homes. it is important that all markets are closely monitored for signs of inflation or supply disruption, and i look forward to hearing the fed's views on how rising oil prices may affect consumer spending and economic growth. i appreciate all the fed has done to ensure continued economic recovery. chairman bernanke, i look forward to hearing more from you on the fed's recent actions and possible future actions to protect our economy. congress also has an important role in making sure the economy continues to grow and more americans continue to find the jobs they need. this week, the full senate continues to consider the transportation bill. this bill includes the bipartisan effort of this committee to update a nation's public transit infrastructure

and create jobs. i'm also hopeful that the senate can find a consensus and initiatives, the topic of another hearing next week before this committee. to promote more job creation and protecting investors. with so many americans in search of work, it's no too late for a bipartisan committee to create jobs. i look forward to your views on these and other steps congress can take to improve our nation's economy. opening statement also be limited to the chair and ranking member. however, i would like to remind my colleagues that the record will be open for the next seven days for additional statements and other materials. i now turn to ranking member shelby. >> thank you, mr. chairman.

welcome again, mr. chairman. sense the federal reserve took unprecedented actions in response to the financial crisis, there's been a growing recognition that the fed needs to become more transparent. there was a time when central bankers met behind closed doors and stubbornly refused to inform the public of their decisions. those days are clearly over. the public now rightly demands that policymakers not only explain their decisions but also be account an for their actions. this is especially true of the federal reserve, which thanks to dodd-frank exercises even greater authority over the american economy and the lives of every american. to its credit, chairman bernanke has long recognized the need to modernize the fed. in his first confirmation hearing for this committee, he stated that he believed making the fed more transparent would,

and i'll quote his words, increase democratic accountability, promote constructive dialogue between policymakers and informed insiders and reduce uncertainly in financial markets and help anchor the public's expectations of long-run inflation. during his last appearance, i noted that he's taken some important steps to improve the transparency of the fomc, including holding press conferences to discuss monetary policy. this is a significant event in the history of the federal reserve. as chairman bernanke has stated, an explicit inflation could

anchor inflation expectations. yet it are mains uncertain if the fed's recently announced inflation goal will achieve these objectives. while the fed -- while the fed was establishing this inflation goal, it was at the same time communicating contradictory signals about his commitment to that inflation target. the fomc minutes reveal that chairman bernanke indicated that he believed tin nation goal would not represent a change in the fomc's policy. in addition, the fomc has stated that it believes economic conditions are "likely to warrant exceptionally low levels for the federal funds rate at least through late 2014." in other words, the fed is signaling to market participants it expects to continue its near

zero percent rate interest policy for the next three years. so is the fomc focused on targeting low interest rates or the new inflation goal? the inflation goal conflicts with keeping interest rates near zero, which target will prevail? in other words, why should market participants have confidence that the fed is committed to achieving its inflation goal? and if the fed is not serious about achieving this inflation goal, how will the fed's credibility suffer when inflation rises above 50%? accordingly today, i hope that chairman bernanke can give the committee more insight into how the fomc's inflation goal will work in practice. i would like to hear whether he believes congress should hold the fomc accountable for meeting its inflation goal. and while the chairman has taken steps to improve the transparency of fomc, the

transparency of the board of governors appears to be getting worse. a recent "wall street journal" article noted the board has held 47, yes, 47 separate votes on financial regulations, yet held only two public meetings. the article noted that there's been a steady reduction in the number of open meetings by the board since the early '80s, when the board had more than 30 open meetings. as a result, the fed is making sweeping policy decisions behind closed doors. this is inconsistent with your professed goal of making the fed more transparent. in another troubling new development, the fed decided to enter the debate on housing policy. on january 4, the fed issued a white paper entitled "the u.s. housing market, current conditions and policy consideration."

