sophisticated as the united states or russia they still possess an untold number of icbms most of which are aimed at the united states and hundreds of short and medium-range missiles for use in an asian theater of combat. chinese military thinking is openly anti-american. in military journals they write openly about strategy of unrestricted war for using a combination of traditional military means along with cyberwar for, economic worker, atomic warfare and terrorism. this is what they write in their military journals. they're also working to develop a space-based military capability. they're investing in various launch vehicles including man space flight, a space station, extensive anti satellite weapon remained to negate the united states's global satellite coverage. they will do everything in their power to discourage the united states from deploying things such as missile defense that could stop the chinese nuclear

capability and the ability of china to operate at will in the pacific. absent a missile defense that we currently do not possess that can stop chinese ballistic missiles the u.s. will be hard-pressed to maintain its security commitments in asia given the advances china has made with offensive nuclear forces. the u.s. seventh fleet however capable cannot withstand the kind of nuclear missiles and nuclear-tipped cruise missiles that china could employ against it. the capability of the chinese b f 21 be against their aircraft carriers can raise the stakes of the conflict in the south china sea that would not portend well for the united states. the chinese have studied american committee is for the past 20 years and built offensive weapons meant to negate our previous advantages. weather or not these advances are effective is unknown but what we do know is the united

states has not taken in my view adequate steps to modernize our forces to meet the ballistic and cruise missile threats of our enemies. the cruise missile called sunburnt cruise missile which was designed by the russians and deplored by the chinese presents a technological challenge because of its mark free speech and the enormous size. these a physical problem in time and space that very smart people try to figure out and do something about. the chinese, the russians, the iranians have thought about these problems and tried to solve these problems to third vantage. that is that the level of capability. what of intent? china has for some time carry out policy of what has been termed the peaceful rise of china. they possess a growing economy and growing military power but with no clear intent of being an aggressive power. that is what we have seen so far but will we have seen lately is

what scholars like tom ben have termed the red guard generation. these are in general 50 to 65-year-old who grew up during the cultural revolution and now taking the names of the chinese military. they're no longer interested in being a secondary power in the eyes of the world and they will match their economic power with military assertiveness. this could manifest itself by a desire to take back taiwan by force people avenge themselves for the wrong done them by imperial japan or move the united states as the preeminent military power in the world. our far-fetched to this may seem to the american policymaker sitting not very far from here it is widely held that america is the superpower on the decline with economic problems that will limit our ability to modernize

our military and maintain our alliances around the world. one can see in the washington post today talk of cutting back our defense procurements. and because america lacks adequate conventional military means to wage war against the country as large as china it is thought that the u.s. would resort to full-scale nuclear war to defend its asian allies from an attack by china. this is the prospect that caused mao tse tung to call the united states a paper tiger. we possess economic and military power but we will not use them to our advantage. this may only have been propaganda and i'm not saying i believe that, the current chinese aggression against japan and the east china sea and they're open assistance of the iranian nuclear program as well as a sale of arms to the taliban in afghanistan by the chinese

would suggest that the communists of chinese seek to marginalize united states and play the role the soviet union once played as sponsor of global revolution against the west which brings us finally to russia and the degradation of strategic thinking during and after the cold war in this age of nuclear weapons. we used to be guided by the principle that the central strategic objective of the united states is the prevention of direct attack upon the united states. that was simple and straightforward. for the past 50 years we have been taught something different, that great power politics is beyond the grasp of ordinary policymakers. that we must understand the balance of power between nations such as the united states and russia especially since we possess nuclear ballistic missiles, america cannot seek superiority over another nation west we create strategic instability.

that is the common view expounded by universities, think tanks and schools of foreign service. there is the collective view that i exaggerate only slightly that america is hardly worth defending or that american military power is fundamentally suspect and far from a fringe point of view these people occupy the foreign policy and national security establishment of this country. you will say these are the intellectual shortcomings of the left. perhaps. conservatives for their part have been basking in the glow of winning the cold war, a war i will say not to be won. so mentally invested in the victory conservatives fail to appreciate that we did not disarm the russians of their nuclear arsenal, we did not stop there active measures to undermine american in the west nor did we create a liberal democracy in russia. what was winning the cold war

