for example. conductors. semi they also rate attractive. we don't on them because we have a big enough position on what the semi conductor manufacturer

is themselves. but they look very appealing. tech right now is the number two ranked sector right behind financials with a lot of attractively rated industry groups. of groupsa number that rate very highly. so i think it is reasonable valuations and the earnings are really coming through. the high margins, the margins and technology are just extraordinary and look to be on the rise. >> many are saying that the grateful market and bond is over. but we have a chart in the terminal that suggest maybe it's not. the is 5215, a chart of long haul showing a very strong downtrend. suggesting we could see yields drop in the 10-year go back to low 2%. would you think about what that would mean for the markets?

>> oh would not completely rule that out over the next number of months. we had a book of economic surprises over lead -- overlaid with 10 year bond yields. they have run at an extremely high level. suggesting the economy -- drop, would were to it be on some sort of economic surprise or some sort of volatility risk off of them? or do they go hand-in-hand? rate of change in the economic surprises has been so off the chart. it might just be that we go through two or three months where the numbers just come in in line. albeit at higher growth levels. it might prove to be a little bit of a disappointment. short-term, i would not be surprised to see a little bit of a bond rally. 2% would be a stretch.

is view on the secular trend that you are not really going to get a definitive break in yields than after we've had the next long-term. i think we certainly haven't made a formal for past -- forecast. we could be looking at the end of the cycle. early 2019, you can be talking about entering into a u.s. recession. joe: we will be talking to you. on bloomberg,ow blackstone ceo steve schwarzman, speaking with david westin after meeting with president trump and other ceos.

that interview at noon tomorrow. coming up, mexico's deputy energy minister says there is a lot of interest for deepwater oil and shale exploration in the gulf of mexico. we will hear from him next. this is bloomberg. ♪

joe: a deepwater shale option will be taking place this december and investors want to know where exploration stands in the gulf of mexico. the policy correspondent set down with the mexican deputy energy minister and asked whether this option will be the biggest ever. >> it might be. it depends. a we did was, for the first

time, what we have for upcoming options. what we're asking the industry is to nominate in three months, those blocks or areas where we think it has more potential. it might be interested in that information. we will decide which will be going for auction in december in the deep waters and the onshore unconventional areas. youhat kind of reaction are getting in the reception so far? >> it is very good. we went to the innovation phase the last year and a half. the first round of bids for various types of blocks. these were smaller bits and we were proving our infrastructure and processes and regulation as we were moving along. we can go from innovation to

standardization. setting up a process that is streamlined with contract that are well understood. we will continue improving as we move along. but for now, this type of process, we can begin thinking about scaling up our own activity. michael: given the interest you have gotten so far of the more than 500 walks, how many do you think are drawing serious interest? at nine.f of them are our blocks in the deep and shallow waters, the other half are onshore. inreceive a lot of interest the shallow and deep waters, proceeding significant interest in the potential. for unconventional blocks or blocks of unconventional resources. a new game, there is a lot of resources to exploit. we hope that the enthusiasm is

reflected in the coming rounds. people contacting you, the majors, are you seeing interest? aldo: from all sides. they, medium, all companies. from asia, from europe. aboutst combined brought $50 billion in potential investments for these new projects. it will be executed throughout the lifecycle of the project. and we expect more to come along. this was just the beginning. another we're going to phase two with a lot of resources. in the nomination process, we expect to have as much enthusiasm as we can. michael: are you getting as much enthusiasm as from north america? are the chinese interested? aldo: the bidding round for the deepwater in december -- a

chinese company won two blocks. we have a malaysian company participating. we have the european majors and the north american majors. all of them are willing to participate in what we believe is a very exciting new energy model. flores quias aldo roga. joe: the first round of residential elections is nearing and the race is heating up. let's open up. the far left candidate made a little bit of a rebound. joe: that's right. we have been talking about the three main candidates.

