a surge in the price of oil and the disaster in japan pushed over a all inflation to annual rate of more than 3% over the first half of last year. as we had expected, however, these factors proofed transitory and inflation moderated during the second half of the year. close to the average in the proceeding two years. in the projections the committee anticipated that overcoming quarters, inflation will run at below the 2% level we judged most consistent with our statutory mandate. specifically the central forecast for inflation in 2012, ranged from 1.4 to 1.8% remained unchanged. loobing further ahead, a subdued level of inflation was expected to persist beyond this year. gas prices have gone up, refrequenting higher global oil

prices. a dwompth that will will raise inflation temporarily. we will continue to monitor energy markets carefully. longer term surveys appear consistent with the view that inflation will remain subdued. against this backdrop of restrained growth, persistent down side growth and moderating inflation, the committee took steps to provide additional monetary acommendation during the second part of 2011 and early 2012. these steps includesed changes in the holdings of agency securities. the target range for the federal funds remains at zero to .25%. in august, the committee clarified the forward guidance language noting that economic

conditions, including low rates and a subdued out look for inflation over the medium, fund, by providing a longer time horizon than exacted the statement put downward pressure on longer term interest rates. at the january 2012 fomc meeting it was amended further extending the timeframe where it will see low levels of the federal funds rate through 2014. in addition to the adjustments, the economy modified the policy regarding the holding of securities. in september, the committee put in place a maturity extension program that provides longer term treasurer security purchases, it will lengthen the -- significant change in the

size of our balance sheet. this will make financial conditions more supportive of economic growth than it would have been. to help support conditions in the major market, principal received will be reinvested agency nbs rather than continuing those proceeds in treasury securities as has been the practice in 20 ten. the holdings will bed a justed as appropriate to promote a stronger economic recovery. before concluding i would like to talk about long-term strategy that was issued at the end of the january meeting t samt reaffirmed our commitment to our objectives given to us by the congress of price stability and

maximum employment. it's purpose is to increase the effe -- the effectiveness of the monetary policy. transparence is enhanced by providing great detail about our objectives. because the inflation rate over the longer run is determined by monetary policy, it's feasible for a monetary goal to be set for that variable. an inflation rate of 2% as measured by the change in the prize index is more consistent in the longer run with a statutory mandate. while maximum employment stands on equal footing the maximum level of employment in an economy is determined by nonmonetary factors that effect the structure of the labor market. it's not feasible for any bank to specify a fixed goal for the longer run level of employment.

however the committee is estimate the employment level. in our most recent projections in january, estimates of the longer run of normal rate of unemployment had a rate of 5.2 to 6.0%. as i noted a moment ago, the level is subject to change, for instance, it can be effected by shifts in policy and a range of economic policy. committee decided the level would increase, we would adjust monetary policy accordingly. the dual objective of price stability and maximum employment is connect. with the inflation out look subdued the economy sustained that a monetary policy is consistent with promoting both objectives. however, in cases where the objectives are not

complimentary, the committee follows a balanced approach in promoting then. taking into account the magnitudes of the deviations of inflation and employment from levels to be consistent with the dual mandate as well the potentially different time horizons over which employment and inflation are projected to return to such levels. thank you and i would be pleased to take your questions. >> thank you chairman, bernanke. chairman bernanke, the biggest driver of the ever increasing deficits this nation faces is the run away growth in the entitlement programs, medicare, medicaid and social security. you have repeatedly stressed that the united states needs to return the federal government to a sound fiscal footing over the long-term. yet, the administration's 2013 budget does nothing to reform the programs or rein in their

costs. we did address military spending with cuts in the budget and with sequestration, but if we fail to reform our major entitlement programs, what will be some of consequences and if we do make major long-term structural changes to our entitlement programs, do you see immediate or short-term benefits? >> yes, mr. chairman, thank you. i have often, as you noted talked about the importance of establishing long-run fiscal sustainability in the united states. if you take a look at congressional budget offices report that came out, what you see is that under current law, which is the basis of the projections they have to make, that over the next ten to 15 years you see an increasing acceleration of the size of the debts and deficits. it reaches a point where it's not going to be sustainable. once the markets lose confidence

