upper or higher class income earners, it's one out of ten for people making over $1 million. it's about 3% for everybody between $200,000 and $1 million. so, i expect, you know -- i'm in that sort of -- somewhere in the middle. at some point i'll get an audit letter. it won't be because it's t-- i' the irs commissioner. what the determination for audits are. my concern is that people are legitimately going to be in that 1.4 million. and if they happen to be very liberal, very conservative, i don't want them thinking i got this letter from the irs because of who i am in terms of what organization i belong to, who i voted for in the last presidential election, what church i go to, or whether i go to church or not. that's my commitment to the american public. but i will say that i can't commit that no one in a

conservative organization that had a -- was improperly selected for further review is not going to get an audit. i can't give you anybody that blanket assurance. in fact, it would be inappropriate. the fact that whatever your difficulties were with the irs in the past doesn't mean you'll never get a legitimate audit. >> thank you, sir. >> mr. crowley? >> thank you. sir, if you would enter into the record a reuters article entitled "conservative republicans, the irs defends." >> can you get copies to the members? >> yes. >> thank you. without objection. >> commissioner, welcome. i suspect there's been a bit more drama here than you anticipated. maybe not. >> identify been around a while, so it's drama i'm used to. >> glad to hear you're a big boy. i appreciate that. we'll talk about that in a moment. but with the chairman of the full committee coming down this

morning and dramatically delivering to the committee what would appear to be new e-mails but, in fact, are old e-mails that have been gone through over and over again, in an attempt to find a smoking gun that would link what has taken place or supposedly taken place at the irs to the president. i have tremendous respect for the subcommittee chairman. and i appreciate the hearing being called this morning. but let me just -- and in this statement before the committee a moment ago, this is an open investigation. leading to, in effect, there's been no conclusions made as of yet. but i have to read from the chairman's opening statement. and i quote, last weekend the president claimed there was not, quote, even a smidgeon of corruption at the irs. and he blamed it on bone headed

decisions by a local office. further quoting the chairman, now this committee has actually investigated the matter and found otherwise. those two statements don't necessarily jive. and i would suspect that again it is an attempt to find the smoking gun. by the numbers, 500,000. the number of pages, documents provide bid the irs to the congressional committees without any political motivation. 60, the number of interviews conducted by congressional committees with current and former irs employees. 14, the number of congressional hearings where irs personnel have answered questions related to the investigation. 5,500, the number of irs employee e-mails and the inspector general's chief investigator reviewed and indicated no motivation of political was published.

failed to until it was revealed in july 2013, two months after the audit was published. there was no indication -- quote, no indication that pulling these selected applications was politically motivated, end quote. the head of the investigations wrote in an e-mail to the senior staff on may 3rd, two weeks before the audit was published. and, quote, e-mail traffic indicated there were unclear processing directions and the group wanted to make sure they had guidance on processing the applications so they pulled them. this is a very important nuance. end quote. the treasury inspector general never mention ed that the term progressive was used to single out applications and was among the terms in the 298 applications reviewed in its audit. a july 2010 power point

presentation instructed screeners to use the word progressive and emerge alongside tea party to select applications for further scrutiny. it was a much broader investigation. and, again, you would only, by the questioning of the other side, it would only indicate that the tea party or conservative groups were targeted when, in fact, political perfect situations of all sorts were targeted as well. and i have decried and continue that it is an outrage, as you have mentioned as well, if any group is because of their political perfect situation, ethnicity or whatever it may be. the need to find the smoking gun. i mentioned no new material has been brought to your attention this morning. as a boy, i played cowboys and indians. i suspect you probably did as well. it was back in the '60s. you probably had better equipment when you were growing up. >> i was playing at an earlier

stage. >> i didn't want to say that. at some point i had to stop in the middle. whoever was playing the indians, slow down i have to stay there, fix the cap gun. if you got it just right, you could pull the trigger of the cap gun, it would hit the cap perfectly, you would get a great sound and an awful lot of smoke. i suspect they found a smoking gun. it's a cap gun. and if you press it a lot, you get an awful lot of smoke. that's what they've been doing over and over again. commissioner, good luck to you. you've been dealing with this some time. we'll continue to hear, i'm sure, some rhetoric. they found a smoking gun but it's a cap gun. >> i thank the gentleman for his fine speech and i would just want to acknowledge the fact that we're still waiting on information and, in fact, central person in all of this is somebody we have not had access to in this investigation and we're still awaiting very important e-mail communications. so, with that, i will -- >> would you yoeld field for a ?

>> and have been waiting patiently. >> for a statement? in your opening statement you did make reference to the fact now this committee has actually investigated the matter and found otherwise. that's a conclusion. >> otherwise is that we have not completed the investigation. >> it's a term of art. i appreciate it. yield back. >> mr. reed? >> commissioner, thank you. to my colleague from new york, who i think still does play cowboys and indians, because i know him very well. >> would you yield? >> how can i yield? >> you don't play fair cowboys and indians. >> my good friend from new york. >> he uses real arrows. >> mr. chairman, i appreciate you being here. and being the youngest of 12, coming from a single mother household, i was always taught look forward. look future. look -- the sun's going to come up. and you have a very important task ahead of you, sir. the irs right now has a reputation. i'll tell you from my

constituents it's just very troublesome to me. you need to have that objective, fair reputation in this agency, in particular. and you just don't have that right now. i'm going to give you an opportunity. and i take my oversight responsibilities here on this committee very seriously. and i want to see if you're going to show an independence or if you're just going to rubber stamp the white house and the president. and i'll give you an example of what i'm talking about. when the president makes the statement in the tea party targeting situation that there is not a smidgeon, i believe the quote was, not even a smidgeon of corruption in that situation, after you just testified to us and confirmed to the american public that there are six open investigations that have not been completed yet, is that a

responsible statement from our commander in chief, that you can trust me. there's not a smidgeon of corruption in the c-4 tea party targeting situation. yet you know and i know and you just testified here today that the investigations are nowhere complete. so, is that a responsible statement or is that something that may be a little irresponsible? >> i don't want to get into a big argument here. a lot of statements have been made in the face of an open investigation that would be drawing conclusions prior to the conclusion of that investigation. so, i don't think that there is a single focus on people at this point drawing conclusions. my position is, as i have said, i'm looking forward to this committee's investigation being concluded and the other five. and determining where the facts actually are. i look forward to that. >> see, what i just heard there, being a relatively new member

here is that you didn't want to answer the question. that you're afraid to stand to the white house and say, you know what, mr. president, that may not have been the most appropriate comment to make to the american people in a public setting. >> let me make it clear. i did not respond to chairman camp or the chairman of the subcommittee when they drew conclusions in the face of an open investigation. it's not my role to challenge what anybody is saying in terms of what's going on and what happened in the past. i've said i'm looking forward to the investigation being concluded. we'll see what the facts are. and we'll respond appropriately. i'm not engaging in -- not that i'm not answering your question -- i'm not engaging in anybody with a debate about the perceptions they may have. i don't think that necessarily would establish that i don't have independence or that i'm not going to behave independently. if we are going to solve this problem i think it's going to help if we actually work to see if we can't get the irs back in a position where it's not being bandied about politically. >> so if i hear your answer correctly, you would be of the opinion that there's no way to

come to a conclusion at this point in time the way you're testifying before us that there's no smidgeon of corruption because the investigations have not been complete? >> my position has been that everybody is entitled to their perception of the evidence as it's unfolding. >> i appreciate that. what is your -- >> i'm not expressing an opinion on chairman camp's view or chairman boustany's view. >> what about the president's view? >> whatever comments anybody is making are their business and it's up to them. i'm not going to go around, second guessing comment business anyone. >> okay. so, do you believe that the investigations are not complete so, therefore, there's no way to come to a conclusion as your role as commissioner of the irs whether or not there's evidence of corruption in the agency? >> i'm not coming to conclusions. what anyone else wants to do is up to them. >> that shows an open mind to get to the facts, get to the investigation and get to the conclusion. i wanted to talk to you from an operational point of view. you do have some needs there

that you clearly have referenced in the understaffing issue and funding issue. how have you judged that there is an understaffing issue in the agency from your point of view? you've heard from the front line employees. i get that. we've heard the same type of confidence. what metrics will you employ to deal with the fact there is an understaffing issue at the irs and how are you going to measure the fulfillment of those understaffing and underfunding situations? >> the irs is a remarkable agency in the sense that it measures a lot of things and it cares a lot about those measures. one of the measures is how many telephone calls go unanswered. we measure that in the old days, we were as high as close to 85, 88%. last year, it was 61%. i find that a measure not of people not being -- working hard. it's a msh we don't have enough people answering the phone. but -- >> how do you come to that