about and what should be celebrated so confidently? for the past two decades we paid the russians to dismantle nuclear warheads they would have dismantled any way. all the while the use those resources to modernize their ballistic arsenal. we on the other hand have not tested a nuclear warhead since 1992. we don't even know exactly if they work. we have no more technical nuclear-weapons force a superpower conflict or any serious challenge will not come to the united states nor did we build the missile defense promised by ronald reagan since this was no longer necessary since we won the cold war. instead we prefer to stay vulnerable to our enemies when we know we have the ability to prevent their nuclear arsenal from destroying or keeping us hostage. this was true under republican and democratic administrations alike including the last one. wide those missile defense that? is it seems like a specialty

issue, doesn't it? kind of like the national security equivalent of the flat tax. but of course it is not merely a specialty issue. it is the singular issue upon which our national security must hinge because so long as the russians possess offensive weapons that can destroy us we must substantially exceed to their demands west we escalate tensions to fullscale thermonuclear war which i hasten to add we will not do. it is said that every war is a moral struggle, moral in that involves life and death, for acquisition of men and material used to wage war and ultimately victory or defeat. although the cold war is said to have been won by the west it was not so much a victory as an interlude and we would do well to get on with the crisis at hand. for instance the senate just ratified the new s.t.a.r.t. treaty that will reduce our

nuclear arsenal unlikely cause us to further delay the building of missile defense because it would be to sour relations with the russians. perhaps the question ought to be asked what is the morality of signing a treaty with a nation such as russia that engages in massive deception against the united states, supports our enemies abroad and build of reward and nuclear weapons whose purpose is to blackmail or destruction of the united states. the debate over the new s.t.a.r.t. treaty would have been easier if it were merely deficiency in the language, restrictions on missile defense and the viability of nuclear inspections. something more insidious is at work. as of the fire to ratify new s.t.a.r.t. reveals the moral bankruptcy of the foreign policy establishment of ms. country and an extraordinary amount of self deception by people who know better. at the heart of our strategic defense today is the notion that we will use massive nuclear

retaliation against a nuclear power that attacked us but absent the reliability of our nuclear arsenal and a smaller nuclear arsenal how can such a strategy work? today we possess an aging nuclear force that we are not really sure will work if we had to use it to retaliate to russian, chinese, north korea or undetermined attack. so perilous is this lack of a renovation of the nuclear arsenal that the obama administration believed it could induce senator john kyl into leading the charge for approval of a new s.t.a.r.t.. senator kyl thankfully knew better and did his best to stop it. new s.t.a.r.t. so we're clear about this will not modernize a single warhead within our arsenal but will instead create the illusion that america is better defended. after all is that not the point? why does one not make a treaty so that they're better off after the treaty.

the question of nuclear modernization of our arsenal should be debated. hearings should be held on it and we should look at the condition of their nuclear force and take whatever steps are necessary to insure our nuclear deterrent. it is not all clear that fewer weapons will make a safer. strategists have often work fewer nuclear weapons are likely to encourage other nations to build nuclear weapons themselves rather than discourage them. catching up to the united states is a powerful incentive if one wants to dictate world affairs to the liking. third, the russians make this treaty because they do not engage in a single act of foreign policy without consideration of what will give them a global advantage over the united states and its allies in the west. new s.t.a.r.t. is no different. the russians to they wish us to reduce our nuclear arsenal and forego a missile defense. they on the other hand are

modernizing their forces and possess themselves a crude system of missile defense using surface to air missiles with nuclear-tipped interceptors. we have no way of knowing today how advanced the russian offensive force is or how detailed their missile defense is. but even in well-meaning policy circles rushes is thought not to be an adversary. even the wall street journal says russia is not an adversary. russia wanted that treaty because it gives them a strategic advantage. in the united states today will not even contemplate missile defenses to stop a russian or chinese nuclear missile aimed at the united states. the argument is made that limiting our nuclear arsenal and not developing new and better nuclear weapons gives us moral high ground in dealing with other nations. can a nation like ours be said

to have nuclear superiority when in fact we won't do the most basic constitutional duty and provide for the common defense of our people by building a robust missile defense? missile defense is referred to these days as if we already have one and i will save this again. we cannot stop is in russian or chinese ballistic missile nor are we planning to build a system that will stop a russian or chinese missile. this is a fact and known to many americans and the unspoken by american policy-makers for fear of the rightful angered would engender in american citizens. if there is any more profound moral statement the country is willing to make scent that they willingly, knowingly and purposely keep their citizenry vulnerable to enemy missile attack because of the morally corrupt notion that is better to engage in a full-scale nuclear

