>> anyone who has ever held a position like mine, has to resist those pressures but if you look at the desire of the operational theater to the best possible capability, so this tendency to optimism in terms of requirements in what we can accomplish. they tend to be optimistic about what can be produced from what kind of capability can result. when budget years put together their budgets they tend to be optimistic about how much you can get that money because they want to get as much as possible into the budget. what people did on products they can be optimistic because they want to win the business.

bid more aggressively and hope you can execute. it ripples all the way through our system. essentially one of the things you have to keep risk under control is to push back against the. dimension yuca, essentially situations where we haven't completely defined the job to be done. we haven't reached a complete agreement with the contractor about exactly what that job will be and what it will cost us. so we start contract activities with the idea that once after we start it will go back and complete the definition of contract. the day is pretty clear on this. in development in particular that leads to problems to it leads to difficulties for the downstream. is look at the history of our programs and the cost overruns, and i'm going to be publishing some date on this, yuca in development is consistently

resulted cost and schedule overruns. it's because the job has not been well enough defined on the government part. the contractor isn't ready to build a. they're still open is for optimism that has not been refined to get. the other problem with the yuca is you give up a larger negotiation leverage once you sign the contract. i resist them. there are rare occasions where we can -- interestingly the data on production contracts that are start with an -- is not nearly as negative. the problem is primary and the developer side of the house. so as a general matter we resist doing the that are rare occasions where need to get started. if we're doing something, it makes more sense to get the work started. people be dying if you don't get that product out and you want to get up quickly and you take some risk and you may spend more money as a result of that but you get the product out quickly. >> based on your testament it sounds like the enemy's optimism

and i don't know the we want to be pessimistic when we get into this. >> we want to be pragmatic and real. >> thank you. >> mr. chairman, we appreciate very much having the cooperation of this distinguished panel of witnesses. and i have a few questions. and general welsh, the major challenge before us in this year is trying to avoid budget decisions that compromise our capabilities that are needed by u.s. and allies, and our allies, to look down the road 10 to 15 years to assess the threats that will exist then, and then making decisions for now that help meet those needs and capabilities. how do you apply that theory to

actual practice? are we making progress in meeting the challenge? >> vice chairman, i believe -- not hearing? light is on. this ought to work for you. thank you, mr. chairman. it's amazing construction to continue to have to do. vice chairman, the biggest problem we have, mr. kendall mentioned optimism at a think he's exactly right by the way. when you're looking at the military threats of the future, we also tend to be pessimistic. so we assume the future threat is 10 feet tall, all capable, all-knowing and almost impossible to defeat. so we knew absolutely the best things but again by in massive quantities available to fight the war. with a fight that will look at the future threat. in the air force we look very

closely at the future threat to access, whether it's for global strike mission or its supporting ground activity, close air support or indirect strike. as we look at that threat, no matter how you examine it, when fifth generation aircraft become available to our adversaries, when advanced sams systems like the as 300, available to our adversaries, when you're able to integrate and train with those systems, the difference between fourth generation and fifth generation fighters becomes starkly clear. and the reality is that talk about how many you need, just in a pure capability perspective, if a fourth generation fighter meets a fifth generation fighter, the fourth generation fighter may be more efficient but it will be dead. it really is that simple. and so we need to determine when do we need this high-end capability, how much of it we need and then how do we mix it with a fourth generation capabilities that will have four years. we're going to have a mix of

aircraft for a long time, and some missions will be better suited to the legacy fleet, that will have little lower operating costs and some will be better suited to the high-end fleet that will have to fight the highly contested determined foe into full-spectrum fight. you have to have the fifth generation capability to succeed in the air fight. that's after pretty comprehensive analysis of the threat we intend to face. >> given the expectation of increased f-35 cost and the inevitable production delays, is it still true or is it time to start looking at investment in alternatives as well as continued commitment to the f-35 program? >> sir, i will give you a brief answer and then see if mr. kendall our general bogdan would like to comment on the production cost. my view from the program office in the company, the contractors understand what it takes to build this are going to

completely have those cost portable captured. the big cost where most focus on the is the operations and sustain the cost overtime. what does it cost to manage this we come to our previously, to repair the fleet, to supply the fleet? a number of initiatives supported by all the services represented here who are working very hard to try and drive those costs down, and doubly general bogdan can give you good examples of early success in that effort. this has to be an ongoing continuous effort. one of the benefits we have in kind of a strange side benefit of the concurrency problem, the chairman described, is we have actual numbers now maybe earlier in the program than we would otherwise. so we are starting to replace projected costs with actual costs. as we continue to fly more hours we will have a better feel for what it really cost to maintain this airplane, but that is going to focus. that will drive us to consider mixed fleets for a long time into the future. all of us will continue to have him for a while, and the

investment strategy in future have to consider options for continuing down that vein. >> thank you, mr. chairman. >> senator reed? >> thank you, mr. chairman. let me first command secretary kendall for his decisive intervention in the program, and also for his candor and warning us that we still of some real serious challenges ahead. we are not there yet. let me ask a specific question about the cost. you've noted that it seems to be coming down. does that exclude him include rework of course? >> just. the cost of production, basic production is coming down roughly within the current we expected to come down and. the cost of retrofit, concurrency changes is also coming in, about 25% less than our productions. so we're making progress on that as well. i mentioned in lafayette we start sharing those concurrency costs with lockheed. they start sharing some of that risk. we did that for two reasons.

one was to focus their attention on this more, and to partake of the concurrency changes into the design as quickly as possible. we've made some pretty substantial progress on that as well. at this point time, of course as we go through the test program we are discovering more and more of the things have to be fixed and we do see that list of things that have to be changed. so as time goes on like we hope that will come down and whether projected messages within the next few years it will be well under control. chris, do you want to add to that? >> yes, sir. what i talk about the price of your plane coming down and i talk about the unit flyway cost or you are f. of the airplane, it does indeed include the calculations and the dollars for concurrency. retrofitting airplanes that came off the production line that were not corrected as well as putting those fixes back into the production line. so our curves under cost models

include an estimate for the concurrency. >> so you're estimating own for that the rework trend is down, and given potential issues where you don't exist at this point that purple band backup and you will have another problem? >> sir, the small good news there is both our estimates have come down about 25%, looking to the future on how many fixes we're going to have to make to the airplanes, and the actual cost of making those retrofit fixes in getting the fixes back into the production line are also down about 25%. so if you take both of those together, our initial estimates of concurrency cost back three, four, five years ago are probably on the order of about 50% lower now in both the estimated and actual costs. and i can provide the committee that information to show you. >> one final question.

one way we manage the cost of the weapons systems is changing requirements. you anticipate that being discussed in terms of managing this costs going forward, given limited budget? >> senator reed, i think our firm at this point to one thing we will have to do is respond to advances and the threats as they occur. so there is some follow-on development planned already and we've asked for some funds for that to start some of the early design work to respond to threats that are just emerging. this is not a world in which things standstill. the threat causally involves evolves and we want to stay have a. i want to mention a couple things on a positive increase costs going forward. as we go through the test program we are retiring risk. the areas where we'll be most concerned are in some kind of a major structural failure where you done roughly one lifetime of fatigue testing on aircraft. so with two more of those to go.

as we go through that the likelihood of a major structural period that will cause redesign goes down but it's not a zero yet. same is true with the aerodynamic performance. there were some aerodynamic performance major problems emerged as we explore the extremes of a flight, that might cause significant problems for redesign work. so far we don't see a high likelihood of either of those things but they're still possibilities spent let me ask a final question. and this goes to an issue that you're looking ahead to emerging threats. are you confident that you systems in place to prevent the cyber aspects of the aircraft from being compromised, and confident at this point they are not? >> i'm really confident, and chris should answer this as well, that are classified information is well protected. i'm not at all confident that are unclassified information is as well protected. it's unclassified because it has

not as sensitive or important. i am concerned in general with the loss of design information that's at the unclassified level. i will be putting policies in place to try to make stronger sanctions, if you will, or stronger consequences for contractors who don't protected information well enough. on that is being stolen right now. it's a major problem for us. >> does that increase the vulnerability of aircraft right now that we can anticipate? >> what it does is reduce the cost of lead time of our adversaries are doing their own designs. so it gives what a substantial advantage but it's not as much as specific vulnerability. it's the amount of time and effort they will have to put into getting their next design and staying with us. as you're probably well aware, at least two nations are well in developing fifth generation aircraft right now. that's a concern. >> thank you, mr. chairman. >> senator shelby. >> thank you, mr. chairman. thank all of you for your service to general welsh, as i

said appeared with this committee, subcommittee, foreign appropriations subcommittee, big part, we have to make sound money decisions. we believe, most of us i believe that i've seen believe air superiority is very important, as you referenced earlier. we've have had a long time, since the second world war. my thought about the whole plane, one from is aircraft is the concept of sound. will it work? have you worked out the technical glitches, most of them? most planes and most weapons systems will have technical glitches. some more than others. and ultimately this committee has got to balance the need to how much we can afford. i believe myself that we should be on the cutting edge in technology. we should be smart in what we do and how we do it. i believe this, from what i know and when not in a closed

hearing, but this plan has got a lot of stuff potentially that you can talk about here today. but what, and how do we bring the costs down? economies to scale, we know the. the more you produce is something, we've got to do this. that's going to be ultimate, one of the money decisions we have to make. one, do we need this plane? i think we do. secondly, can we afford this plane? and how do we afford it? do want to talk about that a minute? >> thank you, senator. i agree we need the airplane. can we afford the airplane is the question, not just the committee but us as well. >> american people. can we afford not to do it? >> i don't think so because there is no other option right now. and what we are asked to do is pretty well defined by our national guidance and by our defense strategic guidance. and based on that requirement

that's handed to our services in the air domain, this airplane is something that we need to me commission we've been assigned. if the mission changed dramatically, if there was no intent to be worried about threats from other technology that develops in the future, if there is not a requirement, if the united states to build objectives national interest against those threats, we would need the airplane. but that's not the case. and so everything we're focused on right now is maybe sure this airplane is operationally feasible. the program office works at every single day. they focus on the cost of development, the production and assist in overtime and how to drive those costs down. the services hel help them in tt effort with a services perspective we're both helping with development to an operational test and we are training aircrews. the air force with 22 airplanes, some of those are flying right now. of those aircraft we have trained 23 new pilots in the f-22 -- f-35 motegi.