conclusion? >> how i come to that conclusion, they measure whether calls are answered or not. >> how do you not know that that's not because the people aren't doing their job? >> it might be. but i suspect -- >> it might be. that's what i'm asking. >> no, no. i will tell you, something is always -- i've been out now. i've been to six offices. i've been to call centers. i will guarantee you, there is no way that 40% of the calls not getting through has anything to do with the activity and the dedication of the employees working there. i can guarantee you that we would answer more calls if we had more people. i can guarantee we don't have the people because we don't have the funding. >> time has expired. >> yes. time has expired. and this is a question we're going to have to continue to work with you on, to justify as we talked about in our meeting prior to this hearing. justification for how the money is being spent to really right

size this budget. this committee will work with you. but we're going to need information from you. >> right. >> to make those decisions. >> as i've said -- it's not as if i say we need unlimited funds. we need to tell you what you're getting for what you buy and what you're not getting because you're not buying it. as we go through the budget, we're about to start the 2015 budget discussion. my view is that i need to be able to tell you if we've got $100 million for this, this is what you would get. if we have $300 million over there, this is what you would get. i can demonstrate in the past what you've bought. you bought where is my refund website that took 250 million hits last year. that didn't come for free. it came because we spent money appropriately. that's exactly right. spent three years omb worrying about how much would be spent. taxpayers deserve to feel we're measuring what we get for it, making sure we're efficient and trying to take this agency into

the 21st century so we don't run a model-t. you can look at the enforcement numbers. agents and officers. i met with them. they will tell you how many millions of dollars are uncollected, sitting right there. we've actually done the reviews. we don't have enough people either to send the letters or answer the calls that are coming back. it's an important question and i look forward to it. mr. chairman, you're exactly right. i wouldn't ask you to give us the money just for fun or just for some general purpose. if we get the funds and we'll talk about it in the '15 budget. i would do my best to tell you exactly where the funds would go, what you would buy for it and i will come back a year later and be held accountable, did you get what you paid for? >> we look forward to that. thank you. >> mr. paulson? >> it goes without saying you're

taking the raeins of the troubld agency at a troubled time. as you clarified i think in your opening statement, hard-working taxpayers deserve this at the very, very least. i want to touch on several topics, if i can in my limited time. 501 c-4 groups, premature, released in the middle of an ongoing investigation, they also do upend long established, as chairman camp mentioned earlier, rules governing 501 c-4s. for 501 c-3 charitable organizations, they would still be able to conduct nonpartisan voter registration. is that correct? >> that's my understanding. >> but if a c-4 organization conducts nonpartisan voter registration, it would jeopardize its exempt status and count against that entity's

social welfare activities. is that correct? >> that's a proposal out there for discussion and comment. >> under the proposed rules a c-3 charitable organization would still be able to conduct nonpartisan candidate forums near an election, correct? >> it's my understanding. >> but, again, if a c-4 organization held a nonpartisan candidate forum near an election, it would then jeopardize its status and count against the social welfare activity. correct? >> that's the proposal out for comment and discussion. >> commissioner, i'm trying to understand if this makes any sense. it sounds like it's time to go back to the drawing board in terms of looking at the rule. the public will have opportunity to comment. shouldn't we expect the treasury or the irs is going to be able to publish a draft rule that makes more sense? the only way this rule is going to make more sense is if the intent is to drive -- the only way this rule makes more sense is if the intent is really to drive 501 c-4s out of the public square. that certainly looks like it's

the direction they're pushing. >> as noted we have the new american record for comments in terms of 21,000. there's still more time. i look forward to seeing what those comments are and participating. i don't have total control over this, obviously. participating in the discussion to respond appropriately to those comments, which are covering these issues and others. because i do think that it won't do us any good if we end up with a final regulation that doesn't solve the problems that people are commenting on and think exist, both with the process generally and with the particular proposal. i'm looking forward to learning more from those comments. and they will, i think, address the issues you raise. >> commissioner, just like many members up here who are members of congress, we've heard from our constituents. i've certainly heard from many minnesotans. light bulbs go off. we heard about media and the press, being targeted based on their political, personal

believers. now they're thinking i'm a little anxious. i'm a little suspicious. i've heard from folks saying my accountants are telling me we've never seen this level of audit activity before. and light bulbs are going off saying, hey, i've been active with 501 c-4s, given politically to organizations. am i being targeted for those purposes? you've touched on this, but what procedures, if any, is the irs now have in place to ensure that individuals are not being targeted by the irs in any way as a result of their personal or political beliefs? >> that issue has been reviewed. we've actuallied with our chief risk officers and others. the irs has an historically long history of very detailed procedures and reviews of audit selection criteria. and i can guarantee you that no one is targeted because for those audits in that criteria for any affiliation they have. the audits are targeted

according to data and the analytics where we are likely to find underreporting or overreporting where there are likely to be issues. it's important to assure the american public that that is the situation. i can give you my commitment that the irs, as it goes forward doing audits will be doing them in a fair, even-handed way. as i discussed earlier, my concern is that everyone going forward, to the extent that there is visibility about the basis for it will assume that if they get a letter from the irs, they're immediately going to think what did i do wrong? which organization should i not belong to? who did i give a contribution to? what's my church affiliation. i just want, to the extent i can by saying it -- the proof will be in the pudding -- assure people that there is no selection criteria that would be viewed as unfair. it is all done independently. and people are going to be treated and have been treated fairly in terms of audits.

>> commissioner, can i just ask, would you and your staff be willing to with myself and members of my staff on those concerns that have been raised in terms of irs reviews? >> right. as i said earlier, i talked to the employees. it's always been my view that internal auditors and igs are very important sources of information, frontline employees are. as i said in my congressional hearing, they're a great source of information. an individual inquiry from a constituent is probably anecdotal. but if we get a series of them from different sources, different congressmen, that's an important source of information that we need to listen to and investigate. to the extent that anybody is getting concerns, i'm delighted to work with you and i will commit that our organization will work with you to ensure that we haven't inadvertently gotten somebody in a situation that they don't deserve to be in. i would like the public to feel confident when we raise that

issue with you, we will jointly assure that if there happens to be a problem, everybody will know about it and be able to fix it. i need to hear from your constituents. one of my commitments to my staff is when we hear from somebody in the congress, i want to respond promptly. i do not want you to feel that you have to write a letter and it takes months to get an answer from me. if you write me a letter, i'll write you an answer quickly. if there's a problem, i'm delighted to work with you to try to get to the bottom of it. >> thank you, mr. chairman. some of the questions that mr. reed and mr. paulson, as well as chairman camp raised relate back to the seven items that chairman camp gave to you. >> right. >> hopefully, we can get those things cleared up. >> yes. mr. kelly? >> i'm delighted to have that list. it does focus on what it is that you feel you need more from, where you think you haven't gotten all the documents you need so we can actually be responsive. >> thank you, mr. chairman.

mr. commissioner, thanks for being here. i would echo the comments for everybody else. you have a very tough job. your background suggests that you have done this before. so, when you were turning around different companies, you said you would called in to help out with troubled companies. when you look at the irs, your number one goal right now, it has to be restoring its image with the public. does it not? >> it is. as i said, i don't say it as words. public trust in the agency is critical. it's our most valuable asset. it's important to the -- we collect 91% of the revenues from the government. we touch virtually every american. we've got to have people confident. >> we also agree that you and i both work for the same people. >> i've always said these are taxpayer funds they're spending. we need to be confident we're stewards of them. >> mr. paulson, whenever he is back home -- when i'm back home in western pennsylvania, i talk to people all the time. we try to gather information. as you just said, come to us. let us know what's going on.

make us aware of what's happening. people come to me and talk to me. this is not anecdotal. this is a fact. can you use my story but you can't use my name. now, the reason they say that is because the history doesn't have the same projection as the words. and, you know, i have been around for a little bit of time. usually when people tell the stories or jokes, there's the three biggest lies. two of them could be something other but the last one is always from the government, i'm here to help you. i would just suggest -- i don't know how you're going to do this. you're a turn around guy. i would like to hear that. how are you going to turn that around? i hear what you're saying. i heard mr. warfol come here, gave us the do you means and said this is the path to getting this fixed. you're on board now. this is a turn around issue. i'm really concerned about this. i've got to tell you, the american people -- i don't know what the approval rating is of the irs. they're scared to death of the irs. >> right.

