some of them legally, some of them illegally. in my case i came in with no documentation and the ability to get a job or an education. so what when i first came in into the united states in the late 80s, and i crossed the border between mexico and the united states, ended up coming into the san joaquin valley. there was no challenge to find a job here. ..

>> fed chair yellen testified at the senate budget committee thursday. this is two hours. >> this hearing will come to order. thank you to my ranking member, senator sessions, and all of our colleagues who are here and many who will be joining us. today we have the great opportunity to hear there the chair of the federal reserve, dr. janet yellen. dr. yellen, i want to start by thanking you for your leadership and encouraging stronger economic growth, stability and job creation throughout your tenure at the federal reserve as vice chair and now as chair. really is wonderful to have you here. i also do want to take a moment and recognize your predecessor, chairman ben bernanke, for all the work he did on we half of -- he did on behalf of the country.

i'm glad we do have the opportunity today to talk about our economic and our fiscal outlook and the steps we can take to continue creating jobs and broad-based growth now and over the long term. dr. yellen, your new role at the fed comes at a very dynamic time. just a few years ago, the economy faced its biggest crisis since the great depression. we were hemorrhaging jobs, business faced a massive liquidity crisis, and markets were in a freefall. i think we all remember how much fear and uncertainty there was throughout the country. as all of this unfolded, the fed stepped in. they acted boldly and aggressively, they cut interest rates, launched new emergency programs and played a very key role in coordinating the crisis response. thanks in no small part to the decisive work of the federal reserve, our economy is much strong or than it was five years ago when the great recession hit. more workers are getting back on the job, the unemployment rate has declined to 6.3%, the lowest

several since september of 2008. but as you have noted before, dr. yellen, the unemployment rate is only part of the story. across the country there are still far too many men and women who simply gave up hope finding a job and dropped out of the labor force. there are millions of workers who would like to take on more hours but are stuck in part-time jobs that leave them really struggling to get by. millions more be have been hoping for a much deserved raise, and they're still waiting. and as a result of decades of rising prices and stagnant or declining wages, families are now finding it more and more difficult to buy a home, send their children to school and save for retirement. the opportunities that i know everyone in this room wants them to have. so while we've made some real progress, there's still a lot we need to do to not only get americans back to work, but to encourage the kind of economic growth that leads to higher wage jobs, more opportunity and a stronger middle class. taking a responsible approach to

our budget challenges will be a critical part of this effort. since august of 2010, congress has put in place roughly $3.3 trillion in deficit reduction over the ten-year window. some of that deficit reduction came from letting the bush tax cuts expire for those at the top of the income spectrum. but the majority came from deep spending cuts as a result of fiscally austere policies fought for by many of my republican colleagues. that includes the across-the-board cuts which impacted so many of our families and communities across the country. today our near-term budget outlook has improved significantly. we've stabilized the deficit as a share of the economy for the next several years, and the deficit for this fiscal year is expected to be about a third lower than what the congressional budget office projected it would be five years ago. it is important to keep in mind, however, that as many economists and experts have noted, fiscal austerity, like the steep

spending cuts from sequestration, has actually hurt our recovery, slowed growth and cost jobs. these cuts also crippled critical federal investments that make our work force more competitive tough and expand economic growth in the long term. and while the cuts did contribute to an improved fiscal outlook in the next few years, they did very little to tackle the real driver of our debts in coming decades. the conversation about these two challenges -- boosting our economy, getting our fiscal house in order -- took place within a cycle of lurching from crisis to crisis on our budget. those crises created a lot of economic uncertainty and put the focus on getting through the next crisis rather than reaching agreement on measures to help the economy recover in the near term and tackle our department in the long term. our debt in the long term. with the two-year budget agreement that chairman ryan and i reached in place, we finally have a chance to look at these challenges without one budget deadline after another hanging over us.

i'm very hopeful we can take advantage of this opportunity and be able to build on the bipartisan budget act by working together on a balanced approach that puts jobs, job creation and growth first and continues to address our debt and deficit. this means even as we look for ways to tackle our long-term budget challenges, we need to address the other deficits we face in areas like education and innovation and infrastructure and research. which are very critical to job creation and broad-based economic growth now and over the long term. it means we will need to follow the recommendation of the bipartisan excerpt and include both responsible spending cuts and new revenues from those who can afford it most in our deaf create reduction efforts -- deficit reduction efforts. and we will need to phase in deficit reduction over time rather than allowing deep, immediate spending cuts like those in sequestration to slow growth and hurt our recovery. i strongly believe that if we can take this kind of balanced

approach, our economic growth will be stronger and more broadly felt right now for the millions of workers and families still struggling and for workers and families in the decades to come. all of this will be especially important as the federal reserve begins to scale back its most recent round of quantitative easing. for most of the last three years, the federal reserve has had to step up its efforts because of the counterproductive austerity measures pursued by some in congress. but in this more stable budget be environment, i hope congress will be able to work together to encourage job creation and growth in a bipartisan way. i know there are serious differences between our two parties when it comes to the best ways to encourage growth and fiscal responsibility. but really our work on the bipartisan budget act has shown that when democrats and republicans come to the table ready to make tough choices and compromise, we can find agreement and take some sensible steps towards addressing the nation's near and long-term

economic and fiscal challenges. that's what the american people expect of us. so i'm very hopeful we'll be able to continue to make progress. dr. yellen, thank you again for the critical work you're doing and for taking the time to be with us at this committee today. with that, i will turn it over to my colleague, senator sessions. >> thank you. thank you, chairman murray, for your courtesy. thank you, chairman yellen, for appearing before us today and for an important discussion. i know you had one yesterday. i must say that i don't think we can say our time is where we -- our economy is where we want it to be. like foundation of a home, america's economy must be built on something real, solid and something firmly planted. neither federal stimulus, nor fiscal stimulus can produce real, lasting prosperity or a sound financial future long term.

millions of americans face the economic future with great unease today. a large majority think the nation is on the wrong track. no government regulator, you or your predecessor no matter how intelligent, can see into the future and micromanage the economy. let us consider the testimony of former chairman alan greenspan at that table before this committee in january of 2001. chairman greenspan came to alert congress about an urgent policy decision that we would have to make, and what was that decision? whether to raise the interest rates, reduce subprime lending, reform entitlements? no. chairman greenspan came to warn us that we would have to decide how to spend all of the surplus money after we soon paid off the entire federal debt of the united states of america. he predicted budget surpluses well past 2030 despite the

budget tear pressures from the aging baby boom generation, closed quote. and he said that, quote: the highly desirable goal of paying off the federal debt is in reach before the end of the decade, closed quote. i think greenspan warned that after, quote: continuing to run surpluses beyond the point at which we reach zero or near-zero federal debt, closed quote, we would need to eshoo private asset acquisition. the key fiscal policy need is to address the implications of maintaining surpluses beyond the point of which publicly-held debt was effectively eliminated, close quote. so forgive us if we can't -- as policy leaders, we ought not to assume everything you tell us is always correct. the federal reserve is not infallible. our responsibility as legislators is to provide

oversight. we are one small voice for the american people in this process. in 2011 the fed forecasted growth last year between 3.5 and 4.3%. actual growth was an anemic 1.9%, roughly half of what you predicted. this is a drastic overestimation, not a small miss, and the fed overestimated 2013 growth in every formal quarterly prediction for each year since 2011. for the people's representatives, your performance in that regard, the fed's performance before you became chairman, is not good. let us consider whether the stimulus policies of the last five years have produced the results predicted. since 2007 interest rates have been near zero, and the federal government has added $8.3 trillion to the debt, but where do we stand? the population has grown by 15

million since 2007, yet we are still 500,000 fewer people working today than in 2007. the work force participation rate has fallen to 63% of the civilian population which is the lowest level in 36 years. median household income has fallen an average of $2,268 per household. that's huge for working americans. almost $200 a month less median household income. and income cohort, the low income cohort has grown while the middle income group has shrunk. the middle class is getting smaller in america. while the stimulus mindset in washington has at least so far been better for the investor class and the political class, it has not been good for the working class. not only has the stimulus failed american workers, but it has

left us with record debt and an economy dependent on unprecedented policies that you and i know cannot continue. one of your two statutory duties is to advance full employment. while the good job numbers last month are a positive sign, it was fully offset, it seems to me, by the fact that 988,000 people dropped out of the labor market entirely. and large numbers that did get jobs were part-time jobs. so the time has come, i think, to assume and return to first principles; spend what you have, plan for the future carefully, lay out policies that are prudent and can be maintained long term, don't borrow what you cannot pay back. so here are some ways i think would improve the economy without adding to the surplus, without adding to the debt, and i think each and every one of these absolutely would help create jobs and prosperity.