however, subsequent actions suggest that the fed has views about the policies congress should enact. just two days after the white paper was released. elizabeth duke gave a speech which she advocated for specific housing policies and effectively asked the gse conservatory to ignore his mandate to conserve and preserve assets to the gses. that same day, mr. chairman, new york fed president william dudley gave a speech which he argued that it would "make sense for fannie and freddie to routine reduce principal on delinquent mortgages, using taxpayer dollars." these statements suggest to many

that the fed do in fact have a blue print there for housing market policy. that blueprint appears to involve using the taxpayer supported gses as a piggy bank. in weighing in, certain fed governors have begun to take sides in which should be a congressional policy debate, i believe. the fed has been and should, i believe, continue to be a useful resource for information and analysis on the housing market. i believe it should not become an active participant in the legislative debate over the future of housing finance. i hope that the fed's recent foray will not become common

practice. mr. chairman, when you say you believe the fed is most effective when it's nonpartisan, transparent and accountable, i believe that's right. i'm interested in hearing from you today, mr. chairman, on how you intend to continue to improve the fed's performance on all three objectives. thank you. >> thank you, senator shelby. welcome, chairman bernanke. dr. ben bernanke is currently serving his second term as chairman of the board of governors of the federal reserve system. his first term began under president bush in 2006. dr. bernanke was chairman of the council of economic advisers during the bush administration from june 2005 to january 2006. prior, he served as a member of the board of governors of the federal reserve system from 2002 to 2005. chairman bernanke, please begin your testimony.

>> thank you. chairman johnson, ranking member shelby and other members of the committee, i'm pleased to present the monetary policy report to the congress. i'll begin with a discussion of current economic conditions and the outlook and then turn to monetary policy. the recovery of the u.s. economy continues but the pace of the expansion has been uneven and modest by historical standards. after minimal gains last year, real gdp increased at a 2.25% annual rate in the second half. the limited information available for 2012 is consistent with growth at a pace close to or somewhat above the pace that was registered during the second half of last year. we've seen some positive developments in the labor market. private payroll employment increased by 165,000 jobs per month since the middle of last year and 260,000 new private sector jobs were added in

january. the job gains in recent months have been relatively widespread across industries. in the public sector by contrast, layoffs by state and local governments have continued. the unemployment rate hovered around 9% for much of last year, but has reached 8.3% in january. new claims for unemployment insurance benefits have also moderated. the decline in the unemployment rate has been more rapid than might have been expected given the economy appears to have been growing at that time frame at or below its trend. continued improvement is likely to require stronger growth and demand in production. not with standing, the job market remains far from normal. long-term unemployment is still near record levels and the number of persons working part time for economic reasons is very high. household spending advanced

moderately in the second half of last year. however, the fundamentals that support spending continues to be weak. real household income and wealth were flat in 2011 and access to credit remain restricted for many potential borrowers. consumer sentiment has since rebounded but remains relatively low. in the housing sector, affordability has increased dramatically as a result of the decline in house prices and historically low interest races on conventional mortgages. unfortunately, many buyers lack the credit history required to qualify for loans. others are reluctant to pie a house because of their income and the future path of home prices. on the supply side of the market, about 30% of recent home sales have consisted of foreclosed or distressed properties and home vacancy rates remain high, putting

downward pressure on home prices. manufacturing production has increased 15% since the trough of the recession and posted solid gains since last year. supported by the recovery of motor vehicle supply chains and real business spending for equipment and software rose at an annual rate of 12% in 2011. but real export growth, while solid, slowed somewhat over the same period, as foreign economic activity decelerated, particularly in europe. the members of the board and the presidents of the fed banks projected that economic activity in 2012 will expand at or somewhat above the pace registered in the second half of last year. specifically, their projections for growth and real gdp this

year provided in conjunction with the january meeting of the fomc have a tendency of 2.2% to 2.7%. these were lower than the projections made last june. a number of factors have played a role in this reassessment. first, the recovery has been somewhat slower than previously estimated. in addition, fiscal and financial strains in europe have weighed on financial conditions and global economic growth and problems in u.s. housing and mortgage markets have continued to hold down not only construction and related industries but also household wealth and confidence. looking beyond 2012, participants expect that economic activity will pick up gradually as these head winds fade, supported by a continuation of the highly accommodated stance for monetary policy. with output growth in 2012

projected to remain close, participants did not participate further substantial declines in ton employment rate over the course of this year. looking beyond this year, participants expect ton employment rate to continue to etch down slowly towards levels consistent with the committee's statutory mandate. in light of the different signals received from the labor market, then from indicators of final demand and production, it will be especially important to evaluate incoming information to assess the economic recovery. at our january meeting, participanted agreed that strains in financial global markets posed risks to the economic outlook. to help prevent straps in europe