the polling that redline, it's kind of appropriate for the far left guy. he is surging and up to 18%. people are starting to wonder if they figured to be le pen versus the mainstream candidate or it may be le pen versus the far left. abigail: we are seeing that in the american markets, the highest levels of the year and another piece of uncertainty here. an unknown. the french german spread widening. vonnie: and selling french bonds now because if we get the base case, that the threads are going to move up. joe: interesting. abigail: janet yellen speaks of the university of michigan today and we will bring that to you live on bloomberg television and

radio. this is bloomberg. ♪

joe: what did you miss? fed chair janet yellen is expected to field questions at the university of michigan today and about seven minutes. the event appears to be oriented towards broad, big picture scenes. and the specifics of near-term policy. ahead of this today, let's bring in a chief economist for bloomberg intelligence. what would you ask the fed chair today? >> you have to ask questions very carefully. they won't give you a good answer. but i would try to pick around the edges to see if there was any sense of buyers remorse.

they brought everyone on board for the right move. close, they're forecasting about 1.3%. it seems like real weak economic growth for the fed to be tightening in that quarter. on top of that, we get friday's jobs report. abigail: one of them is 7652, there is pessimism and optimism. it shows the difference between goods and services. this would be the follow-up question. they are letting inflation run above the fed's target.

we see the orange line, the service sector prices in the cpi. the white line being goods prices. we see this huge divergence between the two. now that the dollar is stabilizing, there are signs that inflation would be perking up. even if service inflation justnues to move sideways, the absence of good sector deflation will mean that overall inflation reset to a higher level. and we have to know at the appetite is for that to occur. the inflations on theme. core good cpi versus isn manufacturing. what manufacturers have to pay for their own cause. what is useful about looking at this? >> we just did the two lines for a bit of a lag. it tends to leave core good inflation.

you can see what has happened over the last couple of months. deflation it has gotten used to over the last three or four years. abigail: what on earth gave you the idea that the fed has buyers are more to even though we see better labor market data that is one of the two parts of the mandate? was at the donnelly,? >> -- the donnelly comment? >> it is wavering and given the gdp numbers that are for the first quarter, i think she will dismiss it as the usual noise and q1 weakness. there is a sense of concern on the periphery. thank you so much. chief u.s. economist for bloomberg intelligence. market close is next. the major averages are slightly

toher, trying to hang on very small gains. this is bloomberg. ♪

vonnie: we are moments away from

the closing bell. stocks closing in a tight range today. investors awaiting janet yellen's remarks from the university of michigan school of public policy. any minute now. the dow closing unchanged. am joe weisenthal. viewers onour twitter, following closing bell coverage. vonnie: we had a little bit of everything. let's hop into the bloomberg and see what happened with individual movers, looking at the nasdaq 100 or andy index. this is member rate returns. another 1.3%, hitting record high. down in the bottom, some ship

chip losers. taking a closer look at tesla, tesla once again higher. the stock really on fire in a big way this year. growth investors will not want to miss out on tesla. higher following a trucking merger. .e also have seagate a little higher earlier, but still finishing in the top 10. on the bottom of the board, some chip stocks lower, including micron. it appears there are some bearish comments on non-pricing. something that could be a little bit of a correction in that pricing. joe: let's take a look at the government bond market. guilds ended lower today. a very interesting action. we saw modest gains in equities.

also, people buying bonds with yields lower. attack,ake of the syria and also the mediocre jobs report, we briefly what both -- went below .2%. check out the french two-year yield. we were talking about this in the block before, more concerned about the french election, now of for wait race with the left-leaning candidate joining the pack. no one knows what will happen there. negative territory for france. a look atm taking currencies today. obviously, a big week, geopolitically speaking. if you take a look at g-20, you the currencies, interesting countries. look at the rand, erasing all of

its gains from last year already. all week, seeing in a race gains from last year. the south korean yuan dropping as well. a similar thing happening in yields. the russian five-year, you see, selling with the yield higher up seven basis points. the ruble losing as well. let's move on to some of the in pairs.ency crosses looking at the dollar index, this is the bloomberg dollar index. again, a wide friday of currencies. it is putting in some gains as well. this one week gain is a good half percent. jobsis ahead of the report. also, the moderating from the fed and the fed speakers. the dollar-yen, a little weakness today, but not much movement over all. the euro has reversed.