war rather than build a defense against such weapons. let me say in conclusion that if we are not going to defend the american people from these many threats we ought to tell from. that is the candor do a free people. what i said sounded like bad news. i don't mean it to be because if the american people understand these facts clipper turtle if their elected representatives tell them these facts i think they will demand something be done and something be done quickly. we have the technology to build missile defense to stop an iranian ballistic missile in -- north korean ballistic missile which we can somewhat today. and we have the technology to build missile defense against russia and china. today we don't do that. there's something unconscionable about that which explain to the american people unbelievable

rise up in danger, and inga that will rival the tea party enter about obamacare and other problems today. i want to thank you for listening to all that and i would be happy to take your questions. [applause] >> parter kennedy, thank you for your sobering comments. i'm not sure if i am nervous about your comments or scared about the money out. i was speaking with my 17-year-old 76 islam ones to either kill us or kill us. as it would do you mean by that? want to change our spirits or morality as we live or kill us as we died. b heritage foundation has 33 minutes which is an excellent resource for those that are not aware of that.

will you do me a favor please and comment on whether or not you think that -- what you think our political liberal leaders such as nancy pelosi, harry reid, what do you think their end game is for the united states ten years from now or 15 years from now? would you think they hope they look like because for me it is a scary picture. thank you. >> thanks for that question and agree with your son. islam is a real danger as i tried to explain. the political left and america i think doesn't worry about national security because they think the political right is worrying about national-security. the unfortunate thing is the democrats in this country used to concern themselves with national security. the anti-communist. unfortunately they moved away from that to purely social issues and i think they believe republicans weather is really a crisis will figure out what

weapons system to build or something else. i myself believe my remarks were not aimed at them. ago expect them to do these hard things. but do expect republicans to take this seriously. there's a lot to worry about. the title of the panel is not just the economy. we just mean to say to of republicans and democrats, republicans especially this is something to be worried about. we want to create jobs absolutely. but we also must provide for the common defense. that is among the first requirement. the time will come in my judgment where you will have a chinese general who wants to do something because he is tired of being fought as secondary and he will have ambition. there is one of thing is that men desire glory. weather happens in the board room or elsewhere. it could happen in the war room. is there a chinese general who

thinks of putting china on top of the world? are there people sitting in rooms like this in beijing or moscow or tehran or damascus who are figuring out how do we make our power the preeminent power? we put the right need to take that seriously because they're taking it seriously. >> fort least a month we have heard talk about a treaty with iran which will put iran's missiles in venezuela. but i have heard from either side any mention of the monroe doctrine. will you comment? >> thank you for mentioning the monroe doctrine. john quincy adams would be proud. it is a violation of the monroe

doctrine. hugo chavez and venezuela should not be allowed to make treaties with powers outside of our hemisphere to build weapons aimed at the united states. it is a sign of our moral bankruptcy that no one even raises the notion of the monroe doctrine. that no one would seriously say that is not going to happen. say it publicly to the american people. much of our diplomacy is done in private after wiki leaks. i am not sure how much of it. it is worth telling the american people things with candor. on the economy, if we are bankrupt tell them that. we can't afford certain things. tell from that. if we have enemies tell them that. don't let people in our hemisphere. that seems to be an outrage. the question about the left, and expect no one of the leftist a that. we are the people on the right saying what you just said.

excellent point. >> to graduate school about electronic magnetic poles mom. i am very concerned that that is more dangerous than any nuclear bomb to me because if it is used it would fry every electronic component, transportation would fail, distribution, communities could starve to death because nothing could be transported. i read all so that the military was more equipped to handel and emt -- but i doubt our ability to protect ourselves on the military side as well as just like washington d.c. if one would tree exploded how would that impact our nation? >> an excellent question. the question really is, one can take a nuclear missile, launch

it in the high atmosphere, 300 kilometers above the earth and create an electromagnetic pulse. in the vacuum of space there is no fireball explosion. it is just a pulse. but this calls destroys all the electronics by destroying the transformers that distribute power through the united states. if an electromagnetic pulse bomb went off over chicago in line of sight covered the united states, the transformers are all destroyed and a lot of simple wiring is destroyed. yourself alone might turn on but the lights in this building go out. the elevators won't work. your car may or may not work. you are walking home today. when you get home your refrigerator won't be working. you won't have water because the water is pumped electronically. we have enough food and water for 3 days in your house if you are like the typical american. after that you run out of food. stores run out of food after three days or a week.