>> because of the past performance. so, we have these talks. it's great that we go back and forth and say how are you going to fix it, but the reality is, they just don't trust the irs because of the way they've been handled in the past. these people aren't treated very well. i would just say what you said earlier. do i understand you to say if you make over $1 million, you have a one in ten chance of getting audited? >> that's the number, yes. >> that's the number. who the heck would want to make $1 million then? you don't want to make that money because the irs could audit you. that's one incentive. in the heart of every single american, audits strike fear. your job, you come in. you're going to turn it around. i look at the figures. secretary of state treasurer ma makes and you make slightly less than that. >> i'm not eligible for a performance award. >> title 5 of the u.s. code, irs in recent years has paid 72 of

its employees annual salaries higher than the secretary of state of treasurer, 32 employee s that earn more than $225,000. is this part of your turn around? >> actually, we have special authority, provided by the congress, actually. >> the answer is, yes, you're going to look into that? >> i've already looked into it. in fact, i will tell you, if part of it comes under what's called critical pay authority and i am very concerned that that authority now expires. what we've used that for primarily are 22 employees under critical pay, 29, i guess. so half of them are -- >> what it is that you're going to do. i know you haven't been there that long. because of your background, i know there's certain things you see relevant to this agency you've seen in other companies. as you were called in to help companies in troubling times, your number one objective right now -- i've got to tell you, this idea -- i know we talked about people having -- drawing conclusions. you were drawing a conclusion that says i'm not going to make

a statement based on people making a statement on facts that aren't yet put out there, whether it be chairman camp, the president of the united states, whoever it is. the truth of the matter is, we don't know yet what the answer is in the investigation of the irs. do we? >> that's right. we're all waiting to see what you find. >> the answer is yes, we don't know. do we? >> no, that's correct. >> so we don't know. so, nobody can make a declarative statement -- this isn't funny from me. >> i've heard declarative statements from several people already. >> nobody can stand in front of you and tell you that this is clear, that these are -- there's absolutely not one smidgeon of evidence that proves tea not there. the investigation isn't done. it isn't done. those type of answers add to the gap between what people trust and what they have faith in anymore. because the answer is never a

direct answer. it's an end run. i come out of church after mass on sunday, i'm at a walmart, kmart, i'm down at my little coffee shop, they keep saying how do we know we can trust you? how do we know we can trust the government anymore? that's a heck of a position to be in, in this country and this time because overwhelming data that we've looked at, sir, is that they can't trust us. we've given them every reason not to. we have hearings like this, the opening exchange is great. the ability to talk to each other is great. straight answers are the thing that is people are looking for. i've got to tell you, when people tell me back home you can use my story but you can't use my name, that is the most chilling effect of what has gone on. and the fact that it goes unanswered for weeks after week, month after month and we keep hearing, there's actually nothing else. move on, folks. nothing to see here. that's when they know, you know what? it's another cover-up. you have a tough job in front of you, but no tougher than mine. i have to take care of the

people in western pennsylvania and the rest of the people in this country who expect us to do the right thing by them. that's what america stands for. any way we could help you, i would like you to weigh in. the investigation is far from over and there are other things we can look at. we can instill that faith and trust the american people need to have in us. >> i look forward to working with you on that. >> we're very honored to have the chairman of the social security subcommittee, our esteemed colleague, mr. johnson here with us. >> thank you, mr. chairman. thank you for holding this important hearing and allowing me as a full member of the committee to attend. mr. commissioner, on behalf of my constituents, some of whom like the patriots in texas appear to have been targeted by the irs. i just want to send a clear message that the irs has no business targeting americans for

their beliefs. what's worse is that while this scandal is still under investigation, even though you claim it isn't, the obama administration has proposed new regulations that effectively target these very same organizations. let me be clear. you have the responsibility as the head of the irs to ensure the irs is not being used as a political weapon, period. and you've said that. now, mr. commissioner, i want to talk to you about the so-called death master file. are you aware of it? >> i am aware of the death master file. >> over the years it has been used by identity thieves to commit tax fraud as well as victimize families of lost loved ones. the budget act took an important step by -- a change your agency has advocated for many years.

>> department of commerce, which handles this file, is ignoring the law, still allowing access until it establishes a certification prm for legitimate users. now, mr. commissioner, i'm going to ask you some questions. and i hope you can respond simply yes or no. it will save you talking. with the tax filing season under way, doesn't commerce's decision mean that the death master file can still be used by identity thieves? yes or no? >> i was not aware that commerce had kept it open. if it is open, then it can be used. >> so tax fraud is still possible because the file is still publicly available? >> as long as those files are available, it's a target of opportunity. >> mr. commissioner, i now want to ask you about the individual mandate tags. this is the first year which americans who do not have an obamacare health insurance policy will be penalized with

the individual mandate tax. now, just to confirm, the irs can enforce this mandate tax by deducting it from americans' tax refunds. yes or no? >> yes. >> isn't it also true that the government can sue americans who don't pay the individual mandate tax? yes or no? >> i think that's correct. >> okay. you know, i think that it is true. you know, obamacare brief filed by the administration's lawyers before the supreme court says in addition to going after refunds, the attorney general has general authority to file civil suits for unpaid tax liabilities. >> right. >> if someone fails -- >> some things we can't do. we can't put levies or liens on -- >> if someone fails to pay the

mandate tax, how much would that person have to owe before getting sued by the government? >> i don't know if a decision has been made about that. >> the american people deserve an answer. could you follow up and write -- >> i will follow up with you. >> lastly, let me just say it is unacceptable that the irs isn't doing a better job of stopping improper payments. for instance, the inspector general has raised serious concerns about the irs management of individual taxpayer identification numbers. bottom line, these i-10s are costing taxpayers billions because they can be used to fraudulently get tax refunds. in the coming days, i will introduce legislation to reform the i-10 program, swroint tax tells me that that would save about $7.5 billion. i hope we can get together on this. >> i look forward to working with you on it. >> thank you, sir. i yield back. >> thank you. >> commissioner, i want to thank you for being here today,

providing testimony to the subcommittee. please be advised members may have written questions they will submit and those questions and your answers will be part of the formal hearing record. clearly, there are a plethora of issues, some that are still outstanding and issues going forward during your tenure that we're going to work with you on. it's my hope that we can have a cooperative working arrangement and we can see to it that we restore the trust of the irs in the eyes of the american people and solve some of these many difficult outstanding problems as we go forward. so, with that, subcommittee stands adjourned. >> thank you.

this committee will come to order without objection the chair is authorized to declare a recess of the committee at any time. this hearing is for the purpose of hearing the semiannual testimony of the chairman of the board of governors of the

federal reserve on monetary policy. and the state of the economy. before we get started, i'm not sure if i called this a personal privilege or not, but i would draw the attention of the committee that we are blessed again with the appearance of the gentle lady from new york, carolyn mccarthy and what a blessing it is to have her back with us. [ applause ] the chair will now recognize himself for six minutes to give an opening statement. we welcome chair yellen for her first of many semiannual humphrey-hawkins appearances before our committee. chair yellen, you may recall that just two months after allen greenspan became fed chairman in 1987, the stock market crashed.

and at that time paul volcker sent him a short note that read, congratulations, you are now a central banker. chair yellen, you face the daunting prospect of unwinding a fed balance sheet the size and composition of which we have never seen before. all of this in the face of an economy that is underperforming at best, to alou me to paraphrase, congratulations, you are now the chair of the central bank. chair yellen we look forward to working with you to ensure that the federal reserve has the tools it needs to operate effectively in to the next century. we also look forward to working with you closely as this committee embarks upon its year-long federal reserve centennial oversight project. any agency or bureau of government that is 100 years old probably needs a good checkup, especially one as powerful as yours. and i remind all, independents

and accountability are not mutually exclusive concepts. perhaps the most critical issue we must examine is the limit of monetary policy to actually promote a healthy economy. we have now witnessed both the greatest physical and monetary sim husband programs in our nation's history, and the results could not be more disappointing. despite being almost five years into the so-called obama recovery we still see millions of our fellow citizens unemployed or underemployed. shrinking middle income paychecks, and trillions of dollars of new unsustainable debt. why is the nonrecovery recovery producing only one-third of the growth of previous recoveries? by one estimate the obama administration owes $494 billion in new regulatory costs upon our economy. from the 2.5 million net jobs cbo has now announced obamacare

will cost us, to the incomprehensible volcker rule, business enterprises are simply drowning in regulatory red tape that they attempt to expand and create more jobs monetary policy cannot remedy this. what else is different from previous recoveries? the single largest tax increase in american history. more than 1.5 trillion in higher taxes, from both the fiscal cliff agreement, and obamacare. and these taxes principally fall upon small businesses, entrepreneurs, and investors, again, as they try to bring about a healthier economy and create jobs. monetary policy cannot remedy this either. what else is different? fear, doubt, uncertainty, and pessimism that has arisen from the erosion of the rule of law. never before in my lifetime is more unchecked, unbridled

discretionary authority been given to relatively unaccountable government agencies. we are slipping from the rule of law to the rule of rulers. to punke uate this point the president recently reminded us that he has a pen, and a phone to essentially enact whatever policy he alone seems fit. regrettably he does not seem to have handy a copy of the constitution. i suppose the fed could send him one and perhaps throw in a copy of milton friedman's capitalism and freedom, although i doubt it would do much good. there are clearly limits to what monetary policy can achieve, but much it can risk. thus, the roughly 3.5 trillion dollar question remains whether qe 3 will continue to taper slowly, whether it will end abruptly, or simply more into qe incontinuety. we look forward to hearing the chair's thoughts and intentions on the matter.