again, taking a look at the rand-u.s. dollar, a little stronger. joe: finally, look look at -- let's look at commodities. back over $53 per barrel. march ine big dip in oil. that has been completely a race. we are at the $52-50 three dollar range. some optimism over opec cuts. inn prices were falling march, everybody was like, that is not going to cut it enough. now it has flipped over, the story. gold modestly lower today. not a ton of action. .e see iron ore weak iron ore being clobbered. lots of concerns on the demand side and also the supply-side coming out of brazil, australia. that is an interesting indicator. those are today's market minutes. we want to remind you that we will be going to ann arbor,

michigan in just a few minutes went fed chair janet yellen begins speaking of the you restate michigan ford school of public policy. there is a live look at the auditorium there. we are waiting for her to come on. vonnie: now, let's take -- deepil: now, let's take a dive into the bloomberg. i really want to take a look at volatility. the vix today hitting a level not seen since 2016. we have looked at this chart a lot in the past. in white, the s&p 500. we see how they tend to trade in inverse action. big spikes, stocks fall. something similar to a lesser degree around brexit. look at the map of divergence that we have been having for weeks, months between the vix and the s&p 500. markets completely complacent. being here on set, i cannot resist but to draw a trend line, which will basically be right here. something important has

developed today. we have the vix breaking the bottom area of complacency of. we could see this entire bottom area break on the upside. we could see stocks drop lower. what the evidence will be, who knows. so much uncertainty out there. lots of macro risks, so to speak. trende always like when a breaks, so to speak. we have yellen coming up. here is some good news from the .ank of federal reserve they ask, how confident are you the you would find a job in the next three months if you were to lose one. it is interesting because it is a strength of the degree that people feel the labor market is strong in their minds. it is at a record high, 64% of consumers believe that were they to lose their job right now, they would be able to find another job.

thinking about what that means for policy, spending, very good signs. maybe it will translate to more spending and more economic activity and make janet yellen's life a little easier. vonnie: and of course, you know what we get tomorrow. the jolt survey. joe: jolt. vonnie: i love that reaction. ,abor market conditions index below the survey. this is a good sign because it shows the labor market is back to the 2007-2008 region. ite a look at the numbers, would take about 18 months to get back to where we were with peak employment. more ways to talk about the labor market. maybe that is a good segue to

talk about janet yellen's remarks at the arrestee of michigan -- university of michigan. dan, carl was mentioning things this market reaction with a teeny tiny bit of market remorse even if she does not see herself. that she? -- does she? >> hardly likely that she would let on. carl was not a fan of the increase anyway. in 2016 and 2017. the first quarter is not looking so awesome in terms of gdp, but we have had a couple years were the first quarter has not looked great and the economy has bounced back. joe: i like how you are accusing carl of being a traitor locked into a bad position. >> i and teasing him gently on

march. aboute are asking carl this, it uses asking via twitter. what would your question be? -- would ask about the t what some called the trump reflation trade. global outlook is a lot stronger now than it was at this point in 2016 and 2015. the deflationary -reflationary scale was .ocused on europe for the first time in a while, we are looking at the prospect of a stronger global outlook, not which is the u.s. pulling or china pulling. abigail: speaking of that reflation trade, one risk particularly is oil.

from a technical standpoint, it is above the daily moving average. how does this plan into everything? lead? and the dollar to what extent do you think that is on the mind of fed chair janet yellen? where would she like oil? she has identified a place, it is highly unlikely that she would tell us. any question that reeks of the they don't want to be accused of gaming the markets. if i were to ask the question, i would not put trade after it. i would get at this issue of global harmonization. the first quarter is not going to look that flash in terms of gdp. yellen has said in the past that she sees it as a noisy indicator. to what extent is the rest of

a major weakness. has the balance sheet clearly emerged as something they are talking about. the commencement of a proper wind down may be later this year. bloomberg news pointing out that maybe we did not get that much in terms of bang for the buck. how big of a deal is this from your perspective in terms of speaking about the last decade almost of monetary policy? the last 10 years, we never thought we would go. things generally associate with 97-98,r greece or asia, it all has to be seen in some sort of perspective. it is easy to forget now. at the time, people were crying, white of the fed -- why doesn't