the electromagnetic pulse commission convened by congress thought that the industrial infrastructure of the united states absent electricity can support life here for about thirty million people. we are a country of over 300. what happens to those other people? they don't have food or water. it is a horrible weapon, this electromagnetic pulse weather. was fought during the cold war that we would do to the russians and the russians would do to us. today the iranians are building nuclear weapons. they practiced twice in the caspian sea launching a ballistic missile from a ship. the iranians practicing in the caspian sea launching a ballistic missile from a ship which could someday be off of our coast. when they practiced this in the caspian sea the missile was not used to go up andrea peron -- reenter the atmosphere to simulated nuclear warhead.

the dummy warhead was exploded in the high atmosphere to simulate an electromagnetic pulse balm. it is not a secret. the iranians are practicing this. in the face of this two things can happen. you can build a missile defense or hardened the system. i would advocate that you do both. you can build a robust missile defense because he will defend us from not only the iranians but defend us from the war north koreans. also hardened the system. there may come a time when we need technologically more robust electronic system. it seems like such common sense.

if you have enemies practicing to destroy you why wouldn't you figure out ways of preventing that? we have an alternative. if we know that the iranians did that to us, if it actually happened, we would have two hundred million americans dead a potentially. we would have the option than of trying to obliterate seventy-five million iranians. what good would that do? what comfort would that give your starving child? none. build a robust missile defense. we have it within our budget to do. as broke as the united states is today we can afford that. the technological advances we would achieve by doing that much of a we enjoy today was because of the aerospace program of the 1960s. this would employ people and defend the united states. >> back in the clinton

administration there was talk of sharing technological information with the chinese. nothing much ever boil to the surface in objection or outrage to that. can you measure today the consequences of that sharing of technology with the chinese? >> during the clinton administration we transferred a lot of technology from american aerospace to the chinese. it did improve their ability to miniaturized and it puts our fleet at risk in the south china sea. with better guidance system, aircraft carriers and battle groups.

in advanced chinese missiles, and nuclear-tipped cruise missiles used with that technology have made the chinese into a very formidable force. i don't mean to paint the united states as backwards or incapable. but we have not kept up with some of their developments. we can catch up. that should be our business. we should tell americans that they can be defended and will be defended and should be defended. i believe the american people will rise to that challenge but the chinese are very hard working, very creative and mean to challenge us in the world. >> the immigration component. you mentioned the islamic immigration threat. what about the chinese american immigration threat. so much espionage had come out industrial and military.

>> chinese-american immigration and potential for espionage. we live in a free society. i don't expect we keep many secrets. i don't expect us to keep many secrets. i think that is okay. it is good to be transparent. i think it is good to tell the american people they are not defended. you tell them they are undefended they will demand the fence. if america has a strong army, navy, air force, missile defense, and it should not be kept a secret. i don't think there's anything we can keep secret from our enemies. we live in a free society. they will find things out. there is the internet, there is wiki leaks. there will always be espionage. it doesn't need to be chinese-american that move here to sell our secrets. and the american or american of any race might sell our secrets. people will do such things.

some people who wish to betray the country, we will build a defenses that can overcome whatever espionage may be waged against us. i doubt sincerely in our history we kept very many secrets. i believe the russians and chinese have known almost everything we are trying to do. we have tremendous capacity for deception but that is mostly self deception at the highest level. >> you used the term military establishment. i was wondering if you could, and why there hasn't been more demand between the generals and joint chiefs people to demand more funding for these programs

and defense measures. if it is merely politics or blind optimism or some reason -- >> that is an excellent question. when you look at these generals and put their lives on the line and they're good men and decent and have done great things for our country but you ask them to think about politics and it doesn't go so well. look all the generals that were in favor of the new s.t.a.r.t. tree or the number of generals for a world without nuclear weapons. just because you are a general and put your life on the line doesn't mean you understand all the nuances of strategy or that you are in the business of demanding these things. we give too much credence to generals and material experts about such matters. if you ask the average citizen

in matanzas what should be done to defense him, he will tell you what -- what ever is necessary. find out what our enemies are doing and make sure we can stop that. we send people to congress to figure these things out. we should have to ask general. most of the things i told you you can read in a newspaper. some said what i said today. you can read about the aerospace literature about russian missiles. you can find out from iranians in congressional hearings what they are doing in their new nuclear programs. we know these things. we send people to congress to study these things, to debate them and build defenses for us. let's not rely on the general's. your own common sense could tell

you we have enemies and we have to meet the challenges. we have time for one more question. in the back. >> apart from the battle over increasing the defense budget what about cutting some of the things we are already spending money on to build up china like military to military exchanges, bank loans etc.? >> we need to worry about unnecessary expenditures. my colleague mark helprin mentioned in wall street journal if there is a wasteful expenditure in the pentagon we should cut it. absolutely. on the other hand if there is something we need that fund that too. how much should we spend on national defense as a percentage? some people from around numbers.