as part of our centennial oversight project, qe will also cause our committee to thoroughly examine the federal reserve's unprecedented role in credit allocation. a focus distinct from its traditional role in monetary policy. should the fed pick distinct credit markets to support while ignoring others? this will -- this creates clearly winners and losers, and under the fed's current policies, seniors on fixed incomes are clearly losers. as we continue to witness the blurring of lines between fiscal and monetary policy. this committee will also examine the federal reserve's role as a financier and facilitator of our president's unprecedented deficit spending. since the monetary court of 1951 between the federal reserve and the treasury, it has been clear that the federal reserve should be independent of the president's fiscal policy, the question, though, is it? we will also consider how the federal reserve has undertaken the expansive new banking

regulatory powers it obtained under the dodd-frank act. and why it fails to conduct formal cost/benefit analysis. we will also consider whether dodd-frank has constrained the fed's 13.3 exigent powers properly and precisely what should its role as lender of last resort be. we will closely examine an old debate in monetary policy between rules and discretion. during successful periods in the federal reserve's history like the great moderation of 1987 to 2003, the central bank appeared to follow a clear rule. today, it seems to favor more amorphous guidance, shifting from calendar based to tight thresholds to loose thresholds, which arguably leaves investors and consumers lost in a hazy mist as they attempt to plan their economic futures and create a healthier economy. chair yellen i look forward to working with you as we examine these issues and to ensure in the 21st century the federal reserve has a well-defined,

specific mission that it has both the expertise and resources to effectively accomplish. the chair now recognizes the ranking member for five minutes for an opening statement. >> thank you, mr. chairman. i would like to take a moment of personal privilege to just say how proud, pleased and honored i am to have our colleague, ms. mccore think from new york back with us today. [ applause ] thank you, mr. chairman. it is with great pleasure that i welcome, chair yellen, to deliver your first-ever humry-hawkins act report and testimony. chairman yellen your presence here today is both historic and well deserved. your record of distinguished service in government, academia,

and at the federal reserve make you uniquely qualified to navigate the considerable economic challenges that lie ahead. your career in public service has been marked by high praise from economists and policymakers across the political spectrum. and in face of increasingly complex and interconnected global economy your sound judgment on the risks to economic growth and stability has been validated time and time again. in the run-up to the 2008 financial crisis, you accurately identified the looming risk to the economy and spoke up, telling colleagues, i quote, the possibility of a credit crunch developing and of the economy slipping into recession seem all too real, quote/unquote. when the crisis hit, as you predicted, you pushed to challenge conventional thinking about the limits of monetary policy and appropriately encouraged the fed to act forcefully to stabilize the economy.

today, in mixed economic data seems to suggest that the recovery is still fridgele and millions of americans continue to be unemployed. your willingness to think outside the box is more important than ever. like many of my colleagues, i remain concerned that more needs to be done to address the long-term unemployment crisis. as you know, 3.6 million americans have been out of work for 27 weeks or more. and i fear that any further delay in addressing the problem could permanently damage the labor force and slow the economy's ability to grow over the long-term. as you weigh the costs, benefits and risks of further large-scale asset purchases, i hope you will press your colleagues on the federal open market committee to take into account the ongoing impact that this long-term unemployment crisis is having on millions of american families. of course the republicans ideologically driven austerity

agenda, protracted political debt ceiling brinksmanship and failure to extend basic unemployment insurance benefits has only made this situation more dire. ironically republican unwillingness to provide the short-term fiscal assistance that the economy needs has put more pressure on the federal reserve to continue the same stimulative policies that many in their party oppose. although monetary policy is indeed a powerful tool, the responsibility of putting the -- for putting the economy on more stable footing cannot and should not fall exclusively on the federal reserve. congress, too, must do its part. what is shown i hope the congress can work in concert with the federal reserve to address is a growing issue of income inequality. as you know, the -- during the economic recovery have disproportionately benefited the wealthiest in our society leaving the middle class and most vulnerable behind. i believe that the income gap is

one of the most pressing threats to our economic potential. i look forward to your views on how we can work together to close it. finally, there are a number of pending issues related to the fed's role in implementing the dodd-frank act and although we won't be able to discuss all of them today i hope to learn more about the fed's role in identifying and reducing systemic risk across the financial system. this includes your proposed rules to enhance prudential standards for large u.s. and foreign banking firms, and your views on risks that continue to exist in the repo markets. as the 2008 financial crisis made all too clear, growth and prosperity are inextricably linked to financial security and therefore your diligence on these matters is critically important. so i thank you, chair yellen, thank you again for being with us today, and i will yield back the balance of my time. >> the chair now recognizes the gentleman from michigan,

mr. huizenga for two minutes. the vice chairman of our monetary policy subcommittee. >> thank you, mr. chairman. and chair yellen congratulations on being confirmed as first woman chair of the board of governors of federal reserve and i think, as you see with this group of cameras ahead of you, buckle up and hang on. this is going to be an interesting ride, i'm sure. as we're preparing for this, i sent out a facebook and twitter tweet about what i should ask you. a number of things came back. competitiveness, our u.s. competitiveness, auditing the fed, a number of other things, but i've got a couple of other ideas, as well. today i'm particularly eager to hear your insights on monetary policy and the state of the economy, specifically your views of the new quote/unquote highly touted volcker rule. i'm not the first to note that since the creation of the fed in 1913 the fed's power has significantly expanded over the last 100 years. ranking member waters just thanked you for quote, thinking outside the box. some of us are trying to

determine what exactly the box is these days. and i think we have -- we all have a responsibility to explain that to the american people. well, originally created and supervised to monitor the banking systems in the united states, the fed's role has continued to grow seemingly unchecked, some of that through acts like the dodd-frank and other reasons but certainly its current position of being a lender of last resort to banking institutions that require additional credit to stay afloat is something that we need to continue to explore. given the interconnectedness of the global financial system, there's no doubt that the federal reserve's monetary policies have also significantly impacted the international markets, and foreign economies, as was explored right at that table last week, when there was discussion of the fragile five, countries out there, as well as our own country, and i look forward to hearing your comments on these topics. so thank you very much. and with that i yield back, mr. chair. >> chair now recognizes the gentleman from missouri, mr. clay, the ranking member of

the monetary policy and trade subcommittee for three minutes. >> thank you, mr. chairman. welcome, chairman yellen. as you report to this committee for the first time in your new position, and chairman yellen, i want you to know that like you, i believe that the actions of the federal reserve should always consider the impact and well-being of main street, as well as wall street. that means actively pursuing the twin goals of full employment and controlling inflation, and it also means advancing the vital work of closing the income inequality gap, which is hurting so many working families, and threatening america's economic future. like you, a believe in fundamental financial reform and real transparency to protect american consumers. that includes maintaining a consumer financial protection

bureau with real teeth and the authority to act swiftly against financial abuses. i strongly oppose the majority's efforts to cripple the consumer financial protection bureau, and it's shocking and it saddens me that the majority is more concerned about bringing comfort and relief, not to struggling consumers, but to some of the same financial predators who caused the great recession. you know in 1977, congress amended the federal reserve act to promote price stability, and full employment. the consumer price index rose 1.5% in 2013, after a 1.7% increase in 2012. and that is actually lower than the 2.4% average annual increase in cpi over the last ten years.