were afloat about 2200, 2300 sorties at about 3500 flying hours now. the airplane works. the pilots will tell you it's a quote great jet that the avionics, here's a quote, light years ahead of legacy fighters in our military. and so they believe this program is moving forward. they are still frustrated by some the things that keep them from fully utilizing the aircraft but a lot of that is the function of the concurrency that mr. kendall described. they can't fly within 25 miles of lighting but they can't fly in the weather get to that will require software development that is due in is on track to be delivered. by the time we reach our initial operational capability at the end of 2016 for the air force, those problems will be in the past. >> will this plane, as far as you see, have any peer in the world? >> the f-22 will be come but that would be the only one. >> secretary kendall, you have to make decisions on acquisition

and that gets into the affordability. the want to speak to the affordability again, a come as you understand that, and the cost, you have brought down, i understand that. >> one of the initiatives dr. carter and i, affordably caps and all the program as they come to the process. the idea of that is to ensure we're reaching our grass. what we require now is to do an analysis of future budget that would expect and look at the portfolio of products, new products would begin. and determine a reasonable amount of money that can be spent on product a from that we derive a cost cap for the production, you know production cost and for sustained cost for the program. the f-35 was many as in development before we started. we are doing that now routinely. as for the f-35 itself is concerned, it is an affordable program. it's a forum in part because of its priority. it's our number one priority.

and we'll find a way to afford it. 10, 20, 30, 40 years down the there may be questioned about how many would actually end up. but i will fix in question at this point on the we need the program, that we can afford with our budget and we need to get production up to a race as economical as soon as we get. >> are you still concerned about any of the technical leach's dealing with the services -- technical glitches? >> there are a number of technical issues that will be resolved. that will be in testing shortly, the next few months. the helmet is still being worked on. at this point in time i said i was kind of the edge, it needs to be better. the software that was mentioned, we need to get that the software is large it a matter of time and labor some of the capabilities are the important to the exceptional performance of this aircraft and we need to get them even though we can neither see

potentially that the. there's number things has to be done. lightning strike was mentioned is another one where working on. these are all things we are working our way through the development program and resolving overtime. we've made a lot of progress the last couple of years and i don't see anything at this point in time that will keep us in getting the airplane to where we needed to be. >> thank you. thank you, mr. chairman. >> senator collins. >> thank you, mr. chairman. secretary kendall, from its inception the f-35 was designed to be an international program, and, indeed, we have formal binding agreements with several of our allies, such as great britain, australia. i believe the israelis have agreed to purchase some f-35s. could you comment on what value it brings to have international partners involved in this program from the beginning, and

also, let cost savings to the american taxpayers are produced by these international agreements? >> thank you, senator collins. there are several aspects of having international involvement there beneficial. first is their direct contribution to the cause. our original partners have all made contribution to development. they are economies of scale associate with higher productioproductio n rates. right now we expect several hundred aircraft to be by our borders and this makes a difference of, i only had number but 10, 15% i think and unit cost, almost 20%. now, interestingly we just had our enemy with all of our partners, review the programs within. they're all encouraged by the progress on the program. they're all still in the program which i think says something.

canada is still considering its decision. i think the netherlands has not made a final decision but even though because the budget contains nothing some of them have reduced the numbers they all see the valley of the f-35 and all at this point in time still in the program. in addition were starting formal sales but if you look at this, there's something of a consensus that this is the future of aviation internationally. >> thank you. general welsh, the sporting you described the f-35 as a fifth generation aircraft. and we hear that term all the time from you and from other military officials and experts. i know that one of the characteristics that you are referring to is the aircraft stealth capabilities. you share a responsibility to build a force that can operate

effectively in an anti-access environment. we know that russia and china are developing advanced stealth fighters. we know that some of our potential adversaries have advanced integrated air defense systems as well. to the extent that you can in open session, could you describe more fully for this committee what exactly it means that the f-35 is a fifth generation fighter, and how that technology helps us counter emerging threats? >> thanks, senator. that's a fantastic question actually. i would put it this way. the emerging threats essentially means i it's more integrated coe it has longer range, and it connects quicker to things like sensors and thinks that can

shoot you down if you're flying in an airplane. it prevents you from getting access to the target. what the fifth generation capability does with a combination of the stealth signature that makes it more difficult for radars of different types to track you, with electronic protection can with electronic self-contained electronic attack capability against those radars, with the ability to move quickly through a threat environment and with the ability to maneuver to evade in the threats that are launched at you. it's significantly breaks to change. if that makes sense. so a kill chain from the time they first see you and pass off your debt on your airplane to a system that would try to intercept to whether it's in their system or a ground system. that kill chain is required to be completely intact for someone who wants to keep you from preventive care mentioned a fifth generation allows you to break that in multiple places ally should operate in a violent you could not operate in a fourth generation aircraft because the guilty would not be disrupted by the way. that's what it does for you.

it's a single airplane or you're competing against a system on the ground but it allows us to operate in places we could not be for a complete the mission we have been assigned. >> you. that's very helpful. thank you, mr. chairman. >> senator murkowski. >> thank you, mr. chairman. and good morning, gentlemen. thank you for being here this morning. thank you for your service. general welsh, as you might expect my comments or questions they will be a large it with -- and the role that future opponent pacing of the f-35 might play. for the benefit of my colleagues here on the subcommittee, back in february of 2012, general welsh his predecessor announced that the air force planned to transfer an f-16 squadron down to a medora air force base. it would downsize alison by the order of about two-thirds of its active duty personnel, and all

done by 2015. the air force has informed us that they intend to make a decision this fall following completion of the analysis. this would have a devastating impact on the economy of the fairbanks and the interior regions, the direct and indirect job loss is estimated at about, over 3000 individuals. and employment would rise from where we are now at 6.2% to an unacceptable level of 8.9%. lay off teachers, closed schools, tough, tough situation but, of course, were not in a brac environment. i described this as a backdoor brac come and it probably comes as no surprise that i, along with the other members of the alaska delegation, have requested that the air force be prohibited from implementing its proposal in 2014. back in 2008 the air force

announced to the fairbanks community in writing the start of environmental scoping process for possibly sing of the f-35, and in 2000 we came to learn the scoping process never occurred but we were promised at that time that eielson was either out or top the list of possible basing of the f-35. we been told it's going to be an announcement that would be made shortly on ocoa no basis. and every king. can you tell you, general welsh, what thoughts come if any, the air force has on the desirability of eielson as an f-35-based location, what kind of timeframe you're looking at for the f-35 basing and then also whether or not the air force's immediate decision on downsizing eielson will be affected by possible f-35 basing at some point in the future? >> yes, center.

the secretary and i just reviewed earlier this week the proposed click here for our overseas tone his selection, process for the f-35. the global work to be done that to much with the criteria from a study to clearly courtney with u.s. pacific command, u.s.-european command. that process is ongoing. i would suspect that the end of this month those criteria will be firm as dubya will start to evaluate all of the potential basis in both overseas, both europe and the pacific. in the pacific eielson is one of the base. it will be part of the pacific overseas basing the eielson is one of the basis on the list to be examined. so we'll take a look at every base relative to these criteria, sometime this fall my guess is late october we will produce a preferred and a regional alternative listing. it will be fully briefed to the congress. i will tell you this, i'm looking forward to my visit to

trend here in about a month, month and a half to meet with the community and hear their concerns directly. as you mention where completing the eis and we are still on the same timeline. to make a recommendation to the secretary this fall. >> let me ask you then about the eis, so the particular criticism that i've heard which you should be prepared for when you go up north, i understand that air force is simultaneously proceeding to complete the eis and strategic analysis. the public will have an opportunity, apparently, to comment on the eis draft but not on the strategic analysis. and i'm not quite sure what it said that what they does seem to make sense to me. and eas is designed to inform the decision-makers on the range of alternatives to propose actions of seems logical to me that you would have the strategic analysis precede the

ds and then inform from their -- the eis and then inform from there. i guess the question would be whether or not you could leave this eis comment period open until the strategic analysis is done, and also to invite comments been on the strategic analysis as well? whether or not you would consider that. >> senator, the path ahead of the secretary laid out for us was for us to take a look at the eis, the strategic analysis i believe you're referring to is the one we conducted on the pacific air force commander, general carl and his team. when he is complete the analysis and as an operational analysis, an assessment from the eis, look at causing, a look at all the things you and i both hope or in the discussion confident he will come forward to the secretary with a recommendation. i'm not sure keeping that there will for public comment as he complete his recommendation would be helpful to his process.

i think public comments have been pretty clear in the eis, it is going to be factored in to everything he says. you of course will see the results of any analysis he does. >> i just might add that the concerned that i'm hearing from those who wait in and gave the public comment is that they don't feel that they have been heard on. so it will be something that you will hear when you go up north comes that maybe something that you and your folks might want to give a little, and actually get and i would appreciate that. look forward to your visit. thank you, mr. chairman. >> thank you, senator murkowski. let me ask you this, mr. kendall. i've listened to your earlier testimony, and i'm trying to draw some analogies which may or may not be accurate in my mind. in the financial industry we have this phrase, too big to fail, and i'm wondering if this project is so large in scope

that it was too big to cancel, that it had to continue a pace because of international partners, fifth generation demands. have we reached the point when it comes that we have to take this into consideration? >> mr. chairman, i don't think any program, department is too big to fail. this is a matter of principle. as a practical matter for the f-35, we are not at a place where we did consider stopping the program. general welsh mentioned that. you know, we are most of the way through developing. the costs i think are under control, at least for production. we're trying to bring the cost of sustainment debt. the threat is driving us to the next generation of aircraft. our fourth generation aircraft will not be survival of future battlefields. to start over, to go back 10 to 20 years and invest 20 or $30 billion in development of another aircraft for the replacement of the f-35 just does make any sense.

