us on this dias have tried to break by coming together in a bipartisan approach, and what a lot of us urged the super committee to do, and by the way, senator sessions, there was a budget act and that was in the budget control act. and that set the course for ten years of cap and had a discipline process which was the super committee, which we had desperately hoped would work. but the deadlock was there. there's an imbalance of budget cuts that could be a drag on this economy. and then of course, the situation in the middle east could result in a i disruption of oil supplies. the european debt and fiscal crisis. and all of these elements are

uncertain elements that could disrupt the recovery. two of this most important steps that we could take to shore up the recovery would be to extend the payroll tax cut and the emergency unemployment benefits for the remainder of this year. and then in the process, seriously move to redo the tax code and to reform this bloated tax code. and we should also reconsider efforts to rebuild the country's infrastructure. and so, mr. chairman bernanke, in looking forward, it's clear that we have to pursue policies that both strengthen the near term economic recovery and address the long-term fiscali

imbalance, these policies are not in come patable. this is what was said last wook. -- last week. if we were combined with a plan that would later narrow the deficit, combining those pieces together would provide the strongest boost to economic activity in the short-term. that is -- the cbo director's words. and so, mr. chairman bernanke, we want to hear your views, and i hope you'll speak further about what the director said. >> thank you very much. >> mr. chairman. >> acting chairman nelson, ranking member sessions, and other members of the committee,

i appreciate the opportunity to discuss my views on the economic out look monetary policy and thing challenges facing fiscal policy makers. over the past two and a half years the u.s. economy has been gradually recovering from the deep recession. conditions have improved, but the pace has been slow. particularly from the perspective of the millions workers that are unemployed or under employed. more over the slow pace has left it vulnerable to shocks. spill overs from the european debt crisis risk derailing the recovery. unfortuna fortunately over the past couple of months, there have been signs of improvement and economic projections just released the participants indicated that they

expect somewhat stronger growth this year than in 2011. the out look remains uncertain and close monitoring of economic developments will remain necessary. as is often the case the ability and willingness of households to spend will be an important factor in how the economy expands in the coming quarters. households continue to face significant headwinds. notably real household income and wealth stagnated and access to credit was tight for many borrows. it remains at low levels by historical standards. household spending will depend heavily on developments in the labor market. the job situation has improved modestly over the past year. private payroll employment increased ed 160,000 a month l

year and, new claims for unemployment insurance declined somewhat. we have a long way to go before the labor market can be said to be operating normally. troubling is the unusually high level of long-term unemployment. more than 40% of the unemployed have been jobless for more than six months, roughly double the fraction during the economic expansion of the previous decade. uncertain job prospects and tight mortgage credit continues to hold back the demand for housing. low interest rates and the drop in home prices have greatly improved the affordability of housing, both residential sales and construction remain depressed. a supply of vacant homes stemming from foreclosure is

keeping downward levels on prices and limiting demand for construction. in contrast to the household sector the business sectors that been a bright spot. manufacturing production has increased 15% and capitol spending has gone up driven by the need to replace aging equipment and software. most firms and factory and services have benefitted from strong demand in foreign markets over the past few years. more recently the pace of growth in business investment has slowed, likely because of concern cans about the out look and developments in europe. however there are signs that the concerns are slowing somewhat. if business confidence continues to improve, u.s. businesses will be looking to hire and increase spending. businesses are still able to loans at low rates and corporate

balance sheets are strong. smaller businesses are facing problems getting credit, the credit conditions have begun to improve for them as well. globally, economic activity appears to be slowing, retained in part from spill overs in fiscal and financial developments in europe. the combination of debt levels in a number of european countries has raised concerns about their fiscal situations leading to substantial increases in borrowing costs, concerns about the health of european banks and associated reductions in confidence in the availability of credit in the euro area. resolving these problems will require action on the part of european authorities. they are working hard to address their fiscal and financial challenges, nonthes less, risk remain that developments could unfold unfavorably and could

worsen resk risks as home. we will take every available step to protect the u.s. financial system and our economy. let me turn to the discussion of inflation, as we anticipated overall consumer price inflation moderated considerably over the course of 2011. in the first half of the year, a surge in the prices of gas and food along with pass throughs of these higher prices to other services had pushed inflation higher. around the same time, supply disruptions associatesed with the disaster in japan put higher price on vehicles. but that did fade in the second half of the year, leading inflation to decline from annual rate of 3.5% in the first half of 2011, to the 2.5% in the second half. closer to its normal.