as a response to the financial emergency in 2008, the federal reserve bank purchased commercial paper, made loans, and provided dollar funding through liquidity swaps with foreign central banks. this action significantly expanded the federal reserve's balance sheet. the fed has gradually tapered its asset purchases from an initial $85 billion per month to this month's $65 billion purchase in treasury and mortgage-backed security. in terms of supporting full employment, let's look at the data. and because of the positive leadership of under former chairman bernanke the unemployment rate in the u.s. is 6.6%, but the number of long-term unemployed is 3.8 million people. and that is even more compelling

evidence why this congress should extend unemployment -- emergency unemployment benefits without delay. and my time has run out, mr. chairman, but i look forward to the chairman's testimony. >> the time of the gentleman has expired. today, we welcome the testimony of the honorable janet yellen, the chair of the board of governors of the united states federal reserve, a position she was confirmed to by the senate on january 6th of this year. she took office on february 3rd, just last week. we congratulate miss yellen for her confirmation. her historic confirmation as the first female chair of the board of governors. prior she served as the vice chair of the board of governors for four years and from 2004 to 2010, miss yellen was the president and ceo of the federal reserve bank of san francisco. during the clinton administration miss yellen

served as chair of the president's council of economic advisers. she has taught at harvard and the london school of economics, she holds a ph.d. in economics from yale. chair yellen i want to personally thank you for cooperating with us to ensure that every member of the committee has an opportunity to ask you questions as part of this hearing today. i hope the members are paying careful attention. i would also say to the members that the chair unsolicited offer to stay all day. madam chair, you're in luck. we're not staying all day. this committee has a bill on the floor later this afternoon. you will be spared that. i peeked at your testimony to where you pledged to be accountable. you are off to a very good start by agreeing to do this. because of the anticipated length of the hearing, i wish to alert members, though, that the chair does expect to call a

couple of recesses during chair yellen's testimony. and, indeed, the chair will also yield a very strict gavel. without objection, chair yellen's written estimate will be made part of the record, after her oral remarks. again madam chair, welcome. you are now recognized for your oral presentation. okay, since this is your first time, chair, you're going to have to bring that microphone much closer to you, please, so we can hear you. >> chairman hensarling, ranking member waters, and other members of the committee, i'm pleased to present the federal reserve's semiannual monetary policy report to the congress. in my remarks today, i will discuss the current economic

situation, and outlook before turning to monetary policy. i'll conclude with an update on our continuing work on regulatory reform. first, let me acknowledge the importance contributions of chairman bernanke. his leadership helped make our economy and financial system stronger and ensured that the federal reserve is transparent and accountable. i pledge to continue that work. the economic recovery gained greater traction in the second half of last year. real gross domestic product is currently estimated to have risen at an average annual rate of more than 3.5% in the third and fourth quarters. up from a 1.75% pace in the first half. the pickup in economic activity has fuelled further progress in the labor market.

about 1.25 million jobs have been added to payrolls since the previous monetary policy report last july, and 3.25 million have been added since august 2012, the month before the federal reserve began a new round of asset purchases to add momentum to the recovery. the pun employment rate has fallen nearly a percentage point since the middle of last year, and 1.5 percentage points since the beginning of the current asset purchase program. nevertheless, the recovery in the labor market is far from complete. the unemployment rate is still well above levels that federal open market committee participants estimate is consistent with maximum sustainable employment. those out of a job for more than six months continue to make up

an unusually large fraction of the unemployed. and the number of people who were working part-time but would prefer a full-time job remains very high. these observations underscore the importance of considering more than the unemployment rate when evaluating the condition of the u.s. labor market. among the major components of gdp, household and business spending growth stepped up during the second half of the year. early in 2013, growth in consumer spending was restrained by changes in fiscal policy. as this restraint faded during the second half of the year, household spending accelerated. supported by job gains, and by rising home values, and equity prices. similarly, growth in business investment started off slowly

last year, but then picked up during the second half reflecting improving sales prospects, greater confidence, and still favorable financing conditions. in contrast, the recovery in the housing sector slowed in the wake of last year's increase in mortgage rates. inflation remained low as the economy picked up strength. with both the headline in core personal consumption expenditures or pce price indexes, rising only about 1% last year, well below the fomc's 2% objective for inflation over the longer run. some of the recent softness reflects factors that seem likely to prove transitory

including falling prices for crude oil and falling import prices. my colleagues on the fomc and i anticipate that economic activity and employment will expand at a moderate pace this year and next. the pun employment rate will continue to decline toward its longer-run sustainable level. and inflation will move back toward 2% over coming years. we have been watching closely the recent volatility in global financial markets. our sense is that at this stage, these developments do not pose a substantial risk to the u.s. economic outlook. we will, of course, continue to monitor the situation. turning to monetary policy, let me emphasize that i expect a great deal of continuity in the fomc's approach to monetary

policy. i served on the committee as we formulated our current policy strategy, and i strongly support that strategy, which is designed to fulfill the federal reserve's statutory mandate of maximum employment, and price stability. prior to the financial crisis, the fomc carried out monetary policy by adjusting its target for the federal funds rate. with that rate near zero since late 2008, we have relied on two, less traditional tools, asset purchases, and forward guidance, to help the economy move toward maximum employment and price stability. both tools put downward pressure on longer-term interest rates and support asset prices. in turn, these more accommodative financial conditions support consumer spending, business investment,

and housing construction, adding impetus to the recovery. our current program of asset purchases began in september 2012, amid signs that the recovery was weakening, and progress in the labor market had slowed. the committee said that if we continued the program, until there was a substantial improvement in the outlook for the labor market in the context of price stability. in mid 2013, the committee indicated that if progress toward its objectives continued as expected, a moderation in the monthly pace of purchases would likely become appropriate later in the year. in december the committee judged that the accumulative progress toward maximum employment, and the improvement in the outlook for labor market conditions,

warranted a modest reduction in the pace of purchases. from $45 billion to $40 billion per month of longer-term treasury securities, and from $40 billion to $35 billion per month of agency mortgage-backed securities. at its january meeting the committee decided to make additional reductions of the same magnitude. if incoming information broadly supports the committee's expectation of ongoing improvement in labor market conditions, and inflation moving back towards its longer run objective the committee will likely reduce the pace of asset purchases in further measured steps of future meetings. that said, purchases are not on a preset course, and the committee's decisions about their pace will remain

contingent on its outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases. the committee has emphasized that a highly accommodative policy will remain appropriate for a considerable time after asset purchases end. in addition, the committee has said since december 2012, that it expects the current low target range for the federal funds rate to be appropriate at least as long as the unemployment rate remains above 6.5%. inflation is projected to be no more than a half percentage point above our 2% longer-run goal. and longer-term inflation expectations remain well anchored. crossing one of these thresholds will not automatically prompt an increase in the federal funds

rate but will instead indicate only that it had become appropriate for the committee to consider whether the broader economic outlook would justify such an increase. in december of last year, and again this january, the committee said that its current expectation, based on its assessment of a broad range of measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments, is that it is like -- that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6.5%. especially if projected inflation continues to run below the 2% goal.

i'm committed to achieving both parts of our dual mandate. helping the economy return to full employment and returning inflation to 2%, while ensuring that it does not run persistently above or below that level. i will finish with an update on progress on regulatory reforms and supervisory actions to strengthen the financial system. in october the federal reserve board proposed a rule to strengthen the liquidity positions of large and internationally active financial institutions. together with other federal agencies the board also issued a final rule implementing the volcker rule which prohibits banking firms from engaging in short-term proprietary trading of certain financial instruments. on this supervisory front, the

next round of annual capital stress tests of the largest 30 bank holding companies is under way and we expect to report results in march. regulatory and supervisory actions including those that are leading to substantial increases in capital and liquidity in the banking sector, are making our financial system more resill yentz. still, important tasks lie ahead, in the near term we expect to finalize the rules implementing enhanced credential standards mandated by section 165 of the dodd-frank wall street reform and consumer protection act. we also are working to finalize the proposed rule strengthening the leverage ratio standards for u.s.-based systemically important global banks.

we expect to issue proposals for risk base capital surcharge for those banks, as well as for a long-term debt requirement to help ensure that these organizations can be resolved. in addition we're working to advance proposals on margins for noncleared derivatives, consistent with the new global framework. and are evaluating possible measures to address financial stability risks, associated with short-term wholesale funding. we will continue to monitor for emerging risks, including watching carefully to see if regulatory reforms work as intended. since the financial crisis and the depths of the recession, substantial progress has been made in restoring the economy to health and in strengthening the

financial system. still there is more to do. too many americans remain unemployed, inflation remains below our longer-term object iv and the work of making the financial system more robust has not yet been completed. i look forward to working with my colleagues, and many others, to carry out the important mission you have given the federal reserve. thank you, i would be pleased to take your questions. >> chair will recognize himself for five minutes of questions. chair yellen you just selfed that, quote, i expect a great deal of continuity on the fomc's approach to monetary policies. i'll ask the obvious question, important guidance, which has been somewhat anchored in the evans rule seemingly said monetary policy will not tighten until unemployment drops below