in the ability of the government to maintain fiscal sustainability. then there are numerous risks the most extreme case is a financial crisis or a sharp increase in interest rates, much like what we have seen in european countries and even after that extreme results, large deficit debt over a period of time, raises interest rates above levels where they normally would be and are bad for growth and productivity. and it may involve borrowing from foreign lenders which is also a drain on current u.s. income. so it's important to address the issue. there are many dimensions of the issue. a point i would make is that there may be some problems that focused on the ten-year window that is part of the effective analysis of the congress to many of the problems, they are just

becoming more severe after ten years. so, i would ask congress to consider not just the ten-year window but the longer horizon m i implications of their pause decisions. would it have benefits for today? i think a credible plan put in place, that would strengthen the view that the united states would be fiscally sustainable in the longer term, it would have benefits, greater confidence and perhaps lower interest rates. >> thank you. thank you, chairman bernanke. chairman, bernanke, you are a member of the financial stability oversight council which is charged with responding to threats to financial stability and mitigating the problem of "too big to fail" the economists recently published a piece on dodd-frank titled "too

b big, not to fail" pointing out the regulations and the effects of the internal inconsistencies will out weigh what good may come of it. will the financial stability oversight council consider the threat to financial stability that the cost and complexity of dodd-frank poses to the financial system and offer advice on how to minimize the cost and complexity and how do you view the fed's role in that process? >> yes, mr. chairman, i've been quite pleased with the functioning of the committee. the meetings involved every principal, they come to every meetsing and we have good discussions. and between the formallial meetings we have discussions among the senior staff. so there's been a lot of interaction, we have talked to each other about making sure our

policies are as consistent as possible, that they provide a level playing field and we can avoid redundancy and we want to do that. at the federal reserves level, we support the basic goals of dodd-frank which are to create a more macro approach to problems, making sure we are looking at systematic risks and to make sure the large institutions are better supervisored, have better liquidity. and we understand the specifics of the regulations make a difference. it's important to make sure that we get the best result for the least burden. and we have a result of comments and consultation and cost/benefit analysis to make sure that we are putting out rules that are on the one hand effective at reducing the risk of financial crisis and minimizes the regulatory cost,

particularly for the smallest banks which are able to deal with the costs. >> thank you very much. >> mr. chairman, thank you for that repeating of the notion that the financial reform bill is causing all the terrible problems. i should point out, bipartisan nature is not fully understood. another contributor was sheila bare, and i was at the treasury department and noted the picture of frank paulson that has gone up, with his approval at least, took credit for the things that wound up in the reform bill. so i want to go back to the deficit, the chairman agrees the military but he talks about the entitlements. when you talk about the level of

reduction you need, if you do not go elsewhere and just focus on social security, i -- let he ask you from the economic standpoint. given the importance of a longer term policy to reduce deficit, purely economic standpoint, policy preferences that i know you don't want to get into, but the purely economic standpoint, would it be greatly different if that came from reducing the cost of living increase or reducing medicare or a change in tax code, would there be a maco economic difference? >> from a macro economic difference, that means the -- >> did not make that much difference which way you do it? >> it depends on how you spend your money. >> i appreciate that. but i want to go back to the question of the dual mandate. and the notion that somehow, you really can't do much about

employment, and you have repudiated that. about a queer ago, two very distinguished economists did a paper about how the great recession was brought to an end. he was a democrat and vice chair with you at the fed. and let me quote. they talk about aggressive fiscal and monetary policy that not only avoided a great depression. when we divide the effects to the components, including the feds easement, we estimate that the latter was more powerful than the former. so it says that things in the jurisdiction of the fed were more important than the stimulus, although the stimulus was important. so this effort to den grate the role you play in that seems to be greatly mistaken. i have handed out a chart to the

press and i would ask those that have the copy, look to page 17 of your report and there's a chart on the bottom, net change in private payroll employment, 2005 to 2000 and 12, what it shows is, and it measures monthly job loss. the lowest point of this, the worst monthly job loss comes in early 2000 and nine, in other words just after the change in the administration. and you then beginning, in like february or march of 2009. you get one of the steepest rises i have seen. you get a substantial, an almost vertical in employment. it takes the place of the numbers being lost and it hits in early 2010, it levels off. europe was part of the problem there and then it starts to rise again. not only does it show a significant -- it shows the