>> let me go to the one particular you mentioned, sustainment. its latest and the cost of flying the air force variant, the f-35, is 28% greater than sustaining the f-16. and a report that came out in 2012, the jsf selected acquisition report, estimates the cost of sustaining the fleet of jsf over 30 your life is $1.1 trillion. which equates over 30 a period of time to $36 billion a year. which is a substantial sum of money by our calculations, by anyone's calculations. it's my essay one of the best ways to reduce sustain the cost is to address them very early in the program but it appears that didn't happen as it should have. so what actions are we taking now to deal with these anticipated systemic costs? >> mr. chairman, i would just point out that's i believe an inflated number over about 50 years so it covers a lot of time, a lot of cost it its

delivery become and we did everything we can to drive again. there's a long list of things i think in her written testimony, but the key include looking very creatively to things we do insist that this is a more efficient ways to do the. and also bringing in competition. we are not going to leave the sole source and has one provider. we will go out and bring competition and use that to bring -- drive cost and. we have an initiative was called performance-based logistics, a business approach, where people essentially provide a level of ali jalali to us. and provided to us at lower cost et cetera number things that can be done but i'm going to let general bogdan answer, he's got a long list of things we didn't. his predecessor has also attacked this province or not just starting on this. you can nothing argue we started this delay. we should have done it earlier, but we're certainly getting it our full attention now spent general bogdan? >> is primarily three areas that

i'm taking action in right now to try to reduce the costs. the first area as mr. kendall said was there are different portions of the sustainment, lifecycle of the airplane that we over the next few years will compete. for example, support equipment on this program is well known. we know where the support equipment needs to come from. we know what it's designed like. there's no reason in the world why i need to buy to support equipment from this airplane from a single supplier who actually just goes out and contracts with many other suppliers to buy the. so we will compete that type of thing. another example is on the global supply chain. will have airplanes all over the world in the next 10 or 15 years. there is a reason to believe that a prime contractor whose niche is building and manufacturing airplanes could be or should be a world-class global supply chain expert.

there are other countries after they can do that and we will explore those kind of options. so competition is one piece. there's a second piece that we're working on very aggressively. that is what we call our reliability and maintainability program. and kill a few years ago this was an airplane on paper. we did not have airplanes flying. today we have over 7000 hours and our belt and over 5000 sorties. the information that i'm gaining from flying the airplanes today is invaluable. i can show you a list of the 50 top parts on the airplane that are breaking more readily than we thought they would. i can show you the 50 parts on the airplane that are taking longer to repair than they showed. by systematically looking at reliability and maintainability program, where we attack those problems by either redesigning the parts or finding a second supplier or finding a way to better repair those parts organically by standing up your

that close, you can begin to attack the roulette belly and maintainability of the program. we couldn't do that a number of years ago because we didn't have any real data. we have a lot of that data now so we're doing that. the third piece is that $1.1 trillion estimate that you talked about has an awful lot of assumptions and it that those three gentlemen at the other end of the table have a lot to do with it, in terms of how many hours does each pilot need to fly relative to getting training and the simulator? how many maintainers to really need on the flight line to launch this airplane? those kinds of assumptions, which we put in place many, many years ago that came up with this $1.1 trillion number are now being reluctant because we know more about the airplane. and they with their advice and with their assumptions, we will go back in and now we look at the concept of operations for

maintaining and sustained the airplane and adjust those numbers. i personally think you'll see over the next two years those numbers coming down. >> thank you very much. senator cochran, in the following? >> mr. chairman, i have one follow-up question. general paxton, the commandant of the marine corps, general inscom has indicated the marines expect to save up to $1 billion per year in operation and maintenance cost i having one type of tactical aircraft in inventory. and that billions of dollars how hard and saved over the last decade i not read capitalizing the marine corps with fourth generation aircraft, and waiting to recapitalize with the f-35. given to the increased f-35 cost and production delays, is this still true, or is it time to start looking at alternatives as was continued commitment to the f-35 program?

>> thank you, senator cochran. i believe the basic premise, the commandant previous statement, and when you connected to the comments that general bogdan and mr. kendall just me, the basic premise of cost and affordably is a true. it's coming down. and as we actually have more flight hours and more sorties and more reliability of data can we better ability to predict the actual flyweight cost as was the cost per flight hour for the aircraft. i come it is a little differently as opposed to the gentleman at the other end of the people who either technicians or aviators. i'm a ground. i'm an infantry guy. so when i look at the program and the viability and the value of the program, i go back to the basic premise that we have three type model series that we're going to do away with. the fa 18, the ea-6b and 88 to be. so there's an inherent cost savings in getting down the tight model should but in addition as we get more

reliability as general bogdan said, we get actual facts from those hours and sorties, we have the capability of collapsing a little bit the maintenance that is done at the enemy level and at the organizational level. we have marines out there right now turning wrenches on things that we can expect to happen this early in the program because we have been able to identify where some of those meantime between failure is and what they can actually do. so i believe as the program gets more mature, the, that general welsh made earlier about the value of stability in the program, it's not an issue of too big to fail. it's an issue of stability and justice ability to create an advantage and turn risk into opportunity because i'm confident we can bring the costs down on this. and then the bathtub that we're in, where we have aging fourth generation legacy aircraft, we will be out of there and they will be intuitive generation aircraft that we can optimize as we use around the world and many more places to do many more

things. >> thank you very much. >> i want to go back, if i could, secretary kendall, to the technical challenges. because general bogdan alluded to some of them just a minute ago. what are, say, the top three technical challenges? is a software? is the medal fatigue or problems, metal production? failure of that? what is it and, i'm sure all of them hadn't been satisfied but i feel technically they will. >> i will give you my three and general bogdan may speech is that important? >> it is different list of things we are attacking. the top three am i less

comfortable with of all would be software. getting the software complete. it is critical to airplanes we need to get that done. we will have to make some decisions as we get further along. we are about to do a critical design review for that software and will be looking at very closely this fall. the second thing on my list is the helmet. the cockpit of your plan is designed around the concept of that helmet. the ability of the pilot to look through the structure of the airplane and have all the things he needs in front of him in the advisor of the -- in the visor of them. there are a number of issues within working, we're kind of at the edge of acceptable but not where we'd like to be to get fully on the. that would be second or third thing is the thing that came up a moment ago, reliability. we're not where we need to be on reliability right now. i think we can do better on that. we're lagging our own goals by significant margin right now in terms of liability we're seeing on the airplane. way to improve that. so those would be my top three. i will let chris at any that he

-- >> general? >> i would they software, software, software. but realistically, mr. kempe got it right. software is number one on the list and to talk about -- >> but the software if i could, correct me if i'm wrong, expanding software, you know, software that people are thinking up in putting together come that would help you expand the envelope of the capability of this plan, would it not? >> absolutely, sir. >> go ahead. >> the software on the program, first of all just to give you some perspective. the airplane itself as 10 million lines of software code in the. that's about five times more than any other airplane we've ever developed. that's just on the airplane. the offboard systems, the maintenance system, another 10 million lines of code on a. so this is virtually a flying computer.

if you don't get the software right on this program, all of those things that general welsh and the cnn and others talk about are not going to work. we have many sensors on the airplane and they all have to talk to each other to provide the pilot with situational awareness he needs to go into those very threat, high threat environments. if you don't get the software talking right to the sensors, you will have a problem. the good news there is over the last two years we have made significant progress in the way we develop test and field software on this program. i'm cautiously optimistic that in the future what we've learned over the last two years can be applied to the future. but that does not mean that we're out of the woods yet. because the hardest part of the software development on this program still lies ahead of us. in our block three. and that's where we attempt to take all the information from one's own airplane, from another

f-35 flying next to you come and all the other sensors that we have in our arsenal, and put that all together and give that private a picture. >> do you believe you can do at? >> i do, sir. and the reason why i believe it, and i'm cautiously optimistic, is because a lot of the foundation of what we need to do in 2016 and 2017 or flight testing today. okay, and it's working but it's not working perfectly, but there are no things that i look at in the future relative to software that i do not think we can overcome, to be quite honest with you. a couple years ago honor to recredit said that on the program, partly because we hadn't flight tested much of it. but we have 40% of the flight testing done now, and we're starting to learn a lot more. one of the other things that mr. kendall didn't mentioned that is always on my mind is the maintenance system on this airplane is a huge information technology system.

we call the house. what it does is it combines both the maintenance of the airplane, the supply chain for parts and airplane and the training for the maintainers and the pilots and puts it all together. that system has great promise, but that system like any other complicated information system with software has got serious problems. what we did over the last year, instead of keeping that logistics maintenance system in that part of the develop a program organizationally, we pulled it back underneath our engineering team. so they are dedicating the same kind of software work that we use on the airplane to the maintenance system. i believe over the next two years, and you can hold me accountable for this, we will see great improvement in the halis system. >> general welsh, do you have anything to at? >> i'm pretty confident because while it's not the same thing and is not nearly as conflict is

doing on the actual airplay, we've integrated this concept in a similar. what should be working well for training for some time. there are not as many lines of software code in a similar but the data integration concept works tremendously well. won by the discredited as if you're flying around in a 200-mile bubble of information. that's the concept behind airplane. that's why the helmet is so important because that's how it is relayed to the pilot. but the integration, everything as a young fighter pilot i grew up flight within the i sure wish i knew ask. x. is not able to somebody flying the f-35. it is displayed for you in a very easy-to-understand concept of the biggest problem for the path is to get how do you manage the info. that's what they're focusing their training on. >> thank you, mr. chairman. >> thanks come senator shelby but it was a good question, and it i think puts in perspective what we're talking about here, who could've imagined 12 years ago when somebody said let's do a joint strike fighter what the evolving threat would be that we

face today and will face in the future, and what the evolving technology would be? couldn't drink we would've in turn this around in a pocket. we are dealing with that. it takes a sense of optimism, mr. secretary. i do think that's a negative in every aspect. i think it's a positive. when it comes to argue as americans, facing challenges, meeting them head-on and conquering them. and despite some setbacks year, we are on the path now to development of the plane that will make america safer. thank you for your testimony today. we will have the second outcome on that and i will come by and say goodbye to you, and thank you for your testimony. director balderas test anybody wishing, michael gilmore, michael sullivan and for bookings, michael o'hanlon will be the next panel.