the fed do something. vonnie: it will be difficult though to navigate the next few months. it is always difficult. it seems that now there is a lot n-consensus,sus -- u if that is a word. crisis if it is a shutdown. how do you see that if you are janet yellen? >> the fed said in january, and i think this was fairly astute of the chair, we do not need fiscal policy to do anything right now. we are approaching most levels historically associated with full employment. inflation is heading back and hit targets. who says we will get a fiscal boost anyway. vonnie: we might get crisis. >> government shutdowns have

thatcally only associate -- is associated with a crisis when stimulated by debts. joe: stay with us. bloomberg's executive at -- editor of economics. we are still awaiting janet yellen live from ann arbor. this is a live look at the auditorium where she is speaking. we will have that with you live. this is bloomberg. ♪

joe: and, we want to take you ofe to the university michigan ford school of public policy where fed chair janet yellen has just sat down. she will be answering questions,

talking monetary policy. let's listen to her now. chair yellen: this is designed to serve the public interest and do so in a nonpartisan way. the analysis on which we base try to have itwe as research-based as possible. they are decisions based on factual evidence and objectives analysis. most people know about monetary policy which is one of our main .asks there, i would say, in a general way, we try to set interest rates and financial conditions , or broadly to result promote, a healthy economy. more specifically, congress has assigned as two main goals. we call it are two mandates. first, low and stable inflation, and second, maximum employment,

which means we want an economy in which as many people as possible who are seeking work find a labor market where they can find work. on that, i think that is what the public focuses on most. we have a wide array of responsibilities pertaining to the financial system. bankinge promote organizations and other financial enterprises to make sure they operate in a safe and sound fashion. second, we monitor potential threats to financial stability. we certainly do not want to have another financial crisis. threats inaddress the environment that could lead to one. every day, week process chilies of dollars of payments quickly

and safely for banks and for the federal government. with the comments about the speech i gave recently. we work with community organizations and banking organizations to promote financial literacy, to make sure that credit is available to all who seek it, and to promote community development more broadly. quite at a long list -- long list. i will come back to some of those topics and i expect the questions from the general audience will touch on them as well. something that i think most you are familiar with, the role of the financial crisis and recent aftermath. leadership in

positions throughout 2004, you were certainly there throughout that entire period. what are the takeaways for you? chair yellen: to me, lessons from the crisis are first and foremost that the financial system in a well functioning financial system is essential to the economy. it is essential for people to be able to get jobs for innovation, for economic growth. what we found out during the financial crisis is that when the incentives facing financial distorted, there decisions that are made can greatly harm the economy. and, the consequence was the most severe financial crisis we have faced since the great depression. whiche a system in banking organizations were not

monitoring and controlling risks appropriately. they had too much capital and were overleveraged. they were highly reliant on short-term borrowing to fund loans that they were making. they had too little liquidity. wh theliquidity -- short-termen liquidity dried up, we found we had a financial system that was highly vulnerable to run. we also found that banking supervision and regulation was not doing what it needed to do to address the risks. we were too focused on the health of each individual institution, and we failed to spot the buildup of systemic the financial system as a whole that made affordable. ,e have tried, in the aftermath

to greatly improve, and maybe we will be able to get into some details later on, to greatly improve our system of financial supervision and regulation. sure we have a safer and sounder banking and financial system. >> that certainly is one of the topics i would like to come back to. it also sounds as if there are very clear additional markers or metrics that you look at to assess how healthy the economy is pure looking at the u.s. economy now, how healthy is it? chair yellen: that is a great question. i'm pleased to say that, in my view, it is healthy. by way of background, we suffered, as a country, through a very deep and very long recession in the aftermath of the financial crisis. 10%,loyment rose to over

and it took many, many years in order to get it down. very hard to try to accomplish that. unemploymentth the rate that stands at 4.5%, that is even a little bit below what most of my colleagues and i would take as a marker of where full employment is. inflation, which, for many running below the 2% objective, the headline figure most recently hit 2.1%. i would say a better forward looking measure of inflation is still under 2%, but reasonably close. in terms of the goals that congress has assigned as, i would say, we are doing pretty well. the economy has been growing at a moderate pace. mainly supported by consumer

spending. housing is a little bit healthier than it has been. investment spending that had quite weak week -- last year is showing better straight. the global economy, which was seems to be operating in a more robust way. looking forward, i think the economy will continue to grow at a moderate pace. our job will be to try to set monetary policy to sustain what we have achieved, to make sure that the economy continues to operate around full employment, and that inflation stabilizes around 2%. have a healthy economy now, but it has been a long time coming. >> a long time to get there. i would actually like to ask you