3% but still 5%, 6%. what is the number? it could be 100%. whatever it takes to keep us a free people. it won't have to be 100%. that is ridiculous. we should figure out whatever it takes to make sure the russians, the chinese and the islamic world believe it will be a bad idea -- if we do that we will not spend as much. may go want to fight a war with the united states because it is a bad idea. thank you for listening to me and thank hillsdale college. there is a lot to do and i thank you for your attention. [applause]

>> this morning on c-span2 of federal reserve governor discusses the fate of the economy. look at the warsaw ghetto from other of "the boy: a holocaust story" and from in depth we talk to miss least analyst and author phyllis dennis. >> i think news organizations have adapted. is it great that overall news organizations are not doing as much? the responsibility here, the public bears responsibility for keeping themselves informed. >> sunday abc news correspondent martha raddatz on the war in iraq and afghanistan on a strategic and personal level on

q&a. there is a new way to follow congress with c-span's congressional chronicle. track the daily time lines, read transcripts and find a video archive of each member. congressional chronicle, part of c-span library. washington your way. on friday the federal reserve governor talked about the economy and said she expects a stronger economic recovery in the coming months. elizabeth duke spoke at an economic forum in baltimore hosted by the maryland bankers association. this is about a half hour. >> good afternoon. i want to join scott in welcoming everybody today. this is the third year we have been involved in this event. we are proud to be involved. this has grown to 800 people today. we believe this is not only the way the bank or industry can give back to our community but

that is one of the reasons we invited 250 of our clients today. thank you for joining us. if you have feedback how we can make this event better we would appreciate it. i have the honor of introducing our final speaker today. our final speaker was elected governor of the federal reserve system in august of 2008. there was not a lot going on then. she brings a unique perspective to the table particularly a banking perspective. prior to joining the federal reserve and being elected as a governor elizabeth duke was chief operating officer of town bank and community bank in virginia and prior to that was the member of the executive management people still held a number of executive management positions at several organizations. elizabeth duke is a former board member of the maryland bankers association and in fact chaired

that organization from 2004 to 2005 and was a former chair of the virginia bankers association. please join me in welcoming gov. betsy duke. [applause] >> thank you. it would have been a real honor to be chairman of the maryland bankers association but unfortunately i wasn't but i was chairman of the virginia bankers association as well as the american bank association. before i begin unlike to bring greetings from our newest governor, former commissioner of banking in the state of maryland. she is doing a great job for us. we are thrilled to have her. i am also pleased to be here at the beginning of a new year and offer my assistant of recent economic developments and the economic outlook of 2,011. i plan to discuss the actions the federal reserve has been taking to support the economic

recovery. before i begin i want to emphasize the views i am presenting are my own and not necessarily those of my colleagues on the federal open market committee or the board of governors. in the third quarter of 2009 the u.s. economy began to emerge from the deepest recession of the post world war ii period. one that has been precipitated by severe financial crisis. economic history teaches such downturns are deeper and the pace of their recovery more moderate than is the case for business cycles not associated with financial crises. that is the u.s. experience for the past year-and-a-half. real economic activity has been recovering over all but the speed and strength of the rebound have been restrained by significant financial head wind. the most telling measure in economic recovery is the painfully slow improvement in the labour market. to be sure we are seeing some signs of improvement in the data. indicators of hiring and job

openings rise in recent months and recently new claims for unemployment insurance have begun to fall again. 18 months into a recovery there are more than seven million fewer jobs in the economy than prior to the recession and the unemployment rate is stubbornly close to its peak. american families have not experienced such a prolonged period of unemployment since the 1980s. on a positive note the recent news on production and spending offers encouragement the expansion may be gaining traction. manufacturing production which rebounded sharply during the first year of the recovery continued to expand at a solid rate in recent months. importantly while earlier gains were supported largely by the rebuilding of business inventory the recent increases represent a strengthening and domestic demand for domestically produced goods. with the recovery in economic activity abroad exports have been providing a boost to our

manufacturing sector. consumer spending which rose at a modest rate in the first year of the recovery's strength in recent months. personal consumption expenditures adjusted for inflation increased at an annual rate of 3% between june and november with sales increasing across a relatively broad range of consumer goods and services. the pickup included an increase in the purchase of light trucks that prompt automakers to increase their assembly schedule for early this year. we don't have december data yet but an issue reports of holiday spending have been strong. even with the recent pickup consumer spending has not provided its usual cyclical basis to the recovery as households have been restrained by a substantial loss of wealth sustained during the financial crisis. persistently high unemployment and reduced availability of credit. the good news is some of these restraints have been easing. rising stock prices have been