6.5%. now chairman bernanke announced that or he described this as a taylor-like rule, although professor taylor, who we'll hear from later, may not agree, be that as it may. we stand on that threshold, and so i also see in your testimony where you said crossing one of these tlesh holds will not automatically prompt an increase in federal funds rate. i guess to some extent the editorial writers in "the wall street journal" anticipated this and opined two days ago in respect to the evans rule, quote, perhaps the open market committee should have called it the evans suggestion. quote the mistake was telling markets there was a fixed rule and the only sure thing at the fed is more improvisation. so who's right here? is "the wall street journal"

that we are -- that these thresholds are ee louisry and we're seeing more improvisation? or do we have something that is rule-like? >> well, when the -- after the federal funds rate hit its effective lower bound -- >> i'm sorry chair, could you pull the microphone a little closer to you, please? >> after the federal funds rate reached its effective lower bound, close to zero, at the end of 2008, the federal reserve s was -- to provide additional accommodation through tools that were new and novel. and an important tool that had been used to some extent in the past, but we have relied on quite heavily since that time, is our toward guidance concerning the likely path of monetary policy. >> but madam chair, if you reach

a threshold, and then you ignore the threshold, what good is the forward guidance? >> so, what the fed indicated in december of 2012 is that we would not consider, would not -- did not think it would be appropriate, to consider raising the federal funds right as long as unemployment was over 6.5% and inflation was projected to run under 2.5%. as long as inflation expectations were also well anchored. so we have followed that guidance. >> i will say this if i can, madam chair, there's one thing that the fed says. it's another that markets may hear. my time is running out. i want to cover a little other ground, as well. dealing with a rules based monetary policy.

i think if i read some of your statements properly and i don't want to put words in your mouth, but that you consider times five years after the financial crisis still extraordinary, and it is not necessarily an appropriate time for a rules-based approach? is that a fair assessment of your views? >> i have always been in favor of a predictable monetary policy that responds in a systematic way to shifts in economic variables. >> well, in fact, earlier in your career, with respect, in reference to the taylor rule you said it is, quote, what sensible central banks do, unquote, so that begs the question today, using your words, are you a sensible central banker, and if not, when will you become one? >> congressman, i believe that i am a sensible central banker and these are very unusual times in which monetary policy for quite

a long time is not even been able to do what a rule like the taylor rule would have prescribed. for several years, that rule would have prescribed that the federal funds rate should be in negative territory, which is impossible. so the conditions facing the economy are extremely unusual. i have tried to argue and believe strongly that, while a taylor rule is or something like it provides a sensible approach in more normal times, like the great moderation, under current conditions when this economy has severe headwinds from the financial crisis, and has not been able to move the funds rate into the negative territory that rule would have prescribed that we need to follow with different

approach. and we are attempting, through our forward guidance, to be as systematic and predictable as we can possibly be. >> madam chair, my time is expired and i'm going to attempt to set a good example for the rest of the committee. the chair now recognizes the ranking member for five minutes. >> thank you very much, mr. chairman. chairman, you alluded to continuing the policies that were initiated by the committee that you served on and under with mr. bernanke. >> i can't hear. >> i'm a supporter of quantitative easing. and i would like to hear from you what you think quantitative easing did to stabilize this economy. can you tell us not only what you think happened with

quantitative easing, but how, again, you intend to continue the policy on tapering as it is today. >> thank you, congressman waters. the purpose of quantitative easing, we've been buying longer-term treasury securities, and agency mortgage backed securities. the objective has been to push down longer-term interest rates. and i believe we've succeeded in doing that. and to more broadly make financial conditions accommodative. the purpose is to spur spending in the economy, and to achieve more rapid economic growth. and i believe we've been successful, and some examples would be that as mortgage rates fell to historicly low levels, we certainly saw a pickup, a

very meaningful pickup in housing activity off the very low levels it had fallen to. we also have seen a very meaningful increase in house prices, and i think that that's improveds security of a very large number of households. many households have been under water in their mortgages, and that fraction has diminished substantially, and that means that those households are in a better position to spend and to borrow. in addition, low interest rates have also stimulated spending in other intrasensitive sectors like automobiles. we've seen a decided pickup in that sector, as well. when spending and employment increase in those sectors, the availability of jobs increases, unemployment tends to come down, growth picks up.

and as i mentioned, we have seen since the beginning of this program, we have seen the unemployment rate decline 1.5%, and i think this program has contributed to that. now, when the committee, you asked our plans with respect to the program, i want to address that. when the committee began this policy it did so at a time when it looked like the recovery and progress in the labor market was stalling. we began these asset purchases as a secondary tool, a supplementary tool to our forward guidance, to add some momentum to the recovery, and we said we would continue those purchases until we'd seen a substantial improvement in the outlook for the labor market, and the context of price stability. as i noted, there have been a

substantial number of jobs created and unemployment has come down, and in december the committee judged that enough progress had been made in the labor market to begin a measured pace of reductions in the pace of our asset purchases. we purposely decided to act in a measured and deliberate way to take measured steps so that we could watch to see what was happening in the economy, and we've indicated that if the outlook continues to be one in which we expect and are seeing continued improvement in the labor market, that implies growth strong enough going forward to anticipate such improvement, and inflation, which is running below our objective, if we see evidence that that will come back toward our objective over time, we're likely to continue reducing the

pace of our purchases in measured steps. but, we've also indicated that the -- this program is not on a preset course, which means that if the committee judges there to be a change in the outlook, that it would reconsider, it would reconsider what is appropriate with respect to the program. >> thank you, madam chair. i yield back the balance of my time. >> chair now recognizes gentleman from michigan, mr. huizenga, the vice chairman of monetary policy and trade subcommittee. >> thank you. chair yellen did short-term proprietary trading cause the financial crisis? >> i wouldn't say that short-term proprietary trading was the main cause of the crisis. >> i'm sorry, it was not? >> i would not see that as the main cause of the crisis. >> i think we would be in agreement on that.

i'm -- you have noted i think as december 10, just this past year, at the open meeting board, you had some concerns about the volcker rule, as well, and to quote you, you specifically asked for a, quote, assessment of what impact do you, i'm assuming that's your own internal economists, think this would have an u.s. banks in terms of, do they face potential competitive disadvantages vis-a-vis foreign banks and various global capital market activities? i have some of those same concerns, and i'm not sure as we had the five regulators, the fed, the s.e.c., occ, fdic and cftc for those of you watching out there, that's the alphabet soup of regulators that look at all of this, the discussion of a volcker rule the discussion of the rule and the impact, governor seemed to indicate that the fed was very

concerned about that. that we were somehow not at a disadvantage. i'm not sure we're safer. do you mind chatting about that, please? >> so i think the impact of the rule is something we will monitor over time as it goes into effect. the agencies have worked hard jointly to write a balanced rule. that will permit banking organizations to bank in marking activities and, you know, we'll be very careful in how they supervise institutions to make sure -- >> well, i'm sure you're aware, we're the only sort of major economy, major government that has put anything like this into effect. you're comfortable saying, i think the quote was monitor over

time to see the effect. how long are you comfortable waiting to see what will happensome is it three months? six months? a year? how long will we see liquidity see the united states and us lose that -- that market share? >> i think it will be able to go on as we implement the rule. particularly market making that's really vital to a well functioning financial system. >> is there a length of time? that's what i'm looking for. how long are you interested in waiting to see the effectiveness? i mean, it's 932 pages. 297,000 words. there's a lot to wade through and a lot of interpretation. >> well, we will be involved with the occ and the fcc in

other agencies in using supervision to make sure firms do comply tw the rule. >> so an undetermined amount of time to see the effectiveness. >> it will certainly take time to see what the effects of the rules are. >> i would like you to put thought into exactly how much time. how long will we be at a competitive disadvantage is what i'm concerned about? we have to move along. i have just over a minute. in response to quantitative easing, they have closed foreign markets to investors and economies in many ways. it was talked about at the table. the fragile five. indonesia, india, south africa, turkey as well as brazil have been affected by our monetary policy, and now it's just the, sort thof the reversing of our easing. i guess as we're not purchasing

as many. do you have any concerns that managed tapering that we're trying to do? might cause capital flight in some of the other economies as well. what would that mean for investors and forms in the united states? not to mention our diplomatic and trade relations. >> certainly they are global in the monetary policies of any country affect other countries in such a world. but we've been very clear at the outset that we initiated our program of asset purchases and accommodating monetary policy more generally to pursue the goals that congress has assigned to the federal reserve. namely supporting economic growth and employment in the context of price stability. we have tried to be as clear as

we possibly can about how we can conduct this policy. it's been quite clear at the the outset that as we advanced that we would wind down or reduce the pace of our asset purchases and as growth picks up, eventually we will normalize our policy stance. >> the time of the gentleman has long since expired. >> thank you, sir. >> and the chair would advise all members to perhaps ask that last question with at least 30 second to go on the clock. the chair now recognizes the man from missouri, mr. clay t the ranking member. >> thank you, mr. chairman. i'll be cognizant of time. madame chair, the u.s. unemployment rate is 6.6%.