[inaudible conversations] [inaudible conversations]

>> [inaudible conversations] we're going to welcome the second panel here, once we've got nametags switched. there we go. our first witness on the second panel is director of operational test and evaluation, honorable michael gilmore. dr. gilmore, please proceed. written statement will be made a part of the record. please proceed to your oral testimony. >> thank you, mr. chairman. senator cochran, senator shelby, i agree with the statements that were made by a number of the previous panel members that the program now is on a much sounder basis than it was back in 2009, preceding the review and restructuring and the technical baseline review that actually extended all of those that could extend into 2011. they put the program on a much

firmer basis by taking a hard-nosed look, a rigorous look at past program performance, and i'm not talking about ancient programs to talking about programs like f-22, what he took to make those planes operational. what realistic assumptions about what kind of testing actually needed to be done and what kind, called task force, needed to be flown, what could modeling and simulation really tell you versus what you need to the aircraft itself tells you. how many aircraft did you actually need to do testing? we added a significant number of aircraft to conduct a test program. we added substantial number of test points not relying on modeling and simulation or unrealistic assumptions about so-called test inefficiencies with the program office unfortunate is beginning to talk about again. and i also agree with the statements that were made by lieutenant joe barton and mr. kendall to third many important challenges that remain. in particular, the block three

of software which is going to provide the most important combat capabilities has yet to be flight tested. it's just, an early version of it is just beginning to vote. what's the history of flight testing of software up to this point? well, as a look at the most recent data from the program office, in preparation for this hearing, as of the end of may of this year, not all of the block one test points had been completed. they were supposed to been completed sometime ago. the block to a software test programs to flight test program was supposed to complete in favor of 2013, according to the integrated master schedule version seven that the program office is funded to. miasma that did not occur that flight testing did not finish at the end of figure. and the estimate is that it could extend anywhere from january of 2014 to august of 2014. block iib in integrate master

schedule seven is supposed to finish flight testing in may 2014. my current estimate raised on the precious dicey build is broken is that it will finish around december 2014. admittedly these are not the multiple you disconnect with reality that existed prior to 2009. these are six to 12 months in schedule slippage relative to the integrated master schedule for which the program is funded. so that is obviously an improvement but it does demonstrate that as many of the previous panel members said, this is an extremely complex undertaking and it's very difficult to project with any certainty, although we're doing a much better job of it than we had been, how long it will take to finish all of these complex developments and demonstrated through testing that they actually work. some of the previous panel members talked about 90% of the developments being complete. that depends upon how you define development. to me that development isn't

complete until the capabilities, military capabilities, are demonstrated through testing to work. many other panel members talk about development of the software being complete when it's available for the first time to be loaded into the aircraft. what we're finding is that we discover a number of problems, many problems that require was called regression testing and other testing to sort through and fix. once we actually start the flight test program. i would note that the peo, lieutenant joe barton of the block 2b software program is just a few weeks out of step with his current schedule. and that is true but his current schedule is based upon a we they signed that the program did back in november of 2012, that added 31 weeks to development program for the block 2b software, and subtracted 31 weeks on the flight test program. that's a concern to me because what that means is the flight

test program is undergoing an accordion like squeeze. and afraid that it may mean that some unrealistic assumptions are being made about flight test efficiency. so i hope that decision to increase the 31 weeks need for development of the software, which was prudent based on what we've been seeing, but to then subtract 31 weeks from the flight test program so that the endpoint, the fleet release of the software stays there in 2015 consistent with needs for operational testing and ioc in the marine corps. i hope that's not a harbinger of decisions that were made early in this, early in the last decade, which yielded the need for the restructuring. finally, you mentioned a concern about how do we reduce risk, what lessons should we learn. mr. candon mentioned we need much more rigorous development of testing and we should wait longer before we can production to me, production in the program started before there was

any flight testing at all, which was unprecedented in the history of aircraft develop programs. so that's about as concurrent as you can get. that's pretty much 100% concurrency. obviously, that's a bad thing. we need to have more rigorous development to testing. we need to let that the middle testing procedure for we make production decisions. but let me also say that my experience with early operational assessment where we take versions of aircraft, tanks, other military equipment before a production decision is made, put in the hands of soldiers, sailors, airmen and marines, let them tell us what the problems are that they see at that point, even though when we start production, low-rate initial production an, we still have a ways to go in terms of developing all the final capabilities. but the actual people who will have to use this equipment and rely on, tell us what the problems are that need to be urgently fixed before we wrap up

the full rate production. under law, we do the operational test and initial operational test just prior to full rate production. but i see great value to doing these operational assessments prior to a decision to begin that low-rate initial production. so i thank you and i look forward to your questions. >> thank you very much, dr. gilmore. mr. sullivan. >> thank you, mr. chairman -- thank you, mr. chairman, senator cochran, senator shelby. it's a pleasure to be here this morning to discuss the f-35 don't strike fighter acquisition program. as the chairman pointed out, the program is now 12 years old having begun in 2001. since then it's the holocaust has grown by more than $20 billion am and as the average cost to buy one f-35 has doubled. from about $69 million to 137 million. clearly, the program's original business case was deeply flawed. in 2012, after the program

breached its cost estimate the department did reset its business case, talked about that on the first panel. they added significant dollars to the cost estimates, more time to deliver aircraft. and since then the manufacturing process appears to have stabilized and has shown progress in delivering f-35 aircraft. today, however, we are here to discuss risks to this reset the business case moving forward, and from our perspective there are three. these are software development, concurrency between flight testing and production, and the funding assumptions from the program that underpin the current business case. in the area of software development, the f-35 will depend on about 24 million lines of software code, both on and off the aircraft, to give the flight and to meet its missions. today, software deliveries continue to lag behind and the contract to continue to struggle to meet schedules. as long as software delivery is

questionable, the initial capability of the aircraft is at risk. with regard to concurrency, the program is now negotiating its sixth and seventh production lots of aircraft. wind that negotiating -- negotiation is complete it will have invested about $34 billion to procure 150 aircraft with less than half of the flight testing completed. as we've heard repeatedly on the first panel and from dr. gilmore, this creates risks that problems found during testing will force design changes that will have to be retrofit onto aircraft in production or already delivered at additional cost to the government. finally, the program's current cost estimate assumes annual funding of more than $12 billion on average for developing and procurement over the next 24 years, and continues to estimate operation and support cost out

over a trillion dollars across the f-35's 30 year life cycle. the department has already deemed this an affordable. it's setting targets to try to reduce this, and the congress may want to consider whether these funny assumptions are reasonable in our current fiscal environment. from our perspective, these are the risk that this committee must weigh as the program moves forward. as it stands today the department plans to by almost 2500 aircraft to replace and approve upon today's fleet. if these risks are not controlled and the cost of the f-35 grows much more, the program is in danger of falling into a much to for motorcycle of quantity reductions in order to meet budget, and that will result in less buying power for the department. would also force decision-makers to consider other options for maintaining our tactical fleet. with that, i will conclude, mr.