rebuilding household help but the ratio of debt to income has come down and the language in the rates from consumer loans have been falling. supply of consumer credit has fallen over the last year. terms and conditions for these loans are still tight relative to historical norms. business investment and equipment and software which rebounded strongly early in the recovery continue to bose solid gains during the fall. the health of larger firms with access to capital markets has shown steady improvement in the last year. operating earnings per share for s&p 500 firms have been rising. financing by corporations has been increasing and indicators of corporate credit quality have continued to improve. the outlook appears positive. recent surveys of purchasing managers have crossed a range of manufacturing and non manufacturing firms indicated an increase in their plans for capital spending in the coming

year. in contrast for small businesses the situation is more difficult. surveys of bank lending syndicate banks are no longer a tightening credit for loans to small businesses but interest rates on small business loans remain high relative to market rate and outstanding volumes of small loans to businesses continue to decline. according to the laces latest survey small business owners see some credit availability but they have not seen a pickup in sales that would trigger more investment. one continued area to stress is housing. after what looked to be a gradual recovery in new home building in 2009, and 2010 these single-family starts slumped again during summer and remained depressed in recent months. sales of new and in vesting homes are at low levels and inventory remains high compared with the monthly pace of sales. house prices even apart from sales of bank owned properties

have been falling again and many households lost confidence that prices will turn up any time soon. reports of foreclosure have heightened concerns about mortgage loan servicing and mortgage modification and created uncertainty about the pace and volume of foreclosure sales yet to come. delinquency and defaults on existing mortgages seem to have peaked but have remained at historically high levels and while low mortgage interest rates contributed to strong refinancing activity many households are unable to qualify for the loans at the most favorable terms due to depressed home values, or weaker credit score. commercial real-estate market is anemic. even after three years of declining investment in office and commercial structures vacancy rates are elevated and property prices remain weak. financing conditions for commercial real estate remained tight and delinquency rates deteriorated further during the

third quarter of 2010. modest signs of improvement have surfaced. after declining for two years prices of commercial real-estate although still volatile have changed little since spring and the number of property sales transactions increased recently. issuance of commercial mortgage-backed securities have turned up from a low level. state and local governments continue to struggle. the federal fiscal stimulus the past two years helped shore up this sector but did not prevent significant cutbacks and services in unemployment associated with steep decline in revenue sustained during the recession. in the second half of 2010 with some pickup in retail spending and moderate gains, revenues began to firm and outlay by state and local government appeared to stabilize. these jurisdictions will face significant pressures to balance -- satisfy balanced budget

requirements and rebuild their depleted reserve fund and the same time federal stimulus grants are winding down. with recovery proceeding at a moderate rate and margin of economic slack quite ride the trend has been lower despite upward pressure from rising cost of energy and other commodity and rising price of imported goods. 12 months end november overall inflation was 1% and the 12 month change in inflation which excludes more volatile food and energy costs was 0.1%. both members show inflation has drifted lower over the preceding year and that slowing appears to have been broadly based. after reviewing a number of measures, i find it difficult to identify a single measure that doesn't show inflation has drifted steadily lower. at the same time, longer run inflation expectations appear to

be stable. the recovery continues to be uneven across sectors recent economic and financial developments are broadly consistent with my forecast that the economic recovery will gain more momentum and expansion should become sufficiently strong to gradually bring down the unemployment rate. key elements of my forecast include further strengthening in consumer spending and business investment in equipment and software both of which receive additional support from the recently enacted tax package. given the high level of resource slack in my projection for a gradual reduction in unemployment i expect inflation will remain subdued. my forecast for continued growth in consumer spending is predicated on an assumption of ongoing recovery and wage and salary income that should accompany the expected pickup in hiring. in addition household balance sheets should strengthen as asset prices firm and continue the leveraging reduces household debt. businesses should become more

confident about expanding about upgrading facilities and adding workers. today larger firms have contributed importantly to the recovery in business spending and seem well positioned for further investment. overtime small businesses which have been held back by slow recovery in demand and greater difficulties obtaining credit should also become more able to increase their spending and expand operations. prospects for u.s. trade are favorable but economic activity rebounded rapidly during the initial stages of the recovery by a bounce back in global trade and inventory restocking around the world. activity abroad has slowed more recently and seems to be settled on a sustainable path that could still rise in demand for u.s. exports. barring significant spillover from the financial turmoil in european countries the expansion abroad should continue. in that regard i should note that renewed concerns about fiscal strain and banking sector problems in the euro area have