for african-americans it stands at 12.1%. for hispanics it's 8%. and for asians, it's a little over 4%. and for young adults, it's 20%. what can this congress do in working in conjunction with the federal reserve to lower unemployment rates for african-american people, for the latino community? any suggestions. >> for our part we're trying to do what we can with monetary policy to stimulate a faster economic recovery to bring un unemployment down nationally. because high unemployment

disproportionately affects many of the groups you mentioned, if we're successful it will have a great benefit to the groups that you mentioned. of course, monetary policy is not a panacea. and i think it's absolutely appropriate for congress to consider other measures that you might take to monitor the goal ls. some have been adversely affected by longer term trends in the economy that have lead to very stagnant wage growth for those in the middle and bottom of the income spectrum, is we've seen rising inequality. certainly all economists that i know of think that improving skills of the workforce is one important step that we should be taking to address those issues.

>> so congress could also, by taking a look at infrastructure and starting a jobs program in that area where we rebuild our roads, bridges and other infrastructure and put americans back to work. >> so these are certainly programs that congress could consider and debate. >> thank you for that response. in a speech you gave to the af of lcio last year, you stated that the evidence you had seen showed that the increase in unemployment since the onset of the great recession has been cyclical and not structural. you cited that job losses were widespread across industry and occupation groups and went onto say construction manufacturing and other cyclically sensitive

industries were hard hit as well. do you continue to believe that a significant component of our unemployment situation continues to be the result of cyclical factors? >> i do continue to hold that view. i think most of the increase we've seen and the decline we have seen, while a small portion of it may be related to structural issues and there may be some reduction in structural mismatched, better mismatching is the recovery proceeding. mainly a decline in cyclical unemployment. members of the committee every three months offer their personal views as to what a longer run normal unemployment rate end is and the range of opinion in the fomc in december

ranged from 5 to 6%. so it's 6.6% we remain well above that. and i guess i would point out two that some broader measures of the labor market, we shouldn't only focus on the unemployment rate. the degree of involuntary part-time employment remains exceptionally high at 5% of the labor force. so broader measures of unemployment are more elevated relative to normal than our standard unemployment rate. in addition t there are an unusually high sneincidence of g duration spells of unemployment. so by a number of measures, our economy is not back. the labor market is not back to labor in terms of maximum. >> the time has expired. the chair now recognizes the

gentleman from alabama. the chairman baucus for 11 minutes. >> thank you. last week the governor appeared before the committee and said that the clo ownership issue was at the top of the agenda for the interagency working group, which, you know, you have the fed and four other members, i think. what additional information do you need to resolve the clo issue and clarify how legacy securities will be treated under volcker? >> so this is something that a number of banking organizations have asked the regulators to look at. the regulators recently issued a ruling concerning trups and this is something they're jointly engaging in looking at. we'll have something on that hopefully reasonably soon.

>> i was going to ask you that. how soon do you think we can expect you to issue some guidance? >> i don't have a definite -- >> but you're saying maybe soon? >> hopefully. >> okay. do you know what remedy the group is suggesting? >> i don't. this is something they're going to shave to look at? >> do you agree this is something that needs urgency to address? >> it's certainly something that the regulators will look at and should look at. >> the fed has long suggested, and i know mr. clay and your response to him mentioned this, has held the view that a large portion of the recent decline in the labor force participation rate has been attributed to cyclical factors. which would become structural f

iffif unaddressed. therefore part of the reason for aggressive quantitative easing. and that's the philadelphia feds recent unemployment study. if you look at that you can see there's evidence of a smaller gap between full enemployment and current unemployment. they said almost 80% of the decline in participation is accounted for by increase in nonparticipation due to retirement. this applies that the decline and unemployment rate is not due to more discouraged workers dropping out of the labor force.

and the likelihood of those who have left the labor force due to retirement disability rejoining the labor forces small and has been largely insensitive to business cycle conditions in the past suggesting at least to me that the decision to leave the labor force for those, who reasons is more or less permanent. if you look at that line, participation is coming down for 10 or 12 years. and let me put a second chart up consistent with that. that's the bureau of labor statistics. i think since 1998 on the fed and in 2001 we have a consistent dropping of participation. does that maybe modify or amend

your review on the structural versus cyclical debate that we've been having? >> so i would like to make clear that i think a significant part of the decline in labor force participation as you mentioned is structural and not cyclical. the baby boomers are moving into older dangers where there's a dramatic dropoff in labor force an an aging population. we should expect to see a decline in labor force participation. and as you noted, that has been going on for some time. so there's no doubt in my mind that an important portion of this labor force participation decline is structural. that said, there may also be, and i'm inclined to believe

myself based on the evidence that there are also cyclical factors that work. so it has a structural component and also a cyclical component. there's no surefire way to separate the decline into the two components. but it is important to realize that we're seeing declining participation also among prime age workers and among younger people. and it seems to me some portion of that reflects discouragement about job opportunities. but there is no clear scientific way at this point to say exactly what fraction of that decline is cyclical. >> time of the chair has expired. the chair now recognizes the gentle lady of new york for five minutes. >> thank you, mr. chairman. i would like to begin by

congratulating you, chair yellen. in the 100-year history of the federal reserve, it's existed for 100 years, there's been only 15 fed chairs. you are the first woman to lead the fed or any major central bank. we are so proud of you. and in your long and distinguished career, you have excelled at every single point of your career and i just want to note that your appointment is a tremendously important historic achievement in the women's movement. congratulation congratulations. >> thank you, congresswoman. >> i would like to ask you about the reaction to the unexpectedly weak job report which showed that the economy only created 113,000 jobs in january. some in the markets are now calling for a pause in the fed's tapering strategy. and has the weak jobs report

caused you to consider slowing the pace of the feds' tapering? >> so, i was surprised that the jobs report in december and january, the pace of job creation was running under what i had anticipated. but, we have to be very careful not to jump to conclusions in interpreting what those reports mean. there were weather factors. we've had unseasonably cold temperatures that may be affecting economic activity in the job market and elsewhere. the committee will meet in march. we will have a broad range of data on the economy to look at. including additional em ploilt report, and i think it's important for us to take our

time to assess just what the significance of this is. i think the committee has said that -- >> well, can you describe what would cause you to consider a tapering pause? in months of bad data reporting? what would cause you to consider pausing? >> i think what would cause the committee to consider a pause is a notable change in the outlook. the committee when it decided to begin the process of tapering measured steps believed that the outlook was one where we would see continued improvement in the labor market. if incoming data were to cause the committee -- >> what kind of data? jobs data?

what kind of data? >> a broad range of data in the labor market including unemployment, job creation and other indicators of labor market performance. we would also look at indicators of spending and growth in the economy because we do need to see growth at a pace in order to project continued improvement in the labor market. and we note that inflation is running well below the objective. >> well, what would it take for the fed to consider sin creasing the asset purchases again? instead of just slowing down reductions? what would it take? >> well, a significant deterioration in the outlook. either for the job market or concerns, you know, very serious concerns that inflation would not be moving back up over time.

but we will continue to evaluate the evidence. >> so fab they are reducing the bonds with mortgage backed securities. why did the fed choose to split it between mortgage backed securities and treasuries? >> well, both kinds of purchases have similar effects on longer term interest rates. >> now if the housing market starts the to slow down, would the fed consider maintaining the purchases of mortgage backed securities and only tapering treasury purchases? >> i think both kinds of purchases affect interest rates broadly.