chairman but i would be happy to answer it any questions. >> i would like to do something a little different with my testimony, and that's just a sketch out an alternative way to think about the f-35 and how many we might by instead as a program of record of close to 2500. .. >> i think there was a fundamental assumption in the way the overall procurement bye was sigh sized that i would

challenge. and i think to put it simply we came up with a number of planes to replace an existing force structure. we essentially looked at aircraft like the hairier jet and the f-16 and the f-18 and several others, and we said how many of them do we have? we want to keep the majority of the force structure that those different types of planes, roughly half a dozen, currently populate, and that takes close to 2500 aircraft. now, i think there was an assumption the fing-35 could be a little -- f-35 could be a little better, but nonetheless, you essentially were replacing force structure. and if you had all three services cooperate and you bought a lot and you got international partners, you could drive down unit costs. but, senator durbin, i do have some sympathy for your image of creating a program that's too big to fail not because i'm opposed to this program, but because i think we have put a tremendous number of eggs in the

one basket, and we've done it in this hope or expectation that we can drive down unit costs so much as to make that logic work. i would come up with a different approach to sizing the number of planes i would buy which is a threat-based approach. in other words, what parking lots of the world, which potential adversaries and scenarios are going to require us to have a lot of fifth generation ground-attack aircraft? and also air superiority aircraft. and i think primarily advance aircraft made by russia and china, as was mentioned in the first panel, as well as some of the surface to air capabilities, and we hear about those even in conflicts to syria, so i acknowledge it would be nice to have f-35s everywhere everything. but realistically speaking, we've done a lot of operations around the world the last two decades with extremely low attrition rates to our airplanes with fourth generation planes. and i think a lot of our future military missions will continue in that vein. so i would recommend sizing the

future purchases of this f-35 plane primarily to the threat environment and principally to the possibility that china could be an adversary. i don't expect that, certainly don't hope that, but it's a possibility we have to plan for. and also, of course, iran. those would be the two most prominent cases. there could be ores. i would basically want to have enough high-end airplanes that for a scenario i can imagine and war game for the basis that we're going to have available to us that we can fill them up a with as many f-22s and f-35s as we can have. it's a threat-based approach. once you accept that premise, you have a more detailed conversation, and i spell out one specific proposal. it's certainly debatable. even if you accept that main premise, there are different ways you could implement it. i could go through it, but maybe i'll save most of that for discussion. i will point out that i do support the f-35b, the marine

corps variant, because i worry about runways being damaged, and i like the idea of a short takeoff, vertical landing airplane. the overall point here is, i'll conclude on this simple observation, if you were to cut the purchases in half overall, i'm recommending we buy about 1200, 1250 instead of 2450. you're only going to save about 20, 25% of the total program cost because most of that force structure you still want to keep which means you have to buy something else or refurbish something else to keep it going. and so those refurbished f-16s and so on are still going to cost money. i don't consider this to be an easy way to lop off hundreds of millions of dollars from expected pentagon saving, but you might be able to save 20% in the acquisition cost of the program, something in that neighborhood with this approach. thank you. >> thanks, mr. o'hanlon. this committee has been handed the baton on one of the last

legs of the race on the f-35, and the question, obviously, looking back at the earlier stages of the race, how could we have done this better? been further ahead? less cost? going back to the beginning, mr. sullivan, looking at what we were trying to achieve 12 years ago, anticipating a threat, anticipating technology changes, how did we miss it by so much where the unit cost of the airplane is almost double what we thought it would be, and what could we have done differently to be in a better place today? >> first of all, i would say that this program is not unique in many ways. a lot of the major acquisitions go down this exact same road. and i think it's very complex why programs get off to this kind of start. but if you look at the mechanics of a program, just the best way to set a business case, i think where this program went wrong is when it set requirements, and it didn't do enough due diligence up front before it had its

milestone b in 2001, and the requirements were more or less not achievable with the resources that they were estimating at that time. so they made a cost estimate based on parametric analysis, no real actuals, quantum leap in capability. it's very hard to model, you know? they talk about modeling and simulation to prove that you can do things, but you can't really model some of the capabilities that they had here. so very mature technologies when they started. a number of the technologies, there are eight critical testimonyings on this aircraft in 2001 that they knew they would have to have to be capable to meet requirements. >> let me go to the point that dr. gilmore raised and perhaps mr. o'hanlon also alluded to. this notion that you would somehow put this aircraft in the hands of those who would ultimately use them, let them respond and tell you how it's functioning, what it needs and the like really seems to me to

be thinking that might have applied a long time ago when technology was moving at a much slower pace. >> yeah. and that's fly before you buy is kind of the term they use for that. but when you have requirements that are so demanding with such immature technologies and you start a program before you understand that, the development program is, will really be at a loss for a long time. there's going to be a lot of churn as you wait for those technologies to mature. in some cases you're talking about technologies that were just concepts. they didn't even have a component -- >> be so, dr. gilmore, how would you address that part of it, this fly it before you buy it versus concurrency? >> there's always going to be a certain amount of con surgeons in the program -- concurrency in the program. i think it was accurately characterized, but to get back to the question you asked about what caused this to happen, i guess i have a little bit different perspective than

mr. sullivan. i actually think it's pretty simple. the department has a long history of deceiving itself early on in programs about their cost, schedule and difficulty. in this particular case, there were a number of assumptions that were made, for example, that there would be high commonality in the structural parking lots among the various aircraft -- parts among the various aircraft. not surprisingly over time, and i was a career person in the department when it started, and there were plenty of people who were indicating warnings at the time that, well, you're making some unrealist assumptions here about commonality in order to drive the unit costs down in the analyses that you're doing because at that point everything was being done on paper. and, of course, those assumptions turned out to be unrealistic. but, you know, those kinds of unrealistic assumptions which then carried through into the program when it decided to start production without any flight tests, the assumption, you know,

one of the assumptions at that point was that the structural modeling and simulation, the modeling and simulation of fusion capabilities, of how the sensors would respond and so forth and so on was going torque so exquiz fit that there would be no surprises in the program. and, of course, that's turned out not to be the case. and i would point out up to this point we haven't actually tested any combat capability. we've tested the handling characteristics of the aircraft, we've done necessary precursors to testing actual combat capability, but the first time we'll be testing combat flight capability is in block 2b. then we'll be testing some actual combat testing capability although it will be limited. so my perspective is that what happened here is, unfortunately, you know, at the onset of the program back in the '90s was what happens frequently, and that is that everyone got together and basically deceived themselves about how hard the

job was going to be and how expensive it was going to be. and then reality intruded, and reality always wins. >> you used the word deception. we heard the word on the to mitt romney before. seems like they -- the word optimism before. seems like they brought us to the same place. mr. o'hanlon, just briefly, i look at this from the view of america's industrial base, our capacity to build what we need next, our capacity to sustain this innovation, creative spirit and keep it in a safe place so that we can really entrust to the people who are doing it our national security which, in the last week or two has, again, been brought into question. how do you view this in terms of what we should have done with f-35 and what we may need in the future and whether we'll be ready for it. >> i guess, senator, one observation i would have is i don't want to defend too much on just one company or just one airplane, and it goes back to your point about too big to fail. i think lockheed's done a

generally good job, and they're making a wonderful f-16 still which is part of the airplane in my alternative. i want to make more f-16s for the united states. we're making them primarily or exclusively for foreign countries. i think the idea of having more than one modern airplane in the works is a good one. and parking lot of the alternative, therefore, that i propose is to focus on this x-47, this naval unmanned carrier-capable plane that is getting some attention, some resources right now, but the services' commitment to it -- the navy's commitment is probably a little bit shaky partly because their budget so overstressed by the f-35. so one of the lessons i would draw is make sure you have a couple or three things in the works when it comes to something as important as combat aircraft. >> senator cochran. >> mr. sullivan, gao has noted the improved performance and outlook for the f-35 program but

continues to identify long-term affordability as a major concern. what work are you doing to identify savings in the projected to sustain the f-35 once it is fielded? >> well, right now the -- as has been stated earlier, the ons costs, you're referring to the life cycle costs, we're reviewing what the program office has now in this review that we're undertaking right now, and in addition to that we're talking with the cost assessment and program evaluation group known as cape in the department to see what kind of assumptions they're using to determine future ons costs and what targets their using to try to reduce those. so we more or less are relying on the initial data that they're

providing us and reviewing that. >> what do you believe are the key factors that must be achieved for the program to meet affordability targets? >> reduction of the ons costs would be number one, and i think the things that they have to look at we've discussed a hot, the first panel discussed a lot of efforts. reliability in the aircraft is very critical to sustainment. and right now they're not quite meeting the reliability targets that they were supposed to achieve at this point in the program. and, in fact, they're about halfway to achieving the kind of reliability growth that they have to do on the aircraft. so i think mr. kendall pointed out that as one of his top concerns, and i would agree with him on that. in addition, they need to look at fuel costs, they need to look at how they man the aircraft, how they train. you know, i think general bogdan

said that when you do the concept of operations on this, you have to pay a lot of attention to how much time you're going to fly the aircraft, things like that. >> what's your current assessment of the f-35 manufacturing process? >> right now, last year when we visited, we actually toured the process last year, and we gathered data on a number of different things that indicate manufacturing like efficiency rates, the labor hours that they take to deliver aircraft, the span times between deliveries. and in every case even in the engineering changes that are the result of concurrency, the program looks like it's trending in a very, in an improved way. and we'd like to see that continue. we think probably it will. they've worked through about 40% of the flight tests, so they kind of have -- they understand the flight envelope and most of

those design changes are probably behind them. so we think that the manufacturing processes will continue to improve. >> comparing this process with others, how does it, how is it similar or not in the various stages of development and production? >> the manufacturing process? >> yes. >> well, the first thing about this one that's not -- that's unique to most every manufacturing process i've looked at is the fact that they have three variants going through final assembly on the same line. so it's more complex. in that regard. and i think they've done a pretty good job of working that out. other than that, on the major acquisitions i've looked at, f-22 was one of those, b-2 bomber and some others ones, it's very similar in that the concurrency on the program causes -- i would say that concurrency between flight testing and production, it does

have a cost of design changes that you have to go back and retrofit aircraft on. but in addition to that, it creates an awful lot of chaos on the manufacturing floor. i don't know how you capture those costs of concurrency, but this program probably has been much less efficient than it could be if it were less concurrent. >> thank you, mr. chairman. >> senator shelby. >> thank you. dr. gilmore, you have a very important job. you're the director of operation, test and evaluation at dod. and you've talked about the plane today. modeling and simulation are very important as far as not just planes, but anything else that comes along. but is there any real substitute once you pass that for testing? and evaluation? why don't you get into that.