more american energy, eliminate all costly and wasteful regulations that do not provide benefit, make the tax code flatter, simpler, revenue-neutral helping our companies be globally competitive, insure that fair trade protects our workers from unfair trade, adopt an immigration policy that serves american workers, turn the welfare office into a job-training center, streamline the government and make it more productive and balance the federal budget to restore economic confidence. these are concrete steps that will work. we need to return to those principles and move this country forward, and i look forward to discussing with you any other ideas you might have that would help the country prosper. >> thank you very much, senator sessions. with that, we're very delighted to have the chairman of the federal reserve with us today. dr. yellen, we'll turn it over to you for your testimony. >> thank you.

chairman murray, ranking member sessions and other members of the committee, i appreciate the opportunity to discuss the current economic situation and outlook along with monetary policy before turning to some issues regarding financial stability. the economy has continued to recover from the steep recession of 2008 and 2009. real gross domestic product growth stepped up to an average annual rate of about 3.25% over the second half of last year. a faster pace than in the first half and during the preceding two years. although real gdp growth is currently estimated to have paused in the first quarter of this year, i see that pause as mostly reflecting transitory"7ñ factors including the effects of the unusually cold and snowy winter weather.

with the harsh winter behind us, many recent indicators suggest that a rebound in spending and production is already underway, putting the overall economy on track for solid growth in the current quarter. one cautionary note though is the readings on housing activity, a sector that has been recovering since 2011, have remained do disappointing so far this year -- remained disappointing so far this year and will bear watching. conditions in the labor market have continued to improve. the unemployment rate was 6.3% in april, about 1.25 percentage points below where it was a year ago. moreover, gains in payroll employment averaged nearly 200,000 jobs per month over the past year. during the economic recovery so far, payroll employment has increased by about 8.5 million

jobs since its low point, and the unemployment rate has declined about three and three-quarters percentage points since its peak. while conditions in the labor market have improved appreciably, they're still far from satisfactory. even with recent declines in the unemployment rate, it continues to be elevated. moreover, both the share of the labor force that has been unemployed for more than six months and the number of individuals who work part time but would prefer a full-time job are at historically high levels. in addition, most measures of labor compensation have been rising slowly, another signal that a substantial amount of slack remains in the labor market. inflation has been quite low even as the economy has continued to expand. some of the factors contributing to the softness in inflation

over the past year such as the decline seen in non-oil import prices will probably be transitory. importantly, measures of longer run inflation expectations have remained stable. that said, the federal open market committee recognizes that inflation, persistently below 2% -- the rate that the committee judges to be most consistent with its dual mandate -- could pose risks to economic performance, and we are monitoring inflation developments closely. looking ahead, i expect that economic activity will expand at a somewhat faster pace this year than it did last year. that the unemployment rate will continue to decline gradually and that inflation will begin to move up toward 2%. a faster rate of economic growth this year should be supported by

reduced restraint from changes in fiscal policy. gains in household net worth from increases in home prices and equity values, affirming in foreign economic growth, and further improvements in household and business confidence as the economy continues to strengthen. moreover, u.s. financial conditions remain supportive of growth and economic activity and employment. as always, considerable uncertainty surrounds this baseline economic outlook. at present one prominent risk is that adverse developments abroad such as heightened geopolitical tensions or an intensification of financial stresses in emerging market economies could undermine confidence in the global economic recovery. another risk, domestic in origin, is that the recent flattening out in housing

activity could prove more protracted than currently expected rather than resuming its earlier pace of recovery. both of these elements of up certainty -- uncertainty will bear close observation. turning to monetary policy, the federal reserve remains committed to policies designed to restore labor market conditions and inflation to levels that the committee judges to be consistent with its dual mandate. as always, our policy will continue to be guided by evolving economic and financial situation, and we will adjust the stance of policy appropriately to take account of changes in the economic outlook. in light of the considerable degree of slack that remains in labor markets and the continuation of inflation below the committee's 2% objective, a high degree of monetary

accommodation remains warranted. with the federal funds rate, our traditional policy tool -- near zero since late 2008 -- we have relied on two less conventional tools to provide support for the economy; asset purchases and forward guidance. and because these policy tools are less familiar, we've been especially attentive in recent years to the need to communicate to the public about how we intend to employ our policy tools in response to changing economic circumstances. our current program as it began in september 2012 when the economic recovery had weakened and progress in the labor market had slowed, and we said that our intention was to continue the program until we saw substantial improvement in the outrook for the labor -- outlook for the

labor market. by december 2013 the committee judged that the cumulative progress in the labor market warranted a modest reduction in the pace of purchases. as the, at the first three meetings this year, our assessment was that there was sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions, so further measured reductions in asset purchases were appropriate. i should stress that even as the committee reduces the pace of its purchases of longer-term securities, it's still adding to its holdings, and those sizable holdings continue to put significant downward pressure on longer-term interest rates, support mortgage markets and contribute to favorable conditions and broader financial markets. our other important policy tool

in recent years has been forward guy dance about the -- guy -- guidance as the economic recovery proceeds. beginning in december 2012, the committee provided threshold-based guidance that turned importantly on the behavior of the unemployment rate. as you know in our march 2014 meeting with the unemployment rate nearing the threshold that had been laid out earlier, we undertook a significant review of our forward guidance. while indicating that the new guidance did not represent a shift in the fomc's policy intentions, the committee laid out a fuller description of the framework that will guide its policy decisions going forward. specifically, the new language explains that as the economy expands further, the committee will continue to assess pote the realize -- both the realized and

expected progress towards its objectives of maximum employment and 2% inflation. in assessing that progress, we will take into account a wide range of information including measures of labor market conditions, indicators of inflation pressure and inflation expectations and readings on financial developments. in march and again last month, we stated that we anticipated the current target range for the federal funds rate would be maintained for a considerable time after the asset purchase program ends, especially if inflation continues to run below 2%. and provided that inflation expectations remain well anchored. the new language also includes information on our thinking about the likely path of the policy rate after the committee decides to begin to remove policy accommodation.