more about things that you have mentioned. maybe one place to start is that you could summarize what you just said as that the fed has successful.en its targets have been achieved, and all the has to do now is maintained that. to be roughlyent at your targets, trying to maintain them, then trying to achieve targets? chair yellen: it is somewhat different. in the aftermath of the financial crisis, with unemployment at exceptionally high levels and inflation running under the 2% objective, monetary policy all that we had. we did everything that we possibly could to support the economy. in december 2008, we lowered our overnight interest rate target effectively to zero.

at that time, if you would ask me or any of my colleagues how long the federal funds rate would be sitting at zero, i said that could not have imagined it would be for as long as it turned out to be, which was 74 full years.en even that turned out not to be enough. the economy was just not recovering rapidly enough. from there, we decided we would try to buy longer-term assets. downthe aim of pushing longer-term rates. long-term interest rates were still substantially higher. and, we also tried to talk the financial markets into the idea that monetary policy would be very accommodative and

short-term interest rates would be very low for a long time. longer than they thought. we called this forward guidance. the objective was to lower have pulled down longer-term interest rates and stimulate the economy. , andd all of those things it took a long time, but as you our we are near reaching objectives. now, the focus is different. what we are thinking about is that with the economy operating close to our objectives, what we want to make sure of is that we sustain the progress that we have achieved. appropriate stance of policy now is something closer to what we call at neutral. whereas, before, we had a foot press down on the gas pedal,

trying to give the economy all pf we possibly could, coast, try to let it giving it some gas, but not that we are pushing down on the accelerator, that is a better stance of monetary policy. we think it is appropriate to gradually raise the federal neutralte to a more stance, if the economy continues to perform in line with our expectations. what ar assessment of neutral stance of short-term interest rates is is actually pretty low. although interest rates now are low, just a little bit under 1%, our estimate of neutral is freely not that high -- really not that high.

we have indicated that a gradual path of increases in short-term interest rates can get us to where we need to be to a neutral stance. we do not want to wait too long to have that happen because if overheatingends up and inflation threatens to rise well above our targets, we don't want to be in a position where we have to raise rates rapidly which can conceivably cause another recession. we want to be ahead of the curve and not behind it. >> one of the things i think there has been a lot of kind of interest in is the behavior of inflation. as you mentioned, you don't want to be behind that curve in terms of inflation, what direction it is going in. has your vantage point changed? i would say, my thinking in recent years on

inflation has not changed a lot. but, the actual behavior of inflation has changed a great deal. i will try to explain why. if you compare current situations with the way things ask with say, when i started an assistant professor in the early 1970's, and inflation was high and rising and was a huge problem. now, most of us do not think of inflation as being a significant problem at all. if you asked me what are the factors that influence inflation, i would point to first the degree of slack in the economy. when there is a lot of slack, unemployment is high, and product markets have a great deal of excess capacity, inflation tends to decline. session,t of a long

and only now recovering say,yment, as they although we are close, we are slightly below 2%, in my estimation. a second influence on inflated -- inflation is inflation expectation. what people expect inflation to wageplained their own sitting -- setting and pricing behavior. then, in recent years, this has been very important in causing gyrations in inflation. moving into energy prices, sometimes food prices, and the dollar. the dollar began to increase markedly in mid-2014 the push down import prices and help inflation down. shouldt set of factors

have a temporary, but not a long-lasting impact on inflation. importantbeen highly in recent years. i think my basic understanding of the forces driving inflation have not changed that much. but, if we go back to the late 1960's and 1970's, when the economy began to overheat, then we had a series of supply shocks. inflation moved up. had aeven when we recession and more slack developed in the economy, oil prices stopped rising, we were left with what seemed like an lyemically -- endemic higher inflation. it turns out what was driving rotations.flation when actual inflation moved up, people thought, inflation is