>> senator, we use modeling and simulation in numerous operational testing activities because we have no choice. in the particular case of joint strike fighter, we are -- it's currently under development. it's an analog to what is currently called the air combat simulator down in marietta, and it is being used for all the follow-on development that's being done to improve the capabilities of the f-22 where you have a full-up effects base simulation of the aircraft, and you can take operational pilots into the simulator and have them fly the aircraft as realistically as you can in a simulator. we're going to be doing the same thing with the joint strike fighter. however, those simulations must be rigorously verified, validated and accredited based on open air data. if they are not, they're meaningless. >> you're fooling yourself if

they're not, aren't you? >> pardon me? >> you're fooling yourself -- >> correct. >> -- if they're not evaluative tests. >> correct. and so we are pushing the flight test program to give us the data to verify, validate and accredit vigorously what's called the verification simulation which is under development. there'll be a version that's used in developmental test. but, again, we must get data out on the open air range where we'll be doing both -- where they're doing developmental testing and doing the open air operational testing which will take a year to validate that model. we can only do even in that year a relatively small number of open air sororities under limited condition. for example, we will not be able to fly the aircraft against the dense integrated air systems that actually the aircraft is being designed to be able to penetrate on the first day of war.

but we can fly against selected air defense assets and take that data, use it to vvna the simulations and then in the simulations, fly against the simulated very dense integrated air defense systems. and we can also do many more simulated flights in the simulator than we can open air, thereby getting a statistically significant sample of data. but the linchpin for all of that is the vvna from the actual open air flight test data. if we don't have a those data, then the simulation, as you point out, is not meaningful. >> have to have it. mr. sullivan, how do we get the cost down? is it, as we call it, economy of scales? scale? mr. o'hanlon was talking about recommending half the purchase

whereas most people deal with economics as a rule, the more you make, the price comes down. i mean, i think that's just basic. explain. >> it depends -- >> your views. >> well, if you're talking about total program costs -- >> uh-huh. >> -- you can reduce the total amount of expenditure and procurement by reducing the quantities, but each one you buy is going to cost more. so there's a difference, you know, looking at the unit cost and the overall total program cost. >> uh-huh. >> for example, on the f-22 program, the f-22 program roughly estimated that it would cost about $70 billion to develop and procure 750 aircraft. they started cutting costs on that by reducing aircraft. they wound up with about 180 aircraft for $70 be. so the cost of the program

didn't go up, but the cost of each aircraft did. you know, that is the one way to save budget on this program, and this is a program that is going to cost if you just look at acquisition costs as i said in my statement, over $12 billion a year for the next 25 years, you can try to get at efficiencies. and i'm sure they are going to continue to drive the learning curve down. but in the end this happens with most programs, you have to start reducing quantities. >> sure. this is not new, as was brought up earlier. this is not new to probably any development of a weapon system. we've seen et over the years -- it over the years. >> b-2 bomber was supposed to be -- >> tanks. >> it's very, it is part of this legendary death cycle that you hear about on acquisition programs where too much is promised, you know, they can't budget for all of it, they have trouble meeting the requirements and eventually they're spending

too much money, and they have to -- they can't buy as much. >> mr. o'hanlon, do you believe that more competitioning in the acquisition process will help solve some of the structural problems that we've had -- >> i think mr. competition always results in not only a better -- >> yeah. >> -- a better price, but responsiveness, better responsiveness. you know, this is a sole source engine as well as aircraft. so we've handed -- there's not going to be any competition in the engine here either, and that -- we've seen in the past where when you have competition at that level, you get reduced costs and better responsiveness from the industrial base. >> we had some votes on that, didn't we? >> yes, we did. >> okay. >> yes, we did. when you're talking about a fighter like this, it's pretty hard to have competition with something this complex. but it, you can maintain competition in some cases longer

than, you know, at the start of the program. sometimes -- you should think more about competing up to a critical design review, for example, you know, when you have a stable design, things like that. >> mr. o'hanlon, you mentioned the f-16 which we know is a good plane. of course, it had a few bumps along the road too. but that is a current generation of plane, a great one. it has been. but technology moves on. >> no doubt. >> either with us or with other would-be adversaries. have you considered that in your recommendation? >> yes, senator. and by the way, i also agree with your earlier point even though you might not have guessed that i would, because i think you have to factor this in. if you're going to have a smaller buy and try to construct a portfolio of airplanes that winds up reportedly being cheaper, you have to factor in a higher unit cost as part of the calculation, and i've acknowledged that in my work.

but that's part of why even though i'm proposing a much smaller f-35 program, the savings are nothing close to 50%. again, that's an important thing to bear in mind. by the way, a compromise could be keep trying to see if the cost curve comes down the way lockheed martin does. if it does can, then maybe you discard my backup plan in a couple years. in terms of capability, senator, your last question, what i tried to do when i sized my alternative was to say let me imagine even though i'm fair hi hopeful on u.s./china relations, let me imagine we wind up with a number of bases in southeast asia including some we don't even have now that might be needed to carry out some kind of a containment policy which is not our current policy, as you know, and i hope it never will have to be. but let's imagine it might be. i think about bases in the philippines, in vietnam, ongoing capability in okinawa and parts of japan, guam, maybe even china

itself -- >> korea. >> and korea. and if i do that and i imagine let's say up to a couple of wings in each of those places, then i get up to the kind of numbers that i'm proposing. so it's a threat-based approach. and it's a fairly rigorous one in regard. it's just not populating the entire force structure with f-35s. >> i'll pose this last question. the chairman's been generous with me. my last question. isn't it important to this country and the decisions we make right here on funding or not funding things that will make this country secure? not just think about tomorrow, i mean, two years from now, but ten years from now, fifteen years from now when we're building weapon systems and acquiring them for the future? and we look around the world, and, i mean, i hope we stay in peace always. but we realize that china has

become a huge economic power. following that throughout history has been a buildup of military strength. and possible the notion of establishing some kind of a hegemonny in that -- hegemony in that area. does that concern all of you when we're thinking about not just to today, but for tomorrow? >> just a one-sentence answer, it's why i'm ultimately a strong supporter of the f-35. we're talking about the numbers. but in terms of the capability, especially in the western pacific, i think it's quite important. >> senator, i'd say that i agree with frank kendall and the service chiefs. i don't think we have an alternative but to develop this plane and make it work. my caution is just that at this point anyone who projects when we'll have certain capabilities is probably being a bit optimistic based on what i've seen so far in the program. and, again, it is improved -- it has improved its performance substantially.

but, still, these are complex undertakings, and i easily see a 6-12 month slip relative to what the program's schedule is now. but that's a marked improvement from where we were in 2009. and so it's going to take a while to get this capability. it's taken a while to get all the capabilities in the f-22 that we wanted. in fact, we're still working on that. that's turned out to be a very capable aircraft, but it was also a program that went through some of the same troubles that this one is going through. >> mr. sullivan? >> i agree that it's needed, but -- go ahead. >> mr. sullivan? >> yeah. i think that the acquisition process for major weapons systems acquisition that the d. uses is broken in that when they set requirements for big bang, quantum leap kind of capabilities that are going to, you know, they project that they'll take ten years, and they wind up taking 15, the world changes dramatically, as the

chairman pointed out, in 15 years. one of the things we've looked at is you need an acquisition process that can deliver much more quickly and be a lot more agile and maybe have incremental improvements to requirements so you can deliver added capability. maybe not the big lapping, but in the next -- big bang, but in the next block you'll get there. the commercial world operates that way, and they make pretty good revolutions incrementally over a ten-year period if you look at some products and look at how long it takes, you know, for a weapons system to get, to deliver anything. there's an awful lot of electronics and things out there that just deliver, deliver, you know, it's an incremental kind of an approach, and you're in production a lot more than you are in development that way too. so the acquisition -- that would be a major change to the acquisition process, to be able to look at a five-year kind of production capability but maintain the vibrant tech base that we need. right now the acquisition process, it's not only

concurrency between testing and production, it's also concurrency between technology, development and product development. and that gets very inefficient. >> thank you very much, senator shelby. senator cochran. i want to thank the staff for their preparations in this hearing and the panel for their valuable testimony along with the first panel. when i took over as the chairman of this subcommittee, i knew i had a lot to learn, and this was one of the hearings that i asked for. this is the most expensive acquisition project underway. we are making sacrifices in the name of deficit reduction that relate to the number of troops, the training of our troops, suggested base closures, perhaps not equipping our guard and reserve units the way they need to be equipped having just relied on them so much in the conflicts in iraq and afghanistan. over and over again, we're being asked to make some hard decisions in this subcommittee.

and i didn't want the acquisition process to be separate from that conversation. and i wanted to start with the obvious big dog on the block, the f-35. and i, your point, mr. sullivan, at the end is one i tried to make earlier and just keep returning to. when people sit down in my office and say, well, we started thinking about 12 years ago about battlefield communications and what our troops will need, we're still working on it. and i'm thinking, my goodness, what has changed in this world in terms of communications in 12 years. and it's a challenge for us, a challenge we have to meet. thank you for your testimony, thanks for everyone attending, and this meeting of the subcommittee stands adjourned. >> medicare trustees will give an update on the fiscal health of the medicare program. we'll have live coverage from

the house ways and means subcommittee on health this morning at 9:30 eastern on c-span3. and later in the day, a senate panel will examine the security clearance process that determines who gets access to classified information. live coverage from the senate homeland security subcommittee on the federal work force begins at 2:30 eastern also on c-span3. >> fed chairman ben bernanke said yesterday that the federal reserve will likely slow its bond-whying program -- buying program this year because the u.s. economy is improving. he took questions from reporters for about an hour. >> concluded a two-day meeting earlier today. based on its review of recent economic and financial developments, the committee seized the economy -- sees the economy continuing to grow at a moderate pace, notwithstanding the strong headwinds created by current fiscal policies. the labor market has continued

to improve with gains in private payroll employment averaging about 200,000 jobs per month over the past six months. job gains, along with the strengthening housing market, have contributed to increases in consumer confidence and supported household spending. however, at 7.6%, the unemployment rate remains elevated, as do rates of underemployment and long-term unemployment. overall, the committee believes the downside risks to the outlook for the economy and labor market have diminished since the fall, but we will continue to evaluate economic conditions and risks as they evolve. inflation has been running below the committee's longer-run objective of 2% for some time and has been a bit softer recently. the committee believe that is the recent softness partly reflects transitory factors and with longer-term expectations remaining stable, the committee expects inflation to move back over time. we will, however, be closely monitoring these developments as well.