in particular, we anticipate that even after employment and inflation are near mandate-consistent levels, economic and financial conditions may for some time warrant keeping the target federal funds rate below levels that the committee views as normal in the longer run. because the evolution of the economy is uncertain, policymakers need to carefully watch for signs that it'sdiverging from the baseline outlook and respond in a systematic way to stabilize the economy. accordingly for both our purchases and our forward guidance, we have tried to communicate as clearly as possible how changes in the economic outlook will affect our policy stance. in doing so, we will help the public to better understand how the committee will respond to unanticipated developments,

thereby reducing uncertainty about the course of unemployment and inflation. in addition to our monetary policy responsibilities, the federal reserve works to promote financial stability. focusing on identifying and monitoring vulnerabilities in the financial system and taking actions to reduce them. in this regard, the committee recognizes that an extended period of low interest rates has the potential to induce investors to reach for yield by taking on increased leverage, duration risk or credit risk. some reach for yield behavior may be evident, for example, in the lower rated corporate debt markets where issuance of syndicated, leveraged loans and high yield bonds has continued to expand briskly. spreads have continued to narrow, and underwriting

standards have loosened further. while some financial intermediaries have increased their exposure to duration and credit risk recently, these increases appear modest to date, particularly at the largest banks and life insurers. more generally, valuations for the equity market as a whole and other broad categories of as is thes such as rez -- assets such as residential reality remain within historical norms. in addition, bank holding companies have improved their liquidity positions and raised capital ratios to levels significantly higher than prior to the financial crisis. moreover, recently-concluded stress tests mandated by the dodd-frank act have provided a level of confidence in our assessment of how financial institutions would fare in an extended period of severely

adverse macroeconomic conditions where a sharp steepening of the yield curve alongside a moderate recession. for the financial sector more broadly, leverage remains subdued, and measures of wholesale short-term funding continue to be far below levels seen before the financial crisis. the federal reserve has also taken a number of regulatory steps, many in conjunction with other federal agencies to continue to improve the resiliency of the financial system. most recently, the federal reserve finalized a rule implementing section 165 of the dodd-frank act to establish enhanced prudential standards for large banking firms in the form of risk-based and leverage capital, liquidity and risk management requirements. in addition, the rule requires

large foreign banking organizations to form a u.s. intermediate holding company, and it imposes enhanced prudential requirements for these intermediate holding companies. looking forward, the federal reserve is considering whether additional measures are needed to further reduce the risks associated with large, interconnected financial institutions. while we have seen substantial improvements in the labor market conditions and the overall economy since the financial crisis and severe recession, we recognize that more must be accomplished. many americans who want a job are still unemployed, inflation continues to run below the fomc's longer run objective, and work remains to further strengthen our financial system. i will continue to work closely with my colleagues and others to carry out the important mission that congress has given the

federal reserve. thank you. i will be pleased to take your questions. >> thank you very much for your testimony and for our committee members, we're going to keep our questions to five minutes each for this since we have a number of members here and others that are coming up. over the past several years, dr. yellen, you, your predecessor and your many colleagues on the federal reserve system worked really tirelessly to put the economy back on track using all the tools of the monetary policy at your disposal. i wanted to ask you about the role that fiscal policy played and should play in healing the economy. we've been having a very robust debate here in congress about the direction of near-term fiscal policy, and some of my colleagues have been urging very large and immediate cuts to a wide swath of public investments, programs, services. and, in fact, government spending and the overall budget spending and the overall budget near historic rates over the last several years. i wanted to ask you this morning

about the effect of these fiscal policies. do you think near-term spending cuts are beneficial for our economy's recovery? >> well, i think that fiscal policy, while it has accomplished a very meaningful reduction in the budget deficit as you pointed out, has served as a drag on the economy on spending and aggregate demand in the economy, and in the sense this has been part of the headwinds that the federal reserve has had to confront in designing our own monetary policy. my predecessor asked that fiscal policy should do no harm. we're -- according to cbo's

estimates, last year tightening fiscal policy both on the spending and tax side subtracted about one and a half percentage points from gdp growth, and that drag is projected to diminish to something on the order of half a percent. and so that's really one of the reasons that my colleagues and i are forecasting stronger growth ask continued improvement in the labor market. now, i do want to agree with my predecessor in emphasizing, though, that long run sustainability of fiscal policy and the debt is something that is very important. as you mentioned, this is something, a set of changes, further changes as we look at cbo's longer term budgets projections -- budget projections, we can see going out 0, 30, 50 years without some further shifts in fiscal policy,

projected that the ratio of debt to gdp will rise to unsustainable levels. and i would join my predecessor in saying that i do think it's important that the congress address that issue, that having a long run sustainable, fiscal policy, a debt to gdp path that can be maintained over time, does require changes. but it doesn't require changes that would come into effect so quickly that it would impede the recovery. >> do you think the various standoffs and crisises that we have had surrounding the debt limit had negative consequences for our broader economy? >> well, you know, it's hard to put a number on what the impact of all of those crises has been, but i think probably all of you have had the same experiences that i've had as you talk to

business people around the country and to households as well. .. finish here. i know you thought a lot about the role of opportunity place in growing our economy and talked about enormous positive impact from opening a more economic opportunities for women. i would just love to have any comment on that in the last 20 seconds. >> i am very concerned about

rising inequality. it is a long-term trend that i think is very disturbing and it's something that public policymakers should focus on. i do think that opportunity for women has been very important, not only recently but nearly over the last century, increasing opportunities for women in their expanding role in the work force in promoting a strong economy and really a century of very solid economic performance and growth. i hope that will continue. >> thank you very much. senator sessions. >> thank you. dr. yellen, we've had an unpleasant stimulus, $1 trillion almost in one single piece of legislation. we did have a containment of spending last year but it would begin to go back up again soon. so we are far from austere. and dr. elmendorf has told us

that where the debt interest on our debt last year was 221 alien, he projects it to be 876 billion in 10 years. so this is a threat to our future and we simply have to get our fiscal house in order and to help you understand that. you're not going to be able to call over from the fed and to congress, now is the time we would like you to cut spending this month but not cut it next month. now, since 2009, the united states has borrowed a trillion dollars and added a trillion dollars in new debt since 2008. the federal reserve has increased its balance sheet debt five fold from 900 billion, the 4 trillion. over 4 trillion. so let me ask you first, who has benefited most so far in this process of stimulating the economy? investors?

ceos? our everyday working middle-class americans? >> so i would say that there has been widespread benefits from the policies that we have followed, since the low, the create has treated over 8 million jobs. and monetary policy has fostered that, and i believe has made some contribution their -- >> can ask you on the job creation, we talked about, we have created 288,000 last month which is the best month supposedly. we've had since i just, one of the best since the recession, but 988,000 dropped out of the labor market. we've got fewer people working today than they were in 2007. so i can week -- and the population has increased by 15 million. 8 million in the working age group.

so how is this progress, please tell me? >> first of all i would caution you not to emphasize too much one months of fluctuation. >> i would agree with that. >> if we look over the last six words or so i would describe labor force participation rate as roughly stable. however, looked at over a longer span, the labor force participation rate has declined very substantially. and i would say that there are two reasons for that. one is demographics, and it's something that we should expect to continue going forward. so as i look forward i am envisioning in coming years a continued secular decline in labor force participation. and that's due to the fact that the baby boomers are entering the retirement years, and as a fraction of the population in the retirement years rises, it's very natural --