some evidence suggested different impact, but it's very hard to think of these being discreet. >> translator: the time of the gentle lady expired. the chair now recognizes the gentle lady from west virginia. >> thank you, mr. chairman. i would like to add my voice to the course of congratulations to chair on her enl employment. i've been on the committee for many, many years and i've understood more of what you said than i have probably the last two folks that were in front of us. so thank you for that. >> well, thank you. >> i represent west virginia and energy state. in your report, you note the growth in the oil and gas development business, which i think has great promise for the country. it's also noted in notes for the richmond fed that the coal industry is suffering. low coal prices, regulation and a decrease in employment. energy has a great cause to bring jobs to this country and keep them here. what do you hear about energy

policy and what effect would that have on economic growth? >> well, i think energy has been a great contributor to growth. and we've seen a huge shift in the u.s. position in terms of net reports in terms of natural gas. and energy policy certainly plays an important role there. >> thank you. another question, again, coming from a state that has a large senior population one of the concerns i've had is a low interest rate and what concern this has on savers, particularly older savers trying to retire when they're relying on fixed income assets like bonds, cds or savings account. this has been difficult for them to plan for their senior years post retirement. what kind of thinking do you have as you're weighing the

interest rate structure on the savings that's occurring in the country. particularly for the older saver? >> well, you know, certainly a low-interest rate environment is a tough one for retirees who are looking to earn incomed in says investments like cds or bank deposits. i think it's important to recognize that interest rates are low for a fundamental reason. and that is because in the u.s. and in the global economy as a whole there's an excess of saving relative to the demand for those savings. for investment purposes. so, the rates of return that can -- that savers can expect really depend on the health of the economy and with a weak economy where there's a lot of saving and less demand for those

savings, that's a fundamental drag on growth and what savers can expect. we are to promote a stronger recovery and in a stronger economy savers will be able to earn a higher return because the economy will be able to generate it. so i recognize that this is difficult for savers. it's also important to recognize that any household, even if it's retired in addition to saving, people care about their work opportunities. they care about the opportunities of their kids. and a lot of people have exposure to the thought market as well. even if it's through a 401k or the health of a retirement plan, and so, this shouldn't be a one dimensional assessment. >> right.

thank you. folks are working longer, too, and that's a concern for those who thought they planned well and they're finding it's not quite turning out for them. you already mentioned that 5% of the labor force is exceptionally large portion for the part time. you know, we've learned with the president's affordable care act that part -- full-time job is now anybody who is working over 29 hours is considered full time. is that consistent with your assessments of what a full-time job is when you're looking at your calculations, and when you say exceptionally large portion as part time, is that anybody working under 29 hours? is that how you define that? >> i'm talking about part time for economic reasons. people who were working -- >> what's the definition of a part-time job? how many hours a week? how many hours pa week would you consider a part-time job when

most people consider a full-time job 40 hours a week. is a part-time job -- the president has defined it as 29 hours and above. what do you define a part-time job as? >> this is a definition by the bureau of labor statistics, not ours. >> do you happen to know what it is? can you get back to me on the that? >> what? 25? 35. under 35. >> 35. all right, thank you. >> thank you, mr. chairman. chair yellen, as you know, the median wage has failed to keep pace with a booming stock market and record quarter profits. is it possible that stagnant wage growth for american workers are not overly accommodating monetary policy as some has suggested is causing a slower

recovery and decreased job creation? >> well, certainly for much of the workforce real wages have been stagnant in recent years. but also unfortunately going back many years as far as the mid to there has been some speculation. i'm not sure we know for sure, but there has been some speculation that the trend for sony households of weak labor markets income growth did contribute to the troubles in the economy. the idea there would be that wealthier families, higher income families spend less of their additional income than lower income families, and so, that shift in the distribution of income may have created a drag on growth. i don't know that we have any

hard evidence on that, but that certainly is a hypothesis that has received some attention. >> the housing sector has continued to see improvement with robust construction activity and higher home prices. how will continued reductions in qe affect the housing market? >> well, i think that quantitative easing, or purchases of securities, did serve to push down mortgage rates and other longer-term interest rates quite substantially, and was the factor underlying the strength of the housing market. and also promoted a recovery in house prices that's been good for so many families. we did see a backup in interest rates in the spring, and into the summer. in part, i think that was

associated with we evaluation of the strength of economic growth and the likely cause of monetary policy. but we did see a notable, mortgage rates are still very low. we certainly have seen a slowing in the housing sector since mortgage rates have backed up. i'm hopeful that housing will continue to support the recovery. there are good fundamentals of their but that was a clear, provided clear evidence of the impact that mortgage rates do have on the strength of housing. >> thank you. according to the adp national employment report, small businesses created for in five new jobs in january. in your opinion, why are small businesses adding more jobs than their larger counterparts? >> well, i think we've seen over a longer time, not just the

month, increases in jobs in most sectors of the economy. i think both small and large businesses have by and large contributed to that. so of course there's a good deal of month-to-month variation, but there has been i think brought improvement in the labor market. >> is it possible that the volcker rule could further boost small business lending as banks seek out revenue, additional financial products due to the general prohibition on risky and lucrative proprietary trading? what we saw during the financial crisis was a fact. we saw anecdotal stories about small businesses having problems accessing capital, yet it is changing. do you think that the volcker rule has anything --

>> i suppose i wouldn't tie trends in credit availability to small businesses so much to the volcker rule, but certainly during the downturn, during the great recession, lots of small businesses have had difficulty in accessing credit. business conditions haven't been very good for many small businesses during that period. in fact, the demand for credit by many small businesses, given theithe prospects, hasn't been t -- hasn't been that high. and, of course, equity in one's home for small businesses is an important source of financing. and the decline in home prices i think has also taken a toll there. >> the chair now recognizes the gentleman from texas, mr. noga bauer. >> chairwoman gallon, again congratulations to you and thank

you for being here today. would you say that the deficit we have been experiencing over the last few years has a negative impact on the future growth of our economy? >> i would say that long run deficits that are projected to rise in an unsustainable way is a trend that has a negative effect on the economy. the larger deficits we've had in recent years, in part, reflects the weakness of the economy. >> but would you agree that long-term, these kind of deficits in the pathway we are on is not a positive thing for the economy? >> well, i think if we look at long-term projections, for example, of the congressional budget office, we see as we go

out 20, 30 years, that the debt to gdp ratio will be rising over time in a way that looks unsustainable. >> i will take that as a yes. >> that is a negative for the economy. >> so here's the question. it looks like last year in 2013, the fed bought about, would be the equivalent of about 62% of the treasuries issued in 2013, and that you currently hold about 18% of the outstanding treasuries. and what a lot of people don't realize is that you kind of bot down to yield for treasury. and i'm sure mr. lew will put you on his turkey list, christmas time because you were doing him a huge favor by buying down the yield curve. transferred $77 billion from the fed to the treasuries so reduce the interest borrowing costs. so in my view, if these deficits

are negative, the fed has almost become a deficit enabler in that you were making it very easy to really mask, you know, what the real cost of these deficits are. speaking of the ceo, -- cbo, they said in a recent release that 74% of the budget deficit for the next 10 years will be on interest alone. and so is this qe, quantitative easing initiate position that the fed has taken, i question, i think it's almost become a deficit enabler. i would be interested to hear your response to that. >> so, we are very focused on achieving the objectives that congress has assigned to the federal reserve. and that is the maximum sustainable employment and price stability.

we've had an economy with unemployment that is well above normal levels, and inflation is running well below our 2% objective, and the federal reserve is focused on putting in place a monetary policy that is designed to achieve those very important objectives that congress has assigned to us. because we have a weak economy with some sensitive -- some sense, savings relative to investment, the fundamental call for interest rates to be low, and we are allowing them to be low and fostering a low interest rate environment to achieve those important goals that congress has assigned to us. i don't think it would be helpful either in terms of achieving the objectives congress has assigned to us or in terms of congress is deficit reduction efforts for us to

purposely raise interest rates in order to weaken the economy. the likely impact of that in a weaker economy would be larger deficits. >> i hear what you're saying about the things that congress has challenged you with the, and the employment and monetary policy. but congress didn't pass a bill for quantitative easing. ..itative easing. that was a choice that the fed made. and that very choice has really impacted, you know, the markets, but more importantly, it really, i believe is enable iing these deficits to continue. and for the real cost to be masked in the fact that you're make making huge transfers. as those interest rates go up,

the deficit has as a percentage of what the interest rate applies to that will be much larger. >> a very busy job and things you can do and your great regrets is you don't have time to hang out with accountants. you haven't focused on the proposal to basically forced the capitalization of all leases. and the balance sheet and america's businesses, adding them to julian dollars of assets and liabilities, you would think that would balance out. it destroys the debt ratios, violates borrow wing covenants. it is estimated this will cost