in conjunction with this meeting, the 19 participants in our policy discussion, the seven board members and the 12 reserve bank presidents, submitted individual economic projections. as always, each participant's projections are conditioned on his or her own view of appropriate monetary policy. generally, the projections of individual participants show they expect moderate growth picking up over time and gradual progress towards levels of unemployment and inflation consistent with the federal reserve's statutory mandate to foster maximum employment and price stability. in brief, participants' projections for economic growth have a central tendency of 2.3 to 2.6% for 2013, rising to 2.9-3.6% in 2015. the central tendency of their projections of the unemployment rate for the fourth quarter of this year is 7.2-7.3%, declining to 5.8-6.2% in the final quarter of 2015.

most participants see inflation gradually increasing from its current low level toward the committee's longer run objective. the central tendency of their projections for inflation is 0.8-1.2% for this year and 1.6-3.0% for 2015. before turning to today's policy decision, let me say a few words about the federal reserve's strategy for normalizing policy in the long run. in the minutes of its june 2011 meeting, the committee set forth principles that it intended to follow when the time came to normalize policy and the size and the structure of the federal reserve's balance sheet. as part of prudent planning, we've been reviewing these principles in recent meetings. we expect those discussions to continue and intend to provide further information at an appropriate time. for today i will note that in the view of most participants, the broad principles set out in june 2011 remain applicable. one difference is worth mentioning. while participants continue to think that in the long run the

federal reserve's portfolio be should consist predominantly of treasury securities, a strong majority now expects the committee will not sell mortgage-backed securities during the process of normalizing mop tear policy. although in the longer one, limited sales could be used to reduce or e limb date hold -- eliminate holdings. i emphasize that these matters are unlikely to be relevant to actual policy for quite a while. let me turn now to current policy issues. with unemployment still elevated and inflation below the committee's longer run objective, the committee is continuing its highly accommodative policies. as you know, in normal times the committee eases monetary policy by lowering the target for the short-term policy interest rate, the federal funds rate. however, the target range for the federal funds rate currently at 0-.25% cannot meaningfully be

reduced further, thus, we are providing accommodation, first, by communicating to the public the committee's plan for setting the federal funds rate target other the medium term and, second, by purchasing and holding treasury securities and agency mortgage-backed securities. let me discuss a few key points regarding each of these two key policy tools. first, today the committee reaffirmed its expectation that the current exceptionally low range for the funds rate will be appropriate at least as long as the unemployment rate remains above 6.5%, so long as inflation and inflation expectations remain well behaved in the census described in the fomc statement. as i've photoed frequently -- noted frequently, the phrase at least as wrong in the guidance is important. the economic conditions we have set out are thresholds, not triggers. for example, assuming that inflation is near our objective at that time, as expected, a decline in the unemployment rate to 6.5% would not lead

automatically to an increase in the federal funds rate target but, rather, would indicate only that it was appropriate for the committee to consider whether the broader economic outlook justified such an increase. all else equal, the more subdued the outlook for inflation at that time, the more patient the committee would likely be in making that assessment. in the projections submitted for this meeting, 14 of 19 fomc participants indicated thatty expect the first increase in the target for the federal funds rate to occur in 2015, and one expected the first increase to occur in 2016. moreover, so long as the economy remains short of maximum employment, inflation remains near our longer run objective, increases in the target for the federal funds rate -- once they begin -- are likely to be gradual, consistent with the committee's balanced approach to meeting its employment and price stability objectives. the purpose of this forward guidance about policies to assure households and businesses

that monetary policy will continue to support the recovery even as the pace of economic growth and job creation picks up. importantly, as our statement notes, the committee expects a considerable interval of time to pass between when the committee will cease adding accommodation through asset purchases and the time when the committee will begin to reduce accommodation by moving the federal funds rate target toward more normal levels. the second policy tool being employed by the committee is asset purchases, specifically the committee has been purchasing $40 billion per month in agency mortgage-backed securities and $45 billion per month in treasury securities. when our program of asset purchases was initiated last september, the committee stated the goal of promoting a substantial improvement in the outlook for the labor market in the context of price stability and noted it would also be taking appropriate account of the efficacy and costs of the program. today the committee made no changes to the purchase program. although the committee left the pace of purchases unchanged at

today's meeting, it is stated that it may vary the pace of purchases as economic conditions evolve. any such change would reflect the incoming data and their implications for the outlook as well as the cumulative progress made toward the committee's objectives since the program began in september. going forward, the economic outcomes the committee sees as most likely involve continuing gains in labor markets supported by moderate growth that picks up over the next several quarters as the near term restraint from fiscal policy and other headwinds diminishes. we also see inflation moving back toward our 2% objective over time. if the incoming data are broadly consistent with this forecast, the committee currently anticipates it would be appropriate to moderate the monthly pace of purchases later in this year, and if the subsequent data remained broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases

around mid year. in this scenario when asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7% with solid economic growth supporting further job gains. a substantial improvement from the 8.1% unemployment rate that prevailed when the committee announced this program. i would like to emphasize once more the point that our policy is in no way predetermined and will depend on the incoming data and the evolution of the outlook as well as on the cumulative progress toward our objectives. if conditions improve faster than expected, the pace of asset purchases could be reduced somewhat more quickly. if the outlook becomes less favorable, on the other hand, or if financial conditions are judged to be inconsistent with further progress in the labor markets, reductions in the pace of purchases could be delayed. indeed, should it be needed, the committee would be prepared to employ all of its tools, including an increase in the pace of purchases for a time, to promote a return to maximum

employment in a context of price stability. it's also worth noting here that even if a modest reduction in the pace of asset purchases occurs, we would not be shrinking the federal reserve's portfolio securities, but only slowing the pace at which we are adding to the portfolio while continuing to reinvest principal payments and proceeds from maturing holdings as well. these large and growing holdings will continue to put downward pressure on longer term interest rates. to use the analogy of driving an automobile, any slowing in the pace of purchases will be akin to letting up on the gas pedal as the car picks up speed, not beginning to apply the brakes. i will close by drawing, again, the important distinction between the committee's decisions about adjusting the pace of asset purchases and its forward guidance regarding the target for the federal funds rate. as i mentioned, the current level of the federal funds rate target is likely to remain appropriate for a considerable period after asset purchases are concluded. to return to the driving analogy, if the incoming data

support the view that the economy is able to sustain a reasonable cruising speed, we will ease the pressure on the accelerator by gradually reducing the pace of purchases. however, any need to consider applying the brakes by raising short-term rates is still far in the future. in any case, no matter how conditions may evolve, the federal reserve remains committed to fostering substantial improvement in the outlook for the labor market in a context of price stability. thank you, i'd be glad to take your questions. >> steve, and then we'll come to don. >> mr. chairman, steve liesman, cnbc. i hate to use my question to ask you to clarify something -- [laughter] but when you say gradually reduce purchases beginning later this year and ending it next year when the unemployment rate hits 7%, what is that? is that a decision by the fomc? is that, is that an intention -- >> that, that is -- we had a good discussion of that issue

today, and we haven't had, um, obviously, there's no change, there's no change in policy involved here. there's simply a clarification helping people to think about where policy will evolve. so it was thought that it might be best for me to explain that to this group and answer questions. future policy statements may include elements of this, but it's not a policy change. i'm just trying to explain how our, how we're making a substantial improvement in the outlook for the labor market, how we're making that concrete and how we're thinking about the potential future of the program given alternative policy and economic developments. >> so there was no, there's no consensus on that? that's not a vote of the fomc, that's not a plan that's written down someplace? >> it represents the consensus of the fomc, yes. >> if we could just -- the question i was going to ask was could you give us some information on substantial improvement? is that the unemployment rate coming down by itself to 7%, or are there other factors

involved, and is it substantial compared to the fall? is that when -- >> well, there are many factors that we look at when trying to judge the state of the labor market. as you know, we look at participation, payrolls, a variety of other data. but the 7% unemployment rate is indicative of the kind of progress we'd like to make in order to be able to say that we've reached substantial progress. >> don and then -- [inaudible] >> jon hilsenrath from "the wall street journal." mr. chairman, there's an undercurrent of optimism in your forecast, in your statement, in the policy statement today. for instance, the unemployment rate forecast comes down to 6.5-6.8 percent next year. it's the case that the fed has overestimated the economy's growth rate very often in the past during this recovery, so -- and we've gone through a period in the first half of the year with pretty subdued growth.