>> dr. yellen, the data show, at least this recently, that the over 55 are participating at a higher rate and the under 55. do you not agree? a columnist said that he has got to take your the unemployed son in the basement. >> it's absolutely true what you say that younger cohorts were recently retirees are working more than their predecessors did, and we have seen the rate of labor force participation rise. but in looking at the overall trend that's dominated by the fact that there are an increasing fraction of the labor force in these retirement years. but i do want to emphasize that there's more that's going on here in at least in my view since simply demographics. because labor force participation is also declined among prime age workers and among young people in part

because they are in school a lot more. but i think that some of those -- a portion probably of the declined among retirees as well is because we have a weak labor market spent i think we have a week labor market or i agree with that. you said yesterday we've never see a situation where long-term unemployment is so large a fraction of unemployment. that's a pretty significant concern, would you not -- >> yes, we are in the order of 35%, of all those unemployed, more than six months, and that's a very disturbing trend, and something that we would like to be able to do something about. >> well, thank you for your service. you've undertaken a tough job. we want to be positive and helpful, but from the point of view of working americans, this

is the slowest, most anemic recovery we've seen maybe ever since the great depression at least, and we vetted medium income fall by $2300 per family. we've had 15 million increase in population and a climate people actually working and we've got more people working part-time. this is not a good trend. what we're doing we need to get better at it. thank you, madam chair. >> thank you. senator whitehouse. >> thank you, madam chairman. welcome, chair yellen. thank you for being with us here today. many reports on the economy show continuing improvement. the stock market is high. unemployment continued to go down. there are elements of the economy that are flourishing,

but i urge you to remember that there are locations in the country where the recovery really has not been experienced much. minus my own state of rhode island where unemployment is still at 8.7%. although that puts us in the unhappy position of being the leading state in the country, there are similar geographic areas in larger states that are experiencing similar difficulties. we are a long way from the boom of wall street. we are a long way down the pipeline from the natural gas boom. we are a long way from the big interventions like the auto industry rescue that were so beneficial in the midwest. and i guess two things. one, i urge you to not be beguiled by the national numbers

that are forgetting the a's were it's still very difficult locally. and second, to ask you what policies you think might be helpful for those states that are still in areas, geographic areas that are still suffering economically? >> well, so i agree completely with your characterization of the national situation. there are pockets of the country that are doing extremely well in parts of the award energy, energy production is very strong, and some other areas as well. but i think your description of the situation in rhode island, many areas of the country share the problems that you describe. our objective in monetary policy is to continue to maintain and accommodative monetary policy for as long as necessary to see

recovery of the labor market to a state. it's hard to know exactly how to characterize it quantitatively, but what the federal reserve act calls maximum employment, or we used to call full employment for short, and the many ways we are far from that. and that's part of the reason why, not only is there a shortage of jobs, but also i think wages are rising as slowly as they are, and our mission is both to make sure that inflation moves back up towards its objective but also to one of foster continued recovery in the labor market, help rhode island and other states like it. >> one of the ways that i find i can help at home is to support infrastructure projects, particularly since we have a national infrastructure deficit in a great number of areas. highways, water facilities, so

forth. from the sort of high perch that you look down on the economy from, is there a difference between spending that goes out the door in the form of a century expense and spending that results in a tangible asset that remains in the united states of america as a highway or a water treatment plant or some other facility? >> so i guess the way i would look at it in the short run in terms of creating jobs in the economy and for trying to get the economy, getting output back up to the potential of what we can produce, it doesn't matter where the spending occurs. it doesn't matter whether it's for a capital investment or -- >> it's a valuable either way. >> but from the standpoint from long run growth, it does make a

great deal of difference what this thing is on, and investment spending in capital formation helps not only create jobs in the short term but to promote growth in the long-term. >> so there's an immediate value to spending in either direction in terms of economic recovery, but the long-term view is for the spending that is on infrastructure that creates the lasting asset? >> right. and i think one of the reasons we've seen the decline in the productivity growth over the last several years, and one reason for it is that firms have been spending less and doing less capital formation. so this holds not only on the public investment side, it holds on the private investment side as well. and that is in a way one of the ways in which this shortfall, this recession we're still recovering from, has served

harm, the growth of the economy over the medium our longer-term spent my time is a. thank you for being with us. >> senator johnson. >> thank you, madam chair. welcome, madam chair. it's nice to meet you. my background is in education, as an account and as a manufacture so it's in my dna to go to root cause analysis and i also like numbers. you mentioned earlier the 30, 40 or outlook and that is unsustainable from the debt to gdp ratio. have a look at just the dollar amount that deficits we are going to be, that's going to be driving that debt? >> i guess i have but i often focus on what is the ratio of debt to gdp and stable or rising. >> one of the reasons i go to dollar deficits, something people can understand better understand better. cbo seems to be resistant to put the projections so i've done it for them.

they like percentage of gdp. i like dollars. their baseline projection over the next 30 years, i think it's pretty relevant timeframe, we have a demographic bubble, show $66 trillion in deficits. that's the baseline. the alternate scenario is $127 trillion of deficits. let me break that up by decade. it's a trillion the first decade, 31 trillion the second decade, 883 in the third decade. does that comport with basically what your accent is of the unsustainable nature of our debt and deficit over 30 or? >> yes. i mean, my understanding of the core problem is that as the population ages and, of course, it depends on the trend in health care costs relative to other prices in the economy as well which has historically been one of rising -- >> but again, desperate actor in terms of number i'm looking at. that is complete unsustainable. my daughter just turned 31.

that went by just like that. this isn't that far out in the future. we need to do justice sooner rather than later. i want to hone in on social security. when you take a look at the trustees report, somewhere between 13 and $15 trillion will be paid out in benefits exceed the payroll tax over the next 30 years. is that you're understand? >> i don't have those numbers at -- >> but does it seem about direct? >> and

for example, just a hand truck, automated. so now there's not a person who is to operate that anymore. it's just like to run effective by itself maneuvering. do you consider the harmful impact of these are the interest rates on the incentives to automate and also reduce unemployment? >> well, those investments raise productivity and in the long run that's good for the economy. and there is no necessary, in order to enough jobs in this economy to put people to work, we don't have to ask firms to move away, making investments that are profitable for them has improved productivity. we need to expand demand in the economy so that there's enough economic activity, even if it's capital intensive economic activity that creates jobs for people who want to work.

so that's what we're trying to do. >> my point is the misallocation of capital being caused by the very low interest rates but my time is up. thank you, madam chair. >> senator nelson. >> good morning. thank you for your public service. i'm concerned that we are getting too much in the trend of the haves and have-nots. with a shrinking middle class. the political and economic stability of this country for two and a quarter centuries has been because we've had a broad middle class and an aspiring middle class. could you comment on the direction of the country's economy? >> well, i agree with you, i am very concerned about trends

towards rising income inequality in the country, and trends that have affected the middle-class. partly this reflects a weak economy, and a weak job market that is only gradually beginning to get back to normal. so a downturn in the economy tends to have a disproportionate impact on middle income and lower income families, and we seem that. and putting in place policies that promote recovery will help i believe in that dimension. but there are also longer-term trends that our country being to what you're describing that are quite disturbing, and i think some of them have to do with technology, with technological trends that have shifted the demand for labor to very high

skilled workers and away from those with less education. and in addition, trends in globalization, in the global economy. and these are longer run structural shifts that they do think policy makers to make something the fed can't address all of the causes of this, but a broader range of public policy makers, including congress, i think should be focusing on policies that could help. >> if the rich are getting richer and the poor are getting poorer, and abroad middle-class is constricting, it sounds like from a policy standpoint that we need to reverse those trends to encourage what has caused the political and economic stability. do you want to suggest any

policy changes that we in the senate should consider? >> so, i don't want to give you detailed policy advice, and our long list of things you can consider, that i would say that on anybody's list, training, education, a wide range of policies that make it possible for people to obtain the kind of education they need to have the skills to succeed in this economy, this could range, there's a great deal of work on the benefits of early childhood, education and, of course, access to loans that enable people to obtain a good college education, a wide range of job training programs and so forth isaac would be on anyone's list of things to consider. >> amen to all of that.

thank you. you know doubt are aware of the tax code provision that has expired that senator stabenow and i are trying to remedy whether it's someone who's been very unfortunate, the only way out in losing their home is a short sale, that's the least painful way, and then lo and behold they now find that that is considered as income, taxable income. just to give you three quick examples, from a state which, of course, is, the housing market was hit enormously hard in florida, but here is someone that after the exhausted all their savings had to sell their

home and they happen to sell the home in 2014, not before the end of the year in 2013. so they've got to pay income tax, another one. they lost their family business. bankruptcy. now losing their home to foreclosure and a short sale they were able to work out, but lo and behold, now they have an additional financial obligation of the income tax, and so, too, in a third example, they had a contract to sell before the end of 2013. it got delayed and that delay of a few weeks then causes them this additional thing. now, we are trying to remedy that. do you want to comment on that? >> very quickly because again we have a lot of senators and a short timeframe.