worst time was around the time of change in administration and increases in early 2000 and nine and the point now where the monthlyin 2012 are equal to what they were in 2005. the total losses were so great that we have not yet under cut it and i note that you point out, while we have had improvements in the private sector, it has been diminished by state and local governments. the fact is if state and local governments had been even, no gain but have not lost over half a million, then unemployment would now be under 7%. we are moving well as i see it, one of the major problems we have got, i guess i'll not ask you to comment, i will just say it. one of the major obstacles or problems that might keep us from a continued upward trend, which is a good trend, although slower

than we would like is troubles in europe. i know, the role that you and your agency have played in helping to get europe on avoid greater troubles has beenf helpful. it's been terrible that you are getting criticism, and i want to express my support for what you have been doing with the swap agreement and the greatest threat to the american economy is what is going on in europe. the american economy is the best performing economy in the developed world. you have been helping that. and the attack on what the fed has been doing to try to keep you from continuing to encourage the right kinds of things in europe are about as disasterous a prescription to american policy and i hope you continue to ignore them.

>> thank you mr. chairman. mr. bernanke, will you tell me if you do your own shopping at the store some. >> yes i do. >> so you are aware of the prices. nobody believes that prices are going up. people on fixed incomes, they are hurting and the middle class is hurting. their inflation rate is very much higher than the government tries to tell them and that is why they lose trust in government. but you know, this whom idea of prices and debasement of currency, if you loan me $100 and two years from now i gave you $90 back, you would be upset. but we are paying that money back and it's worth ten or 15 or 20% less and nobody seems to be able to do anything about it. it's upsetting. but it theft, if i do not give you your full hundred dollars back, i'm stealing $10 from you

and it's upsetting. last january, you poked a bit of fun, to down play the 2% inflation rate. if i say it's 9% and you say it's 2%, compromise for the sake of argument, 5%, you said it does not hurt you if you put your money in a mattress. so where are you you going to put it? put it in a cd and make no money at all. it makes no sense, it discourages people. i want to make a point about prices. prices to up. it's one of the bad consequences of the inflation that comes from the increase in the money supply. that is one of the bad effects. but, you know, you took over the fed in 2006. i have a silver ounce here. and this ounce of silver back in

2006 would buy over four gallons of gasoline. today, today, it will buy almost 11 gallons of 11 gallons of gasoline. that's preservation of value. that's what the market has always said should be money. money comes into effect in a natural way. not in an edit, by governments declaring it is money. but why is it that we can't consider the two of us an option? you love paper money, i think money should be honest, constitutional. still on the books. gold and silver, legal tender. why don't we use it? but why don't we allow currencies to run parallel? they do around the world. one motor vehicle optiof my optd is going to self destruct eventually anyway when the money's gone. but why wouldn't we legalize

competing currencies? why couldn't people put this in a mattress and get four or five times as much of the value in a few years? so the record of what you've done in the last six years is destroy the value of real money, of paper money. at the same time, real money is preserved. but a competing currency, we already have a silver eagle. it's legal tender for a dollar. and some people say, well, it's legal tender? it's a dollar. it's on the books. they use it. they get into big trouble. the government comes and closes them down. you can get arrested for that. but what would be wrong with talking about parallel currency, competing currencies? this is something that hayek talked about, that i think would be a compromise and i think we would work along with you. >> first of all, good to see you again, congressman paul. just one word on the inflation. the numbers are constructed by the bureau labor of statistics, not by the fed.

i think they're done in a very serious and thoughtful way. on alternative currencies, nobody prevents you from holding silver or gold, if you want to. it's perfectly legal to do that. and you're also happy to -- it's also perfectly fine to hold other currencies. euros or yen or whatever else. so in that respect you can do that. and i would be happy to talk to you about other options. >> mr. chairman, that's not money. when you pay tax toes buy a coin or you have a capital gains tax, when it's not -- if you have to settle a lawsuit, it's always settled in depreciating federal reserve notes. it's never settled in the real contract. that's nothing near money when it's illegal to use it. but to do it you would have to repeal the legal tender laws, legalize it, get over the sales taxes, get rid of the capital gains taxes. even in mexico, they're talking about this. they're trying to have computing currencies. they've been wiped out too many times with inflation and wipe out the middle class. they're allowing people to start

to save in a silver currency. so i hope we move alongthat direction because there shouldn't be any, you know, overwhelming changes all of a sudden that there could be a transition. people could vote on it. maybe they'll give up on the federal reserve and vote for real money. >> i would be very happy to talk to you about it. >> thank you. ms. waters? >> i would like to make an announcement for the democratic members. we're going to follow the policy on our side. obviously we won't be able to get to everybody here. the committee is too big. our policy is when mr. bernanke comes back for the second appearance this year we will begin where we left off. members who do not get to ask your question today, we will start from there and they will get to ask the question the second time. >> thank you. we have the same procedure. ms. waters, we hope you will continue this cordiality. >> thank you very much. i'm interested in housing.