here to stay and inflation expectations moved up. then we found we were caught in a vicious circle in which people's expectations of higher left us stuck with high inflation. at the end of the day, it was the fed's job to make sure that inflation came down with a low andstable level -- low stable level, and to anchor expectations so that they would not keep ratcheting up, moving up and down with actual inflation. that was a hard lesson for the fed to learn. by the mid-1980's, the fed was focused on maintaining inflation, bringing it down, and maintaining inflation expectations. since the mid-1980's, evidence that the- suggests

population expects inflation around 2%. muchtations are not that influence by deviations above and below that. temporary. we are focused on making sure that inflation exit patience and actual inflation stay very well anchored. to emphasize our commitment to adopted 2012, the fmoc a statement of its longer-term goals and strategies. we set excessively, 2% -- said waslicitly, to present our objective. we added last year, 2% is the symmetric objective -- objective. we certainly do not want inflation to linger and definitely above 2%, we don't want it to linger below 2%.

not aan objective, ceiling. it is where we would like the inflation rate, and intend to make sure it is moving over time all the time. i think we have had good success in achieving that. >> i was action going to ask as to whether you see it as symmetric. you already answered that. why don't we shift gears back to financial stability. one of the lessons focused on the importance of financial in the aftermath, we have had the dodd-frank legislation, a number of legislation. atot of controversy as well the moment. in particular, as to whether we should focus more on banks or more on institutions, shadow banking, the hedge fund concerns. what are your views on that? chair yellen: we are focused

both on banks and institutions outside the banking system. manye the crisis, investment banks were standalone and not part of the banking system. one thing that changed with the financial crisis is that some of shadowortant so-called banking institutions, mainly the allstment bank are almost part of the banking institutions. the banking sector in some sense now is larger and incorporates more of what used to be in the dangerous part of the shadow banking system. let me say, we have accomplished a great deal, i think, to make

the financial system and particularly the banking system and largest and most systemic safer andganizations sounder. we have forced these institutions to hold much more capital. and, higher-quality capital. we have forced them to hold much .ore liquidity where as, the used to be highly reliant on volatile short-term funding, that is less true now. we are also forcing them to better measure, monitor, and .ontrol the risks a completely new thing that we are doing, that i think has enhanced the quality of our supervision is we conduct annual stress tests. stress testing was something that was exempted in the middle of the financial crisis when people had no idea how much

capital major banking organizations in the united states held. they were afraid that they might not be strong. a decision was made by chairman bernanke and secretary garner to subject the largest organizations to a rigorous stress test in which we would insist that they, and we, independently, would examine where these institutions would be. what their capital would be if there were a highly adverse shock to hit the financial system. we developed the methodology necessary to look at each anditution individually evaluate this severe shock. say, house prices tumbling 40%, the unemployment rate rising --

.ighly adverse shocks when these institutions still have enough capital to lend and support the needs of the economy? in this first round, it was insisted that if they did not have that amount of capital, they would be forced to raise it or the government would invest it into the firms. the reports were publicized and credible. raise capital. this has become a staple of our supervisory program. we publish the results every year. we look in detail at the capital planning processes of the large banking organizations.

that they retained their earnings to maintain adequate capital. our supervision has change in its character and is much better and focused on risks in the financial system as a whole and not on what each individual protrudes in the .orest -- farthest also, the shadow banking system is safer and sounder. the fec adopted reforms to address weaknesses in money a crucial part of the shadow banking system, where we saw runs during the financial crisis. the riveted's market and the -- derivatives market and the derivatives have changed in a way that makes the system less

a source ofnd less systemic risks since the financial crisis. funding markets have undergone reforms that make them safer. i think we have accomplished a lot and we have a much safer system. we have to be aware of risks outside the perimeter of what we regulate. if we regulate one sector, there is a natural tendency for activity to operate outside its boundaries. intensive to be what is happening in the shadow banking system as well. >> there are certainly some who extensivethat supervision has gone too far and actually the regulations are hampering lending and growth.