more commodity -- we expect inflation to remain subdued. against that backdrop, it's been decided to retain the stance on policy. the program to extends the average maturity of holdings and reinvesting principal payments on securities and to keep the target range for the federal funds rate has been decided. the committee anticipates that economic conditions are likely to warrant low levels of the federal funds rates at least through 2014. as part of our ongoing effort to increase the transparency of the modern policy. following the meeting, a sta statement was released to provide clarity on the long-term goals and policy strategy. the statement begins by stressing the federal reserves firm commitment to pursue

congression congressional mandate to foster prices and employment. the fmoc stated its collective view that inflation at the rate of 2% as measured by the annual change in the price index is most consistent over the longer run with the federal reserve mandate. and it indicated that the central estimates of the longer run, normal run of unemployment is between 5.2 and 6%. the statement noted that the objectives are generally complimentary but when they are not, they will take a balanced approach to return both employment and inflation to the desired levels. i would like to discuss briefly the challenges facing your committee and the country. the federal budget deficit widened with the recent recession and it has averaged 9%

of gdp. this increase in the deficit has reflected the automatic cyclical response to the weak economy and the fiscal actions taken to ease the recession and aide the recovery. as the economy continues to expand the budget deficit should narrow over the next few years. unfortunately, even after economic conditions have returned to normal, the nation will still face a sizeable structural budget gap if current budg budget policies continue. using the recent cbo out look, one can assume that most expiring tax cuts are extended, and health rates are held at the current level. the budget will be 4% of gdp, assumining the economy is close

to full employment. assumptions about the evolution of the economy and budget under current policies show the budget gap increasing significantly over time and the out standing debt to gdp will rise rapidlily. this is clearlily unstainable. this did not occur overnight, it's the result of fast rising health care costs and an aging population. the cbo projects that net federal outlays for motorcycle entitlements could rise to 25% of gdp, the time for projections to be reality is coming closer. having a large and increasing national debt runs the risk of serious economic questioconsequ

threatens to crowd out private capitol formation and from borrowing from a broad, the income we have would be devoted to intere interest payments on the debt. even the prospect of unstainable deficits has costs, including a increased possibility of a sudden fiscal crisis. as we have seen in a number of countries, and rates can soar quickly. although historical experience and economic theory do not indicate the exact threshold as which the debt would increase, we could be sure that without reaction, we will move closer to the point without action. to achieve economic and financial stability, u.s. fiscal

policy must be placed on a sustainable path that ensures that the debt to income is declining over time or stable. attaining this goal should be a top priority. as policy makers address if issue of fiscal stability, they should take care to not get in the way of the economic recovery. the two goals of achieving long-term stainability and the head winds for the recovery are fully re-enforcing. a more, robust economy will lead to smaller debt. but a pathity to stainability could help keep interest rates low and there by support economic performance today. fiscal policy makers can promote stronger economic performance in the medium term

through the tax and spend programs. they should work to encourage investments in the skills of our workforce, and stimulate private capital formation and provide necessary public infrastructure. although we cannot expect our economy to grow it way out of its fiscal im balances a more productive economy will increase the likelihood that we leave a healthy economy to our children and grandchildren. thank you sir. >> thank you, chairman, bernanke on page four of your statement, you testified that the current rates of the normal rate of unemployment is between 5.2% and 6 is %. how does that compare, for example to unemployment during the go-go years of the 1990s and

our, do you think we are going to have higher unemployment than in the 1990s? >> well it did go higher than that in the 1990s and 2000s as well. we are concerned that over the ft pa past few years that there has been a modest increase in the stainable long-term unemployment. one of the factors contributing to that, that about 40% of the unemployed have been unemployed for six months or more, they lose skills and it more difficult for them to find steady employment in the longer term. i would like to stress that in estimating that stainable long run rate of unemployment, we are not saying it was a desirable state of events or circumstances, we are only say

thanksgivi ing that monetary policy cannot bring unemployment below those levels based on our current information, be however other policies effecting workforce skills and fiscal policy and trade and all kind of other policies could bring down the stainable rate of of unemployment and i hope congress will consider ways to address that problem. >> we have started to see a revival of the manufacturing tech sector, 50,000 jobs added last month. is there anything that you would suggest that we do to speed up the return of the manufacturing jobs? >> well, the recovery of the manufacturing sector has been an encouraging development, manufacturing has led this recover significantly. one reason that it's doing so, is that american manufacturers have been competitive on to

global stage. and as emerging markets in other countries grow quickly, they represent a source of demand for our manufactured goods as well as some of our services. so, clearly maintaining open trade, with other countries and maintaining those markets is an important step. i think another area that is important is trying ensure that the u.s. remains a leader in advance education and research and development and the like because many of the manufacturing firms, for example, high tech firms that are often clufterred around universities are producing the most sophisticated, most tech -- advanced teps. and remaining --