>> so i think in my roll it's important for me not to weigh in on details, specific changes in fiscal policy or taxes, but, of course, the recovery of the housing sector is very important to see that ongoing is important to our recovery and has been, you know, a very important factor in the downturn. >> thank you. cinda ayotte. >> thank you. i want -- senator ayotte. thank you but i would think you for being here. i wanted to ask you about according to reports, fsoc is considering designating asset managers assisted medically important financial institutio institutions. and as i understand, two companies have already advanced to stage two of the designation process. and what i would like to understand is that, i believe that asset management of a banking is completely different,

or in many ways very different and that the risks are different. i guess i would ask you, do you agree that asset management and banking are different? and can you help me understand also as i understand it the designation of asset managers assisted medical important financial institutions that the fsoc council announced it will hold a public forum on asset management but they've already moved to companies to stage two so seems like the card got before the horse. so if you can help me understand that as well. ..

of the firms that they are looking into and considering for designation. there is no 1-size-fits-all in terms of analysis and what they are looking to see is is there some way in which the distress of a particular firm could give rise to systemic risk for the financial system in the economy? and that can occur through a number of different mechanisms that specified and it will be necessary if they consider such firms to identify clear ways in which the failure of these firms trigger systemic risk? >> if they are designated asset

managers, and one of the issues that has been raised that will serve, and historically eligible for taxpayer assistance in a crisis situation. more-or more risk, can you comment on that criticism of putting asset managers in that category? >> really eligible for taxpayer assistance in a crisis, the federal reserve is authorized to lend to depository institutions and we are not authorized except in the systemic risk situation through 13-3 powers, design broad programs to cover more sectors of the economy that may

be impacted by difficulties and gaining access to credit. we have no authority to go to individual firms and these firms are systemic, their failure cantatas financial instability problems, reason for them to be designated and subject to risk standards and potentially capital and liquidity standards that reduce the odds they could fail. >> hopefully not encouraging risk by saying the backdrop of where we have been. and paying so much from community banks that would feel incredibly burdened by dodd-frank, the number of banks is decreasing in the country,

and one size fits all solution, you recently commented about this issue, can you tell me what your thoughts are about how we can address this concern, they are swallowed up with regulations that may not fit necessarily because they want the big systematic institutions or put us in a situation we are concerned about. >> i completely agree with you. community banks were not the source of the financial crisis. my colleagues and i do not want to see them a regulatory burden. we have very attentive to the need to reduce regulatory burden for these institutions, to make clear most of the regulations we are putting in place to address

systemic risk that affect larger institutions do not apply to the smaller institutions, whenever we put out a regulation, a recent capital regulations implementing basel iii. we have a special guide to show what is relevant to community banks that they can ignore and are not affected by the risk. i know that there is no question they do feel that banking regulation has become more burdensome but i pledge i will continue to work with my colleagues to do all that we can to make sure we reduce burdens on these community banks and do not in any way have a 1-size-fits-all approach. >> thank you for that.

senator king. >> i would urge you to put in jimmy stewart's wonderful life the very first two minute clip is an exchange between george bailey and mr. potter that captures what we are talking about today. i would just say gosh, miss yellen, gee whiz, channeling jimmy stewart, how about putting the community banker on the federal reserve board? don't you think that would be a good deal? >> i would say -- i certainly am in favor of that. two individuals who are very familiar with community banking. governor duke who ran a community bank in virginia or had a lifetime experience in

community banking, and the governor rascal who moved to become treasury secretary who served as commissioner of banking in maryland and got to know the community banks and community bank regulatory issues very closely. they made huge contributions and i would look to see replacement. >> kobe will convey that sentiment to the white house pleas. i met with bankers to underscore the point you made about the weakening in the housing market. that is what i am hearing from that. marked decline in new mortgages and i realize the florida anecdote is not data. it is getting close and that is something we need to pay attention to. i was at a panel on economics and there were two questions that were unrelated to each other, and one was about why is this recession recovery so

sluggish and the other was about the gross income inequality, the date of 95% of income growth in last few years, the top 1% of the population. those two things fit together. two thirds of the american economy is driven by consumer spending and the income is going to the top 1% and not to the people who do the spending, isn't that a contributing factor itself, sluggishness of the economic recovery or lack of demand. >> we have been trying to stimulate demand. greater spending is the key to try to get the economy to operate. >> the consumers generally drive the economy, not getting the income. >> that is the factor that is relevant to the pace of expansion we have seen. >> the famous book that recently came out, brad worldwide by

income inequality, have you had time to digest that? only a thousand pages. >> i can't say i have gone to the last page of its but i am certainly familiar with it. >> it seems to me something that going back to the basic principle, two thirds of the economy driven by consumer spending henry ford 100 years ago this year had this insight, double the pay of his workers so they could buy his cars and we have to start thinking that way again. >> many economists have argued the distribution of income does matter to the pace of spending. i don't know of any utterly clear evidence on this topic but it makes sense to assume that households that would tend to spend a great deal of their income, income distribution shifts in the direction of those

who are wealthier and likely spend at the margins less of their income that creates a drag on the economy and the number of economists have certainly made that argument. >> one minute left, want to turn completely and talk about the issue of that. i have articulated -- you have articulated an intelligent strategy but be careful about short-term, abrupt fiscal changes to deal with the debt. as you characterize the head wind for the recovery, on the other hand, we can't ignore this. the interest in the debt, an increase in the increase on the federal debt, that will set more money out of the federal budget. >> i would agree the interest

spending and the accumulation of deck, i would also want to point out interest rates are unlikely to begin rising until we are in a strong economic recovery. and start to raise interest rates. we can recover and that will eventually become appropriate. what will happen with deficits and the debt, it is important to keep in mind a stronger economy will be very good. federal budget deficit will be stronger revenues coming in and decline in social safety net spending and that will be an offset and the most important elements of the deficit and the evolution of the debt interest

payments. and julius stronger economy will improve the budget. vote of those things are operatives. >> long-term strategy, not a short-term emergency strategy. >> that is what i would urge. senator gramm. >> let's continue, that was interesting conversation. good news if interest rates go up? >> it is likely good news if interest rates go up. >> how compared to historical averages, how would you say interest rates are today? unusually low? >> absolutely. >> sort of like a cocktail. interest rates go up a, more interest payments on the debt. a stronger economy. would it be 1:1. >> i think most projections

would suggest that as growth picks up and we are getting the economy moving back toward full improvement -- employment, the effect, this is a case of higher output on the economy, the federal budget deficit would be larger than the negative impact of higher interest rates. >> net positive. >> it would -- >> got to move on. >> sequestration. if it is fully implemented in 2016. what would it have on terms of the long-term national debt? small, medium, large, insignificant? >> what matters is the overall size? >> sequestration itself. would you agree with me at a low

effect on reforming entitlements? just discretionary spending? >> is not something that addresses long-term problems. >> what are the long term problems? >> what shapes the long run trajectory -- >> retirement of the baby boomers? >> yes -- >> 8 million of us are going to retire in the next 20 or 30 years and slump medicare and medicaid and medicare and social security care care? >> medicare, medicaid and social security will roughly double as a share of gdp. >> projections of 2042 of a projected revenue would pay those payments? >> that is the dominant trend. >> long-term effects to the country, what makes this brief, what puts us in an unsustainable situation is the baby boomer is going to retire and it will take

all the money you generate to pay the bills, retirement systems today. if you don't reform entitlements you won't fix this problem. do you agree with that? >> both revenues and spending -- >> i don't say how. can you raise in taxes? >> a decision -- >> is there enough to fix the problem? every penny from their -- >> i don't need the answer to that. when it comes to our tax system would you support a territorial tax system. >> i don't intend to weigh in -- >> under the current tax code trillions of dollars. and do business overseas. to 35% tax rate.