so i would like to hear you explain where this optimism comes from and how confident you are that these expectations are going to be met. >> well, the fundamentals look a little better to us, in particular the housing sector which has been a drag on growth since the crisis is now, obviously, a support to growth. it's not only creating construction jobs, but as house prices rise, increase household wealth supports consumption spending, consumer sentiment. state and local governments who have been a major drag are now coming to a position where they no longer have to lay off large numbers of workers. generally speaking, financial conditions are improving. the main drag or the main headwind to growth this year is, as you know, is the federal fiscal policy which the cbo estimates is something on the order of one and a half percentage points of growth. and our judgment is that, you know, given that heavy headwind,

the fact that the economy is still moving ahead at at least a moderate pace is indicative that the underlying factors are improving. so we'll see how that evolves. obviously, we haven't seen the full effect yet of the fiscal policy changes. we want to see how that evolves as we get through that fiscal impact. but we're hopeful, as you can see from the individual projections and, again, these are individual projections, not an official forecast of the committee, we'll be, obviously, very interested to see if the economy does pick up a bit and continue to reduce unemployment as we anticipate. i think one thing that's very important for me to say is that if you draw the conclusion that i've just said that our policies, that our purchases will end in the middle of next year, you've drawn the wrong conclusion, because our purchases are tied to what happens in the economy. and if the federal reserve makes the same error and we overestimate what's happening, then our policies will adjust to

that. we're not, we have no deterministic or fixed plan. rather, our policies are going to depend on this scenario coming true. if it doesn't come true, we'll adjust our policies to that. >> [inaudible] and then robin. >> alistair wolfe from reuters. thank you, mr. chairman. financial conditions have tightened in the last few weeks, and beyond -- bond yields have gone up again today. why do you think that is? could you talk about whether that could affect your economic outlook? and particularly given the mortgage rates are now back up above 4%, if that could effect the recovery underway in the housing market? >> it's a good question. yes, rates have come up some. that's in part due to more optimism, i think, about the economy. it's in part due to perceptions of the federal reserve. the forecast, the projections that our participants submitted

for this meeting, of course, were done last few days, so they were done with full knowledge of what had happened to financial conditions. rates have tightened some, but, you know, other factors have been more positive, increasing house prices, for example. i think as far as the housing market's concerned, we're going to want to watch that, but one important difference now is that people are more on optimistic at housing. they expect house prices to continue to rise, and we see that, for example, in the survey question in a michigan survey. and that, you know, compensates to some extent for a slightly higher mortgage rate. and, in fact, in terms of monthly payments on an average house, the change in mortgage rates we've seen so far is not all that dramatic. so, yes, our forecasts, our projections do factor that in. and if interest rates go up for the right reasons -- that is, both optimism about the economy and an accurate assessment of monetary policy -- that's a good

thing. that's not a bad thing. >> robin? >> robin harding from the financial times. mr. chairman, you've always argued that it's the stock of assets that the federal reserve holds which affects long-term interest rates. how do you reconcile that with the very sharp rise in real interest rates that we've seen in recent weeks? and do you think the market is correctly interpreting what you think is most likely to be the future path of the petrol reserve stock of assets? thank you. >> be well, we were a little puzzled by that. it was a, it was bigger than can be explained, i think, by changes in the ultimate stock of asset purchases within reasonable ranges. so i think we have to conclude that there are other factors at work as well including, again, some optimism about the economy, maybe some uncertainty arising.

so i'm agreeing with you that that seems larger than can be explained by a changing view of monetary policy. it's difficult to judge whether the markets are in sync or not. generally speaking, though, i think that what i've seen from analysts and market participants is not wildly different from what, you know, the committee is thinking. as i tried today to communicate, i think the most important thing that i just want to convey, again, is that it's important not to say this date, that date, this time. it's important to understand that our policies are economic dependent. and in particular if financial conditions move in a way that make this economic scenario unlikely, for example, then that would be a reason for us to adjust our policy. >> okay -- [inaudible]

>> thanks -- [inaudible] washington post. on monday president obama said in an interview that he believed that you had stayed in your position as chairman for longer than you wanted to and maybe longer than you were supposed to. do you agree with that assessment of your term, and can you update us on any conversations you've had with him about your future? >> well, elan, we just spent two days working on monetary policy issues, and i would like keep the debate, discussion here on policy. i don't have anything for you on my personal plans. >> okay. craig? [inaudible] >> greetings, mr. chairman, craig torres from bloomberg. i'd like to push for a little deeper explanation on thresholds and triggers. >> sure. >> the forecast and the mysterious dots kind of don't map into the unemployment forecast. we see more gradual rate rise going out into time, people moving to the right -- at least

one person -- on when they expect the rate to increase. and yet unemployment's going to fall to 6.5% in 2014. i also note that labor force participation is not in great shape, and you, in fact, have been a big believer that in a lot of the exit from the work force is related to weak demand, not structural factors. so here's my question. can you explain a little bit more, um, you know, how -- maybe is the threshold too high? and i'll point out that the vice chair and two other people who used to work here have done significant research on maybe you need to let the unemployment rate fall much lower to pull these people back into the labor force. so i'm wondering if you can expand on that. >> well, it's a great question, and -- but what you pointed out, the difference between the little dots and the forecast actually illustrates the point which is, remember, the 6.5% is

a threshold, not a trigger. in other words, when we get to that point, we will then at that point begin to, you know, look at whether an increase in rates is appropriate, and among the things we would take into account, first of all, is inflation. inflation, obviously, is very low and expected to stay low. secondly, we would be taking into account does that unemployment rate fairly represent in some sense the state of the labor market? and as you pointed out, we have underemployment, part-time work, people leaving the labor force, reduced participation, long-term unemployment, a number of factors which suggest that maybe the 6.5% is a little bit not exactly representative of the state of the labor market at that point. so, first of all, since it is a threshold and not a trig or, we are entirely free to take all that into account before we, before we begin the process of raising rates. and that's what the diagram suggests. people are saying that unemployment will be at 6.5 in late 2014 or early 2015, but

they're saying that increases in rates may not fall but several quarters after that. in terms of adjusting the threshold, i think that's something that might happen. if it did happen, it would be to lower it, i'm sure, not to raise it. >> [inaudible] then we'll go to vicki. >> daniel applebaum, new york times. following up on that, so i understand the 6.5% is a threshold, but you've just talked about a 7% line for asset purchases that sounded less like a threshold than a target, you said if you're at about that level, you'll stop with the asset purchases mid next year. you talked about wanting to see substantial improvement in the labor market before you did suspend those purchases. it's very easy to imagine a situation where we hit 7%. employment rate's been at the same level for three years now. has something changed in your thinking about the value of asset purchases? why are you cutting them off before you see that substantial -- >> no -- well, substantial is in the eye of the beholder.

i think going from 8.1% and a stagnant rate of improvement to 7% and stronger economic growth is a substantial increase. i think it's important to explain that, you know, we view ourselves as having two tools. one of them is rate policy, and that includes both setting the rate and providing guidance about future rates. that's our basic tool. that's the one that the federal reserve and other central banks have used forever. asset purchases are a different kind of thing. they're unconventional policy, they come with certain risks and certain uncertainties that are not necessarily associated with rate policy. so our intent from the beginning as i've been very clear was to use asset purchase as a way of achieving some near-term momentum to get the economy moving forward into a sustainable recovery. and then, essentially, to allow the low interest rate policy which -- to carry us through. but, so let me just make two i think very important be points. the first is our target is not

p, it's not 6.5, our target is maximum employment, and that's where we're trying to get to. the 7, 6.5, these are guide posts to tell you how we're going to be tiow we're going to be shifting the mix of our tools as we try to land this ship on a, you know, in a smooth way into the, on to the aircraft carrier. sorry. so the other thing i wanted to say was that stopping asset purchases, when that happens -- and i think we're still some distance from that happening -- but when that happens, that won't involve ending the stimulus from asset purchases because we're going to hold on to that portfolio. and if the stock theory of the portfolio is correct, which we believe it is, holding all those securities off of the market and reinvesting and still keeping

the, you know, rolling over, maturing securities will still continue to put downward pressure on interest rates. and so between our commitments to low federal funds rate, the large portfolio, we will still be producing a very large amount of stimulus, in our view, enough to bring the economy smoothly towards full employment without incurring up necessary costs or risks -- unnecessary costs or risks. >> vicki -- [inaudible] >> be hi, chairman. victoria -- [inaudible] with dow jones news wires. you in your statement before the press conference and in the policy statement acknowledged that unnation readings have been low, but you maintain that inflation expectations -- longer term inflation expectations have remained stable, but actually certain bond market measures of these things have fallen in recent weeks. >> uh-huh. >> is that of any concern? and if not, why? what would you need to see for the committee to start being

more concerned that longer term inflation expectations are, in fact, falling? >> well, this is something we watch very carefully. there are a number of, as i mentioned in the statement, there are a number of transitory factors that may be contributing to the very low inflation rate. for example, the effects of the sequester on medical payments, the fact that nonmarket prices are extraordinarily low right now. so these are some things that we expect to reverse, and we expect to see inflation come up a bit. but, first, on inflation expectations it is true that the break evens from the inflation-adjusted inflation index bonds have come down. to this point, they still remain within the historical range that we've seen over the past few years, and moreover, other measures of inflation expectations be it forecasts by professional forecasters, whether it's survey measures from firms or house olds --

households, those are all still pretty much in the same place as they were. now that being said, and as i said in my opening remarks, we don't take anything for granted, and one of the preconditions of, for the policy path that i described is that inflation begin at least gradually to return towards our 2% objective. if that doesn't happen, we will, obviously, have to take some measures to address that. and we are, certainly, determined to keep inflation not only -- we want to keep inflation near its objective not only avoiding inflation that's too high, but we also want to avow inflation that's too low -- avoid inflation that's too low. >> [inaudible] then we'll go to donna. >> mr. chairman, peter cook with bloomberg television. given the volatility we've seen in the market since your comments of may 32nd, the lengths to which you are stressing the forward guidance here today, it does suggest that there are some out there you're worried are not getting your

message right now. and i'm wondering to what extent do you think now that your exit strategy is going to be that much more challenging? because even in this small period of time when you haven't done all that much, you've seen this kind of reaction. >> well, it is important for us to communicate. it's particularly important when we have an unusual economic situation where i think the standard relationships are not applying the way they have, where we're using unconventional tools, where we're using forward guidance. so i guess i agree with you that our communication is going to be very important. we hope that the, again, the key point i've tried to make today is that our policies are tied to how the outlook evolves, and that should provide some comfort to markets, because they will understand -- i hope -- that we will be providing whatever support is necessary. if the economy does not