>> and you know the decisions that we will have to make yard to budget terry policy coming up. and you know that, that there were all these attempts to get agreement between the white house and the congress last year that did not make it. there was one plan that a number of us were even held a press conference, i think, some fourpt of us in the senate, wanting the super committee to go big with a $4 trillion cut in the deficit over the next ten years. would you recommend going forward, since all of that failed, steep cuts that only hit at a handful of the safety net programs or do you believe that we should place more on reducing future deficits over the

long-term in a more broad, way while being fiscally conscious of the recovery efforts in the near term. >> mr. chairman i was supportive of being aggressive last summer. a number like 4 trillion was the cbo's estimate of what would be needed to stabilize debt to gdp ratios over the next decade which is an important objective obviously. but, i would like to urge the committee to not just look at the cbo window, most of the problems in our fiscal path arise after the next ten years, going out 15, 20, 30 years, as our population ages and health care costs rise, and so on. so, what i would support is you know, looking broadly and having

a broad based discussion, but in particular, looking at stainability over the long run and i think that will take a lot of work on the part of congress, i, it not my place to make detailed recommendations about specific components of the budget. but i do urge the congress and i heard many people on this committee express the same feeling, that we need a long-term plan to put our debt to gdp ratio, our overall fiscal burden on a sustainable path. >> thank you. senator sessions. >> thank you, mr. chairman, and thank you chairman bernanke, i think you are close to what we need to be doing and we value that. i would yield to senator grassly at this time.

>> first of all, i want to compliment you on your movements forwards transparency and the more you can do of that, and do it not just for the sake of people know about the economic impact of your policies so there's not that -- the obscurity that existed but to do it for the purpose of educating the public more about the important role of the federal reserve. you are too important for people to think that there's some conspiritorial aspect of everything that the federal government does, it comes up, not all the time, but too often in my town meetings the more you can tell people about what your role is important. my question is based upon first of all, if congress fails to act

1st, 2013, our nation will see the largest tax increase in the history of the country, and people do not understand that will happen even without a vote of congress. it's estimated that the impacts of this tax increase along with a few other policies, cbo estimates that the unemployment rate at the end of 2013 could be as much as 2% higher and that the gdp growth could be as much as 3% points lower. do you agree with cbo that the failure to prevent this tax increase will have a serious negative impact on our committee in terms of gdp growth and unemployment and secondly if so at what point in if 2012 will the uncertainty of the tax increase begin to hinder economic growth? >> thank you for your comments

on transparency and i am giving lectures next month at a class at george washington university. and i'll be talking about that issue. i agree with the cbo's analysis, if no action is taken on january 1st, 2013, there will be a sharp change in the fiscal stance of the federal government. which by itself would, with no compensating action would indeed slow the recovery, cbo predicts a 1.1% growth and an increase in unemployment and that is based on the current assumptions so they are assuming that contraction will take place. so i want to be clear that i'm in no way stepping back from my strong support of maintaining fiscal sustainability in the longer term, it's critically important that whatever actions are taken to mitigate the short run impacts of some of the

changes that they be combined with a credible plan for longer term return to sustainability. but, i think there's a concern there, that it's a very sharp change in a fiscal position in a short time would, might slow the recovery. i do not know exactly when the uncertainty would be a factor but as we get closer and we have no road map to proceed, that effect household decisions and business decisions as they look ahead to the next year. >> okay, my second question and it will have to be the last one. you announced that the federal open market committee of an inflation target of 2%, core inflation currently stands above the fed's target of 2.2%. you announced that the federal funds rate will be held at zero

through 20 parentheses. in question comes from the point of view, you said if there's a trade off between decision making on unemployment and inflation, as i read it, unemployment would have a higher priority. is a federal, is a fed sending a signal that keeping inflation in check is a secondary priority to achieving full employment and in what situation is the fed going to act if the inflation continues the rise? >> it true a 12 month backward look shows inflation at 2%, as we look forward and the energy price increases of early last year, have you know, not recurred, oprojections are that inflation will below the 2% target going into 2012 and 2013, so our best, because monetary policy works with a lag, we have to think about where inflation

will be not where it been in the past. inflation has been averaged two years, over 2% a year over my tenure and we expect it to be 2% or below in the next couple of years. so we think it's consistent with the policy. i want to disabuse any notion that there's a priority for maximum employment, we say that we take a balanced approach, congress gave us a dual mandate, we worked to bring both sides of the mandate back towards the target. the main goal of that statement was not to announce any change in policy, the gogoal was to gi greater clarity. but we will be working to bring both parts of the mandate to desired levels. >> if you want to come to the grassroots of america and the university of northern iowa, i'll help arrange it for you.

>> thank you, it will be streamed online. so it's open. >> okay. okay. thank you very much. >> thank you. senator grassly. >> senator widen. >> thank you chairman nelson and thank you chairman bernanke, i want to ask you about the shocks to the economy that you have been discussing. you talk about the pace of the recovery being slow and particularly for the millions people who are hurting, unemployed, under employed and that all of this really comes together as part of a sluggish expansion that has left the economy vulnerable shocks. can see the shocks. talking about two months or another short-term effort. we mentioned europe as another one. mentioned the question of

sequestration and to me, that alone puts a very negative image out because in a lame duck session in the 2012 session of congress, you'll see the same sort of flailing that you did after 2010 so my question to you on the shock issue is, doesn't it serve to shock our economic system just to have all this delay and week after week of fighting and inability to get decisions on payroll taxes or others? isn't that in and of itself, a shock to the system in terms of what it does to business confidence and predictability and certainty? >> policy uncertainty is one of the things that businesses complain about, makes it harder to plan. we face theme