what is your view on that set of concerns? chair yellen: to start, i think we ought to tailor supervision so that it is appropriate to the risk of a particular organization. institutionsemic really deserve and require the highest degree of rigorous supervision in regulation. we are looking for ways, we have tried to shield community banks from some of the supervision and relation. for midsized banks, we try to tailor supervision so it is appropriate and what we expect .f the most systemic banks community banks do field -- feel overburdened with regulation and we have looked for ways to respond to that by lessening

exams cycles, where we can, lessening our demand of reporting of information. we're trying to develop a simple fight capital regime. there is a lot of focus on regulatory burdens. i do not think, if you look at objective data on lending, that it is possible to make the case that regulation is simply stifled lending. lending has grown in very healthy ways. the economy has recovered. strongerhat we see is banks that are better capitalized, in a better position to lend. >> growth, as you know, the user has-- u.s. economy's growth only been in the 2% range. that is certainly a concern. what is your view of the growth prospects and has it changed recently? chair yellen: a depressing fact about the u.s. performance is recovery,ghout the

growth has averaged 2%. by anas been accompanied improving labor market or diminishing slack. is not stunning in absolute terms, has generated a lot of jobs. the fact that we have a lot of jobs is a good thing. we wanted that. the fact that you could create that many jobs in the context of towth that is so low points a significant problem. the problem is the productivity growth is very low. it takes of lot of labor to produce not very much extra output. what that is pointing to is that output per worker is growing at a very slow pace. it looks like, at present, the

economy's potential to grow, with labor, but just growing at a trend pace, we are not absorbing slack from the labor market. it is probably a little under 2% actually. i think of that as reflecting to pieces. first, how fast is the labor force growing. second, how fast is output per worker or man-hour growing. labor force force, growth has been slowing in the united states. partly that is a matter of demographics. we have an aging population. the labor force participation ratio in the united states has been declining for a number of years now. due to an ongoing aging of the

population, that is something that will continue. the piece of immigration is also important and has contributed to labor force growth and will matter as well. , and we areok unlikely to look to faster labor force growth to boost the economy's potential to grow. second, productivity growth has been very disappointing. 2011, output per worker has grown at about half percent per year, which is an extremely lopez. by comparison, since 1970, output per worker grew at 2% per year. so, very slow in recent years. my guess is that it will pick up. ds, likealso seen perio the second half of the 1990's when growth was well above 2%. no one really knows why

productivity growth is so low. that makes it hard to know what the future has in store and whether or not it will pick up. one factor that seems to be depressing it is many people think just the underlying pace diminished,n has for reasons that are not easy to understand, but looks like it has diminished. second, educational attainment was rising at a rapid pace. now it looks like it has leveled off. we're not getting very much of a boost from higher degree of educational attainment. the third thing i would point to is that dynamism in the business sector. one thing that drives productivity growth is firms that are more successful and

more productive can grow more rapidly at the expense of firms that are less productive and less successful. that the allocation of labor from less productive to more boosttive firms tends to productivity growth over time. suggests thath thepace of reallocation, or underlying dynamism of the u.s. economy, looks to have diminished some. it is not an encouraging prospect. it is conceivable to public policies that focus on raising productivity growth that boost private or public investment in the workforce or innovation could make a difference to that. turnvery soon want to

things over to the audience, but perhaps i could ask a few other questions. one is that you have said a number of times how important you believe the federal reserve independence is. that some haven about that going forward. i wonder if you could share your current views in that regard. do believe that independence of a central bank to make decisions about monetary policy free of short-term political pressures is very betternt and results in decision making that is focused on the long-term needs. i think this view is supported by a lot of research that looks at central banks around the globe and seeing that those

banks are more independent and those countries tend to enjoy a stronger macro independence, -- lowerinflation inflation and stronger macro economic conditions. congress, wisely, in the 1970's passed a law -- remember, we talked about many different things that the federal reserve does. the one thing where congress said they should be something where the central bank has independence and congress and its agencies don't engage in detail policy reviews in real-time of its decisions that one area is monetary policy. the general accounting office, essentiallygresses

audits incy conducts real-time and evaluates all the other things we do. technical decisions about monetary policy -- we are of course accountable to congress. adependence does not mean lack of accountability or transparency. i go before congress and testify regularly. policy i have press conferences. we issue statements. we have minutes of our meetings. whaty to explain in detail we do and why. we make decisions independently. i think that is important. the structure of the federal reserve system was designed to promote independence. it is complicated, but we have a monetarymmittee -- policy committee.