recently contributed to increased volatility in financial markets but today we have not seen a widespread pullback. my outlook for the housing market and commercial real-estate is more cautious. a sustained recovery in income and jobs will be an important prerequisite for the housing industry but until the overhang of vacant homes is reduced significantly and house prices begin to firm due residential construction is likely to remain at low levels. time will be required to absorbent currently large amount of vacant office and commercial space before construction in that sector begins to turn up noticeably. one important element is the expectation that financial market funding and lending conditions will continue to improve providing additional support for further pick-up in consumer and business spending. during the financial crisis banks reported on quarterly survey an extraordinary tightening of lending standards and today only a small part of that finding appears to have

been reversed. as banks repair their balance sheets and develop greater confidence in the economic outlook i anticipate standards will improve further in coming quarters. nonetheless i expect low volumes especially real-estate loan volumes to recover only slowly as both borrowers and lenders proceed cautiously. one notable exception to our forecast for gradual improvement in financial markets is my expectation that residential mortgage markets could take a number of years to repair as policymakers and market participants grapple with the role of housing finance, adapt to changing regulations and look for better ways to manage and price risk associated with mortgage lending and servicing. whatever the structure of housing finance is to become the large overhang of problem loans and weak counting markets will necessitate a gradual transition. facing these assumptions i expect a gradual decline in unemployment and little change in the underlying rate of inflation. congress has charged the federal

reserve with two objectives as is our dual mandate. achievement of maximum employment and price stability. as i noted earlier the financial crisis in severe recession left the economy far below levels of resource utilization consistent with maximum sustained employment. the wide margins of economic slack that have persisted have moved inflation below the level of 2% less which is the rate that most fomc participants see as consistent with our dual mandate. in light of these results monetary policy continues to be focused on ensuring the economic recovery is sufficiently strong to sustainable progress toward our mandated objectives. i would like to take a few minutes to offer perspective on how monetary policy has been meeting this challenge. the federal reserve responded forcefully to the financial crisis by employing a range of measures and programs to provide badly needed liquidity to financial institutions and markets.

at the same time the fomc used standard and less conventional forms of monetary policy to promote economic recovery and preserve price stability. the standard way in which it stimulates the economy is by reducing targets for the overnight federal funds rate and shaping expectations of future policy actions through the fomc statement and other communication. such policy actions typically lead to lower interest rates and broader easing of financial conditions that together business and household spending and net exports. after the fomc lowered its target for federal funds rate to nearly zero in december 2008 that conventional policy tool was no longer available. to provide additional accommodation between december of 2008 and march of 2010 the fomc elected to purchase large amounts of longer-term credit agency and mortgage-backed security. those purchases put downward

pressure on longer-term rates generally and helps normalize the spread between mortgage rates and long-term treasury rates which widened during the financial crisis. reducing longer term rates influenced the economy in the same way as lowering the expected path of short-term rates. the decline in longer-term rates lowers the cost increases the availability of capital and credit which encourages business expansion. in the most recent episode another important result of lower rates has been a reduction in debt service burden from existing debt. households in particular significantly reduced mortgage payments refinancing and numerous small business owners have told me they could not have survived downturn without lower rates. economic activity picked up in 2010 but by the time the fomc met in august the rate of growth was slowing and inflation continued to drift lower. lower mortgage rates were resulting in faster prepayment of mortgages underlying the agency held by the federal reserve.

to avoid the modest monetary tightening that would result from the fed's gradually shrinking portfolio the fomc voted to reinvest all principal payment from agency debt and agency m b s in longer-term treasury security. the committee began a discussion about the strength of the recovery, the amount of slack in the economy, the path of inflation and the appropriate action to provide additional monetary accommodation should such action be necessary. in november the fomc dead additional monetary stimulus was needed to support the economic recovery and help ensure inflation over time return to desired levels. to implement the stimulus the committee decided to expand its holding of securities by purchasing an additional $600 billion in long-term treasury security by the end of the second quarter of 2011. after considering the cost and benefits of the action and recognizing that taking no action would have its own risk i believe the expansion of