>> some transitory -- >> why don't you ask them. and you going to bring the money back? pfizer will move their headquarters overseas. and one of these big companies, what would happen if we had a one time good deal and apply it to infrastructure spending. and ask them that question. >> talk to business executives -- >> i am asking you to ask him that question. of one time good deal to repatriate money held overseas would they take advantage of it? okay. let's talk about obamacare. do you believe if the incentive in the law is if you are not covered if you hire somebody for 29 hours versus 40, a lot of people will wind up with 29

hours of pay? >> -- >> is that a likely possibility? that an employee works 29 hours is not covered by the mandate that works for. and that is a likely possibility. >> the magnitude of that effect. >> you have over 50 employees, every employer would be covered by the mandate could you see a scenario where a company of 48 employees wouldn't hire three more? >> will such incentives present, i don't know how large they are. >> you need to talk about this. i don't think i would. 48 employees. if everybody was covered by obamacare. last, $46,000, a subsidy somewhere in that range, 46, 47, would you take a promotion for

$50,000? and lose your subsidy? at least part of it? >> senator? >> great to have you here today. want to talk about the management economic wisdom of the management of debt. i was a mayor and governor. i had debts for capital purchases. we didn't manage our debt in city or state by total debt number. we managed it buy ratios. usually ratios of debt to annual budget in some instances, total debt to gross or state product. there is controversy about the study most discussed, this study, we talked about it a lot. and in your work with the fed. what is the best economic wisdom about the levels of debt and one

ratios i should be looking at to keep the death within acceptable levels? >> there is controversy over rinehart -- i am not sure i have a number to give you about what a safe level of debt to gdp, it is essentials that the cost of debt to gdp be one that is sustainable over a time and we can see as we have seen in the case of some european over the last several years. when a country is seen to be on the path where debt to gdp is not only high, but is projected with current spending and tax policies to be rising on -- unsustainably, that can have an exceptionally negative affect and begin to drive lenders away and we see interest rates rise.

the united states has never seen anything like that. for us it is known that changes have to be made to put debt to gdp on sustainable course, but we have enough time and a good enough record as a country in making these policy changes that we have not seen any impact in our financial markets that i am aware of. >> discussions we have been having generally sort of focus on publicly held debt as a percentage of gdp. you would rather be in the low 70s than the high 70s. we have been trending downward which is positive. there are demographic trends that are starting to trend back up in significant way. if we are sort of using that as a rough strategy to try to manage the debt and abetted trend toward the low 70s and hy 70s does that set off red lights in your head? that is the wrong way to

approach this? >> it doesn't set off red lights but if you go out and see the trend heading up, that is what is worrisome. >> that is like the back and forth you had with senator king about short-term versus long term and each time horizon. the pace of the recovery is a topic we have been discussing today. something i wanted to get into as uncertainty is affecting the recovery, congressional budgetary uncertainty. long periods of time without budgets. the imposition of a sequester that congress said we do not want this happen. this will be a bad thing, we're senega up as a punishment to force us to find a deal but if we don't find a deal we allow the sequester after we said it would be bad. government shutdown, continuing resolutions which i described to my constituents as spending -- like driving by looking in the rearview mirror rather than the windshield. we do what we used to do.

to what extent has the combined weight of congressional budgetary uncertainty been a factor on the slow pace of the economic recovery? >> it is just impossible to put it number on that but in discussions that my colleagues and i have had with businesses and members of the public, this is a topic that comes up very frequently, contributing to an overall sense of uncertainty, spending and hiring and business investment, i don't know how important it is, there certainly is work suggesting policy uncertainty and uncertainty more broadly about the path of the economy, and -- >> doing the two year budget deal, the murray ryan budget deal in december the first two

year budget in federal history to give people some certainty, doing a full appreciation set of bills in january, getting over the debt ceiling discussion, flirting with default or gimmicks in february, those are the kinds of things that you suggest we should be more like that in the future? >> that does seem like a positive in terms of providing confidence to businesses and the public. >> thank you. >> senator richter. >> thank you. we have national debt of $17 trillion. how much of that does china hold? >> i don't remember. >> if i have a chart here that says 1.3 trillion that would be right. japan next at 1.2 trillion. let me ask you, i also have some information with regard to the foreign debt, 70% of it is held

by government, some 30% is attributed to products for investors, japanese banks. a $17 trillion debt. asian countries with a lot of that. what should we worry about? do you worry about the $17 trillion? should we be concerned in this congress about the affect the chinese and japanese own some much about it on -- zone so much of it or do you worry about the chairman of the federal reserve? >> i worry about as we discussed, the blonde turned half of the death and whether or not it is sustainable, u.s. government debt is regarded as the safest of state assets and very much in demand of globally,

among investors who want security. >> that is a good point. what rate of return to these investors received today on the u.s. debt? >> ten year government bond is a little over 2.5%, and so this is a safe return. >> why do they continue to purchase -- why do these governments continue to purchase our bonds? >> they have confidence that is a safe investment and i hope it also suggests and leave it suggests they have confidence in the federal reserve is an institution that is committed to maintaining price stability, and so in addition to what congress does with future deficits, our

management of the economy or commitment to keep inflation as close as we can to the inflation objective of 2%. >> what alternatives do they have? and what could tip the balance away from choosing to invest further in the united states securities? >> what is the next choice? >> they have many other choices of assets they can purchase. if we if we were to lose their confidence by failure to address long-term debt problems, physical problems, or by mismanagement by the federal reserve. >> let me ask about the long-term issue, senator king

mentioned this. economy improves, the $221 billion we pay each year, interest in the national debt will double. is that correct? >> depends what happens to interest rates but yes. is the economy recovers and inflation moves back toward objectives, the federal reserve eventually will begin to normalize monetary policy. >> the $227 billion that we pay, $227 billion that we expect to pay in this fiscal year would double to somewhere close to half a trillion dollars and interest on the national debt, would it not? >> it would certainly go up.

>> yesterday i had the opportunity in another committee to have a conversation with you. you expect the asset purchase program to end in the fall of 2014. what variables could occur to make the fed alter that decision or continue the asset purchase program? >> what we need to see in order to follow that plan is continued improvement in the labour market and overall pattern of growth that is sufficient to cause us to project continued -- >> can you quantify that improvement? what degree of improvement.