of opinioniversity and helps promote our independence. somendependence is under threat. there is a bill called audit the forth inh has been put congress for a number of years. it would and our independence in making monetary policy decisions. theher bill that has passed health -- house of representatives goes even further in interfering with monetary policy. it would require us to follow a simple mathematics ruled in deciding interest rates. aboutys worry

independence. i think i'm not going to -- think the u.s. is better served group a nonpartisan making these important political decisions. >> my one final question is, being chair of the fed is a very intense, stressful position. what do you do to relax? [laughter] so, i try to come into the office every day having a good night sleep. arianna huffington has written eloquently about virtues of getting a good night sleep. i don't know how many of you are a.m.iar with her work, but and ardent believer and have discovered over the years that unplugging from electronics and getting a decent night sleep makes me feel calm her and

better able to address, during the day, what i need to do. that is the first tenant. i have the pleasure of working with a very talented group of staff at the federal reserve that i am able to collaborate with. own in trying my to address the various issues that we face. i'm in a collaborative environment where i have one full policy to ike -- call caneagues, who i brainstorm with. outside of work, i don't have any study i series, but i try to spend as much time with my husband and friends. i enjoy cooking and like to keep out, -- eat out, but i don't

have any remarkable activities. i do try to relax as much as i can. >> ann arbor has wonderful restaurants. you should know that. i have seen a number of cards being collected and questions have come through on twitter. at this point, i would like to turn over the questions to the audience. will helpcolleagues to facilitate the q and a session. and we had two students who will be reading questions. i will turn things over for them to introduce themselves and get that part started. is laura my name gilbert. thea joint phd student in public policy school and economics. thank you both for the fascinating conversation. our first question is you have been a governor, vice chair, and chair, what unique perspective

do each of these positions bring to the table? chair yellen: the federal reserve has a complicated structure. we consists of a board of that have governors serving as chair and vice chair and then 12 regional reserve banks, each headed by a by adent that is selected private-sector board. as you mentioned, i have served in different positions on the board of governors. first as a governor in the 1990's. then, i was vice chair from 2010 to 2014 and chair in three different positions, and also president of the federal reserve from 2004n francisco 22010. i think, i have gained an theeciation of all of

different things that the federal reserve does. and, i was better able to understand different aspects of the fed work from different vantage points. my work at the san francisco fed, one of the important things that was part of my work was to be broadly with participants in the economy in the region that the san francisco fed covers. i met with business leaders, people who worked in nonpartisan -- nonprofits, community development specialists, labor leaders, ordinary people working and members market of the financial system, and try them information

that would be useful in forming monetary policy. i think that gave me a chance to understand how, let's call it, anecdotal information, not exactly systematic, but talking to people who are experiencing the economy in real-time does thatde a body of insight susan and i and our colleagues, most of you with phd's, are trained in economic theory. that is extremely helpful. it is hard to do a job like i have without having a good grounding in economic theory, but making the connection between economic theory and what is playing out in the real economy is important. i would say that some of the insights of my directors in the years leading up to the financial crisis, they said things that maybe worry -- made financial and

bounces. it was not enough to stop the crisis, but it certainly was , early on, arouse my concert and suspicion about what was going on there. board, intion at the ,ontrast to the reserve banks the board of governors and the governors are responsible for writing regulations and consulting supervision's. i have had a pretty intense involvement in writing the dodd-frank rules and thinking through what reforms we have needed to create a safer and sounder banking system and how we would translate that into supervision and regulation. as chair, i have gotten much more perspective on the relationship between congress and the federal reserve, and much more involvement in trying to manage that. thank you, chair yellen for

the conversation. my name is matt, i am a first-year master student policy at thec ford school. should the fed more actively promote international policy coordination? that is a very good and important question. that while isay will not go as far as to say that policy is coordinated internationally, and i'm not even sure that that would be possible, if we wanted it to separate legalr mandates from our own , policymakers at the

senior level do talk to one another on a fairly regular basis. the governors meet six times a year or more than that. finance ministers and central bank governors meet at the g-20, i.m.f. meetings twice a year. the g7 meets. we exchange notes on what is happening in our economies, and we try to explain to one another how we are thinking about implementing policy to try to promote understanding and avoid surprises. we all understand our policies have spillovers. that is certainly true for the united states. we have seen our policies have spillovers in emerging market countries.