security was worth implementing to support the economy and make the recovery more durable. i don't want to overpromise. this is not a panacea and it is still premature to judge the overall efficacy of the program i believe by exerting downward pressure on long-term interest rates it has provided and will continue to provide support for a vulnerable recovery. at the same time the risks associated with this section are manageable. we have safeguards in place to monitor evolving conditions and most importantly we have the conviction to act when necessary. based on our own research and that of others evidence is accumulating that purchases of long-term assets have been successful in the glittering downward pressure on longer-term rates. consistent with research on the effects of asset purchases between august when ben bernanke in a speech publicly suggested the federal reserve might take additional action and november when the action was taken longer term treasury rates fell as

market participants priced in additional fed purchases. since the announcement of the decision to purchase long-term treasury longer-term rates have increased. it might seem the recent increase in rates contradict the view that asset purchases put downward pressure on rates. the logic behind this view works in both directions. if the market expects the fed to respond to weak economic conditions by buying more assets investors bid up the assets and rates fall. conversely if the market expects the economy to strength and investors ratchet back expectations for fed purchases, reduce access and rates rise. the current rise in rates is exactly due to this latter circumstance. the outlook for the economy in a corresponding decrease in market expectation for future accommodation. one of concern that has been raised about asset purchases is resulting expansion of the fed balance sheet and corresponding

increase in reserves. some observers have noted that an increase in reserve balances could lead to an increase in money supply which would in turn generate inflation pressure. others worry the elevated levels of reserve balance might make it difficult for the federal reserve to remove monetary accommodation at the appropriate time. we will need to remain alert to economic the filaments but i am convinced we can and will manage these risks. the monetary policy objective of asset purchases is to foster downward pressure on interest rates. the assets are paid for by crediting the reserve balance of banks, generating higher level of reserve balance in the banking system. reserves are relevant to the growth of money supply because banks are required to hold a percentage of some reserves with the federal reserve. that is the total amount of reserve in the banking system act to cap the maximum reserveable deposit. it is important to note is deposits, not reserve balances

in the monetary aggregates used to measure the money supply. and one is made of deposits and other czechable deposits and am 2 is made of am 1 and saving small time deposits and retail money-market mutual funds. moreover the link between the level of reserve balance and monetary aggregates in the current environment is quite weak. you were probably talk as i was that broad monetary aggregates increase when reserve balances increase because the larger volume of reserves support increased lending which leads to a larger volume of reserveable deposits. the argument might hold in normal circumstances the current environment, excess reserves are many multiples of required reserves and adding reserves is unlikely to spark a further increase in the volume of deposits. as a result the textbook link between reserve balance, bank loans and transaction deposits is not operative at present. fundamentally the levels of m1 and 2 are determined by the

strength of the economy and the preference of business and consumers for money depend on the heels of monetary instruments and competing assets. recent experiences illustrated difficulty in identifying a reliable relationship between reserve balances and monetary aggregate. even though federal reserve actions to fight the financial crisis and support the economic recovery added roughly $1 trillion to a base of $43 billion in aggregate bank reserves and rose at a relatively moderate rates over the same period. going one step further i should note the language will tween the monetary aggregates and real economic activity or inflation will be weak in recent decades. the lack of reliable relationship between monetary aggregates and the economy led the federal reserve to abandon am one as a key policy instrument in the 1980s and reduce the role of into as policy instrument in the 1990s.

in a 2006 speech about the historic use of monetary aggregates setting federal reserve policy ben bernanke pointed out that in practice the difficulty is in the united states financial regulation and other factors lead to recurrent instability in the relationships between various monetary aggregates and weather nominal burials. my colleagues and i will be monitoring a wide range of financial and economic developments very closely including the growth of money supply, inflation and many other financial and non-financial variables. based on a full assessment of those developments the fomc will withdraw monetary accommodation at the appropriate time. my view is the elevated reserve balance will be inflationary if they prevent the fomc from effectively removing monetary accommodation by raising interest rates when the time comes to remove such accommodation. i am convinced that will not be the case. the fomc has tools at its disposal for raising interest

rates. the federal reserve can put upward pressure on interest rates by raising reserve balances and we develop new tools that will allow us to drain reserves if necessary. in particular we can train large volumes of reserves by replacing them with purchase agreements and term deposits. we can always sell the securities repurchase. such sales would drain reserves and also put upward pressure on long-term rates. to summarize the recovery and economic activity has been uneven and has not been sufficient to reduce unemployment noticeably but i am encouraged by signs the recovery gained traction recently and i believe it is the same gains in consumer spending and business investment and further easing of credit conditions will reinforce each other leading to greater confidence and improving prospects for extended expansion that over time will reduce unemployment to a level consistent with full employment. at the same time i