everyone agrees that this economy is not going to rebound until the housing market is vigorously operating. so i want to find out a little bit about what is happening with the servicers and maybe some -- something about principle reduction. on february 9th the federal reserve assessed money to penalties totaling $776 million on the five largest market services pursuant to the consent orders you issued in april of 2010. these five servicers also happened to be part of the settlement between the state attorneys generals and federal government announced on the same day. as i understand it, the penalties paid by the servicers under the consent orders issued by the fed can be satisfied by loan modifications that they make under the state a.g. settlement. in other words, unless the servicers fail to comply with

the settlement, with a.g.s, there will be no monetary penalties for servicing violations identified by the consent orders. though we don't know all the details yet because the a.g. terms have not been released i understand servicers can satisfy some of the requirements by writing down loans, including investor loan, owned loans, that they service. my question is, will servicers be able to use the write-down of loans held by investors to satisfy the penalties lever i haved by the fed in response to unsafe and unsound practices? that's the first part of my question. >> no. we are part of the overall agreement. and i participating, we helped make it happen. we have released our -- by the way, we just released our engagement letters and action plans for those companies that we oversee. the banks will have to verify that they have produced their

own holdings, their own assets by the amount that they are taking credit for in the overall holding. and if they don't meet those full amounts, then they will have to pay the rest in cash. >> on the issue of whether to pursue principle reduction modifications on residential marketers, your report -- your federal reserve white paper report -- acknowledges some of the problems with negative equity but the report never endorses principle reduction as a stabilization strategy, so with that said, i wanted to ask you what you thought of a speech by new york fed president dudley after your paper came out. in his remarks mr. dudley suggested that principle reduction for sge loans would minimize loss of value on delinquent loans they guarantee and a shared appreciation approach could help policymakers avoid giving certain homeowners a windfall and he suggest

limiting paper reduction on people who are current on their payment. does this approach void some of the problems? would principle reduction you identified in your report? couldn't this shared appreciation approach discourage homeowners from defaulting when they could otherwise pay their mortga mortgage? >> first, the fed has no official position on principle reduction and we were careful not to make explicit recommendations because we thought it was their per rog ga tive to make those. i think it's a complex subject. it's not that we disagree on the goals. we want to reduce foreclosures and delinquencies. we want to help people who want to move to be able to do that. they're often a number of alternatives in tircht situations. for example, if the idea is just to be able to move, then a short sale or a deed in lieu might be the most effective way to do it. if the goal is to reduce payments then refinancing at a lower interest rate or modification might be the most

effective way to do it in terms of dollar spent. interesting questions from the perspective of public policy about what the best way to proceed is. whether that's the most cost effective approach or not. >> we're really interested, many of news principle reduction, in your report to congress, you note that facilitating principle reduction modifications are all underwater bars would be too costly but identifying targeted segment bars would go to foreclosure without principle reduction is too difficult. i won't go on to talk about what mr. dudley said. so if you're not supporting principle reduction and you're not talking about how homeowners can get out from under this foreclosure problem, what are you suggesting we do to improve this housing market? >> well, we discuss a whole variety of things in our white paper. though again, with the proviso that our goal was to provide background analysis to help

congress make good decisions. for example, we have a big overhang of homes in the market. one of the ideas that we've discussed is the moving reo, real estate owned to rental. that is something the fha has begun a pilot program on. that is interesting. we talked about tried to identify some of the barriers to doing that on a larger scale. that's one potential direction. it's a lot of issues right now with the tightness of mortgage standards where people are not able to get mortgage credit. even when they meet gse standards. so we have talked about clarifying the representations and warranties that are part of the mortgage contract. fhfa and gses have, in fact, looked at that as well and i think that could be a constructive step. servicing is an important issue. you just made -- referred to in the beginning the servicing agreement. we have, since early last year, we've put consent o