>> our objective is to make sure the economy moves back to full employment or maximum employment and we are making gradual progress and we made considerable progress since we started the asset purchase program. when we meet we ask ourselves the question do we continue to believe that the economy is on the path that will take us toward our objective of reaching full employment or maximum employment and we also think about inflation which we run below the 2 present objective and ask ourselves does evidence indicate inflation will be moving back to it 2% over time? and if the answer to those 2 questions is yes we will continue to reduce the pace of our asset purchases. if the economic outlook were to

change in such a way so we no longer felt the answer to those questions we would reconsider our plans. >> thank you. >> thank you for holding the hearing. thank you for being here. let me first say thank you for being prudent as you move forward in decisions and recognizing jobs and the economy matter and i appreciate very much your thoughtful, deliberative approach and also want to associate myself with senator ayotte and senator king. we certainly appreciate and need an understanding that they did not cause what happened, very much on the front lines of helping us get out of any

recession we have which we do for many middle-class families. i want to speak just for a moment before asking a question, talk about how people invest in the united states, a lot of great reasons in terms of rule of law, disability, manufacturing coming below natural gas prices helping to fuel that. we in fact have a deficit. since 2009 since the president came into office, two thirds, 66%. any other time there might be ticker-tape parades and speeches on the floor about bringing down the deficit that much. we are seeing stockmarkets double basically double since spring of 2009. at other times, a different president, different party we would be hearing very different things about the economy

improving. i want to save for the record the economy is improving. my biggest concern, i know many of you share this, it is not improving for every one. we have an economy based on supply and demand, very focused on supply, waiting for things to trickle-down and too many people are waiting for things to trickle-down and demand is critical. and before i ask that question, if we blind up, 774 people around this building, making minimum-wage, which still keeps them below the poverty level, keep them on food assistance, keeps them on additional healthcare, you could line them up and that would be one average ceo salary in this country. if we in fact have an economy based on two thirds consumer

spending. when colleagues talk about raising the minimum wage or equal pay, giving folks a fair shot, one more time to the horn of a great michigan person, henry ford 100 years ago as senator king mentioned, he doubled the wage by today's minimum wage would be $15 an hour. small businesses thrive, he was heavily criticized by the wall street community saying the world was going to end, he became one of the wealthiest men of his generation. i would take that any day. on to my question, as we see deficits coming down, one area of deficits continues to go up which is of great concern in terms of the economy and you mentioned education. we have total student loan debts over $1 trillion which is more than credit card debt. huge issues, 70% of students have to borrow money to get

$30,000 in loans. could you talk about what you would see as the estimate of impact of student loan debt on the economy and the cost as we try to continue to come out of this recession and keep our middle-class. >> i agree with you that student loan debt has risen data very rapid rate. i always start, it is important for us to recognize how important it is to be able to get education and to have access to loans that will improve earnings power over time. that is always my starting point in thinking about this but i do worry for example when students take on every burden of debt,

can't be discharged and bankruptcy, do they actually understand for starters what the benefits will be of the programs that they are involved in. are they being given appropriate information about what the benefits of a particular program are in terms of placement, completion rates, and so forth, they have good knowledge about the returns from the debt that they are taking on. but the debt loads certainly are high enough that they may play a role for example in making it hard for people to buy first homes, to build their down payment and the housing market, i don't know what clear evidence of it but there has been a key huge increase. for families that get into

trouble with student desk it cannot be discharged in bankruptcy so it can represent a very heavy burden for individual if things don't go well. >> it is also an area where we have not allowed refinancing at the low rates you have created for other parts of purchasing in the home market which many have joined with senator warren in legislation that would allow those students to refinance at the lowest rate that we had all voted on last year, 2.8% and get folks out of that so they can buy the home, get the car and be able to have the life that they want. thank you very much. >> we have three senators left in this order. senator grassley, senator koontz and senator portman. i have to go to a hearing, confirmation hearing so i'm going to have to turn the gavel over to senator king.

and i want to thank you. and senator grassley. >> the american enterprise starting salaries of bank regulators and the salaries of bank employees. they found bank regulators on average made double the amount of private sector counterparts. this study involves salaries that control the currency office, federal deposit insurance, a consumer finance protection board, can the fed refused to respond to the freedom of information act, i ask this question because i am

quite an advocate of transparency and disclosure because it creates accountability, you being called a leader in transparency and the federal reserve, to what extent would you provide detailed information about the salary of federal reserve employees? >> let me just start by saying with respect to general salary levels that the fed would benchmark what we've a very carefully on an ongoing basis to surveys of competition including other federal regulators. we do release salary information, we have provided the names of individuals who are our top earners, individuals with salaries above $225,000.

we provided on salary grades including officer grades and salary ranges to go with those grades. and benefits employees at the board and the federal reserve received our annual report, contains a total salary and compensation expenditures so that information that we are already providing. >> then you must be telling me judicial watch, satisfied that they got the information i was told they didn't get from you. my question is what would be wrong with providing that information, freedom of information request. what would be wrong with that? wouldn't that be the thing to do? you are a public servant, your

organization is a public institution, it seems to me why would it be different from any other light control of the currency, federal deposit insurance corporation. >> we have provided this information in response to full year requests. >> if you haven't i am wrong and willing to accept that. i will get back to the people that i read about. and the reason for my question. let me go on to another one. if they tell me you are wrong i am going to be writing to you and i want an answer why you are a public institution, public servant, why are you different from any other part of the federal government that will make the same information available? on another question, in the past the conventional view among many economists was there was an inverse relationship between inflation and unemployment. that is rising inflation was

associated with lower unemployment. a couple decades ago milton friedman challenged the view claiming that over the long run this relationship actually brings down as individuals begin to expect inflation. an example of his theory was the 1970s so just one question in your view, i had two questions, starting to ask only the one i was going to ask. do you have any concerns the high unemployment we experienced in the 1970's could happen again should the fed act too slowly in reversing easy money policies? >> very well aware of milton friedman's theory and i am not aware of anyone in the federal

reserve who adheres to the notion that there is a permanent trade off between unemployment and inflation. we all recognize that inflation expectations matter and can shift overtime. all of us live through the 70s where we saw that happen. none of us want to or would be willing to see that happen again and it is why in our statements we constantly reference the importance of inflation expectations and stability and they could in terms of describing our policy and how it will be conducted. >> how long will it take to get your balance sheet down to $800 billion like it was in 2008? >> we all expect our balance sheet to gradually decline over time. after we regard it as appropriate to tighten policy, we have not decided and will probably wait until we are in

the process of normalizing policy to decide just what our long run balance sheet will be, but clearly it will be substantially lower than it is now and take a period of the number of years. this could happen simply by ending our reinvestment policy at some point. if we did that and nothing more, it would probably take somewhere in the neighborhood of 5 to eight years to get it back to pre crisis levels. >> thank you. senator coons. >> thank you for your leadership of the fed and thank you for your testimony at your service. and thank you, senator king for chair schenk. there were some exchanges about community bankers, community banks and the potential role i felt was constructive and would encourage your attention in that direction. let me move us towards a focus on inflation.

given that it is well below the target of 2% i would be interested in what you think about the consequences of its staying below 2%. a variety of factors that might lead to inflation either reemerging or staying low. and is there any risk of entering a deflationary period in what would be the consequences of that would happen. >> it would seem deflation is associated with very weak outcomes, economic outcomes in the rare situations where it has occurred and it is something we absolutely want to avoid. even ignoring the risk of deflationary, inflation that runs persistently at levels lower than 2% objective also have economic costs. first of all it raises real or inflation-adjusted costs of

capital and also read distributes debt burdens in the sense that when individuals take on debt they have an expectation for how rapidly prices in their own incomes wages will be rising and when those expectations are frustrated by exceptionally low inflation, the burden of the debt is really greater and something that constrains their spending and i want to avoid persistently having inflation both running higher than our objective but also running lower than our objective on a persistent basis. >> referencing back to the question senator grassley asked. folks who grew up in the 70s sorrys got assumptions about inflation rates that are significantly different from the current period. would there be some real benefits to having inflation exceed 2%?

>> we have gone to a point in this country we now have a long period since the early or mid 90s in which inflation has averaged 2% and if you look at inflation expectations they run around 2% and have been very stable and well anchored and have not moved around when actual inflation on some temporary basis has diverged from 2%. that is a huge asset to this country to have stable, well anchored inflation expectations. for example, when we have been undergoing periods in which oil prices have risen and there were a number of years in which, contrary to the market's expectations, oil prices continue to go up for a number of years so headline inflation ran above 2%.

was willing to inflation expectations we did not see what happened in the 1970s, namely what should be a temporary period of inflation above our objectives due to rising commodity prices. in the 70s, that dislodged inflationary expectations. dave rose and even when energy prices stabilized, we were left with permanent we higher inflation. we have not seen that since the mid 80s and that is the huge asset to us in conducting monetary policy to be able to rely on it. so i would not savor trying to raise our inflation objectives above where it is. >> let me ask one other question. there has been a lot of conversation and work around deficit reduction in the last few years. the american society of civil engineers has given our national

infrastructure a rating of dep plus. my own state has a number of bridges that fail, i deposit we have a significant infrastructure deficit as well as innovation deficit because we are underinvesting in our and the relative to our main competitors, underinvesting in upgrading our infrastructure relative to main competitors. any comment about what value it would be to our economy and recovery significantly increasing short-term investment and sustaining long-term way our investment in infrastructure and research development? >> spending in the short term on infrastructure would tend to create jobs or stimulate aggregate demand. from a long run perspective i believe it has benefits for long-term growth. studies of the factors that determine long-term growth consistently point to r&d which

influences the pace of technological change, productivity growth as well as investment or capital spending both private and public. >> thank you for your testimony. >> senator portman. >> thank you, mr. chairman and thank you for being here today, chairwoman. you have had to answer a lot of questions and a lot of things have been discussed. one that i have always been curious about is when you say you will reverse this quantitative easing which i view to be at historic levels, one thing you talk about his interest rates and if interest rates are above 6.5% you will begin that process. i am sorry. unemployment rate at 6.5%. first, people say we are 6.3% unemployment now but more to the point, i you taking into account the more fundamental weakness on the labour market side when you

look at those who left the work force altogether? when you take the labor force participation rate which is the percentage of folks who are looking for jobs or working, and compare it to before the recession or when president obama was sworn into office, the first one if you compare those two rates will be at 10.8% unemployment right now. if you take it back to when president obama was sworn in it would be 10.4%. the 6.3% or 6.5% for that matter looks better than it actually is given the reality out there and one of my colleagues said earlier that this is a weak recovery and another one said it it is a real recovery but not everyone is benefiting from it. there are millions of americans not betting fitting, historic levels of unemployment who are counted in the unemployment numbers relative to any other recovery. all those folks who left the work force altogether, i you

taking it into account when you choose an unemployment rate to begin backing off on easing? >> if i could just clarify. 6.5% was an unemployment rate we named. it had the following significance. we said that as long as inflation was under control and the unemployment rate exceeded that level, we would not consider raising targets for short-term interest rates. it wasn't something we tied to our asset purchases, it was tied to the level of short-term interest rates. we did not say that we would start to raise a target for short-term interest rates, when unemployment fell below 6.5. it was something we were simply trying to tell the public. don't even think about the possibility the fed will raise

interest rates with unemployment in excess of that 6.5% level as long as inflation is not an issue. it was not a traitor to start raising the level of rates. we recognize that as we get closer to our goal for full employment, we can't look at any single statistic in describing the state of the labour market. everything that you mentioned, the level of labor force participation, trying to understand why it has fallen so much, what part of that is due to demographics and what part of that is a reflection of a weak labor market. the fact that you mention long-term unemployment is so very high and there is so much part-time employment that is involuntary, that we will have to factor all of those things and other facts about the labor market -- >> i understand that.

i would hope you would all be looking at some of those other indicators. >> we are looking at those. >> i am not suggesting you shouldn't back off what i view as unprecedented federal reserve quantitative easing including studying interest rates at relatively low levels because i do think there is some danger is there but in terms of the economy i don't think that the unemployment number reflects the reality. in terms of demographic changes you suggest i would suggest i am sure you have all looked at the brookings study that talks about the fact that it is not my generation of baby boomers start retiring early primarily. is disproportionately young people, disproportionately men, single men. this economy is therefore not as strong as folks say and what do you do about it? there is the saying that if you have a amber every problem you

see is a nail. i worry that every federal reserve is using monetary policy hammer in effect to solve all problems that is not a monetary problem and some risk. by doing so. that is my own view. i talked to business leaders and i hear the reason they are not investing in plants and equipment and people has a lot less to do with interest rates and more to do with the uncertainty in the economy. there was a study we saw of 500 cfos, chief financial officers around the country saying 60% said they would not increase business investments no matter how low interest rates go. they said they won't even if they had $2.5 trillion right now in excess reserves in banks and businesses are worrying about $2 trillion of their own cash sitting on the sidelines. that is not happening because they say there's uncertainty and they tell me it is about the debt. in response to some questions the fact the we are heading

towards 100% gdp to debt right now, 74% concerns them and i hope it concerns us as policymakers. the president proposing more tax increases, the affordable care act is an effect on cost of doing business. with the epa is doing and other regulations that increasingly move from the legislative branch to the executive branch creating even more uncertainty, not knowing what the regulators will do. and i would say one of the uncertainties is federal reserve policy. they 1 don't know what you're going to do, as you say there are different factors so you don't have a trigger but second concerned about potential impact of the unprecedented expansionary policies in particular the possibility of a bubble as more people not being able to invest in stocks and bonds rates are so low going into equity markets, taking some times riskier investments on the stock market slide and creating potential for a bubble. that is a lot of commentary for

you to respond to but i would love to hear your response to that. it is in fact what the fed is doing not responsive to the real problem based on the anecdotes' i am hearing, you are hearing i am sure in various works around country and what the surveys are telling us and what you are doing in effect making it even worse. >> before you begin, we have been notified the vote has begun on the floor so if you can respond to the very broad question with a very precise answer, thank you. >> monetary policy is not a panacea but maintaining a policy of lower interest rates has been helpful in a number of ways. i think it has helped get housing back on track, helped the housing sector more broadly, house prices have risen, helped the financial situation of many households. we have seen a revival in car

sales for firms in terms of their investments as you mentioned, many different factors matter and interest rates, interest rates may be less of a factor in stimulating capital spending, but there are number of sectors of the economy that have responded favorably to a policy of low interest rates. it has helped stimulate demand and job growth, one factor that has been helpful. i would not say it is a panacea. >> thank you. senator sessions, closing. >> you look good in that job. rapid rise, meteoric rise i have to say. madam chair, thank you for coming. i know that you work hard at this job and take it exceedingly seriously. you are one of those more correct, only one i think on the board, anticipating the severity of the housing crisis of that is

something i would express appreciation for but just let me say we are not happy. the average american is not doing well. i don't think we need to overspin a positive numbers because i agree with senator portman totally on his comments about what he is hearing in the business world so thank you. you are challenged in your new position. we hope you will lead us with wisdom and get insight. thank you. >> thank you, senator. >> thank you for joining us today. has been delightful to meet you and to hear your i think very thoughtful comments. i want to thank my colleagues for the information. my colleagues will meet back here on tuesday the thirteenth on expanding economic opportunity for women and families. i also want to mention i was delighted to hear your comments about infrastructure.

in 1832, a 23-year-old young man running from legislature in illinois talked about the key importance of infrastructure development, canals, riverways and roads for development of the economy of the nascent united states. that was abraham lincoln at the age of 23. finally, as a reminder to my colleagues additional statements, questions for the witness are due by 6:00 p.m. today to be submitted to the office of the chief clerk in room 624. with that, again, our sincere thanks for appearing today but also for the work that you are doing. i call this hearing to a close. >> thank you. [inaudible conversations] ..

permanently extend the research and development