from spilling over to the u.s. economy. the federal reserve in november agreed to extend the terms of iit s swap lines with other major central banks and continues to monit monitor. a number of actions have been taken of late, including the program to extend three-year collateralized loans to european financial institutions. most recently, european policymakers agreed on a new package of measures for greece, which combines sector loans with a sizable reduction of greek debt held by the private sector. critical fiscal and financial challenges remain for the eurozone, the resolution of which will require concerted action on the part of the european authorities. further step also be required to boost growth and competitiveness in a number of countries. we are in frequent contact with our counterparts in europe and will continue to follow the situation closely.

as i discussed in my july testimony, inflation picked up during the early part of 2011. a surge in the price of oil and other commodities associated with the disaster in japan that put upward pressure on motor vehicle prices pushed inflation to more than 3% over the first half of last year. however, these factors prove transitory and it moderated to 1.5% during the second half of the year, close to its average pace in the preceding two years. the committee anticipated that inflation will run at or below the 2% level. specifically, the central tendency of inflation in 2012 range from 1.4% to 1.8%. looking further ahead, participants expected the subdued level of inflation to

persist beyond this year. since these project shups were made, gas prices have moved up, reflecting higher global oil prices, a development that's likely to push up inflation temporarily. longer term inflation expectations is measured by surveys and financial market indicators appear consistent with the view that inflation will remain subdued. against this backdrop of restrained growth, risk to the outlook for real activity and moderating inflation, the committee took several steps to provide additional monetary accommodation during the second half of 2011 and early 2012. the target range for the federal funds rate remains at zero to

0.25%. in august, the committee clarified the language, noting that economic conditions, including low rates and a subdued outlook for inflation over the medium run were likely to warrant exceptionally low levels for the federal funds rate, at least through 2013. the statement tended to put downward pressure on longer term interest rates. in january of 2012, the committee amended the guidance further, extending the horizon over which it expects economic conditions through late 2014. in addition to the adjustments made, the committee modified its policy regarding holdings of security. in september, the committee put in place a maturity extension program that combines purchases

of longer term treasury securities with shorter term treasury securities. removing longer term securities from the market should put downward pressure on longer term interest rates. to help support conditions, the committee also decided to reinvest principal received from its holdings of agency debt back into agency mbs, rather than continuing to reinvest those proceeds, as had been the practice since august of 2010. the committy reviews the size of security holdings regularly and adjusts those holdings as appropriate.

before concluding, the fomc statement reaffirms our objectives of price stability and maximum employment. its purpose is to provide additional transparency and increahe policy. the statement does not imfly a change in how the committee conducts policy. transparency is enhanced by providing greater specificity about our objectives. because the inflation rate over the longer run is determined by monetary policy, it is feasible and appropriate for the committee to set a numerical goal for that variable. the fomc judges at an inflation rate of 2% is most consistent over the longer run with its statutory mandate. while maximum employment stands on an equal footing as an objective of monetary policy, the maximum level of employment

is largely determined by nonmonetary factors that affect the labor market. it's not feasible for any central bank to specify a fixed goal. however, the committee can estimate the level of maximum employment and use that to inform policy decisions. in our most recent projections in january, plants estimates of the longer run normal rate of employment, had a tendency of 5.2% to 6%. it can be af edifts in the structure of the economy and a range of economic policies. if at some stage the committee estimated that the maximum level had -- the dual objectives of price stability are complementa complementary.

the committee judges the sustaining highly accommodative stance for monetary policy is consistent with promoting both objectives. however, in case where is the objectives are not complementary, the committee follows a balanced approach. as well as. pleased to take your questions. >> thank you for your testimony. i'll questioning of our witness. will the clerk please put five minutes on the clock for each member for the questions. dr. bernanke, what are the reasons for the modest pace of n? is the economy recovering as you would expect following a major

financial crisis or has a great recession led to any permanent adjustments in either output or unemployment levels? >> mr. chairman, normally when an economy suffers a severe recession, the recovery is comparably stronger. so a sharp decline tends to have a stronger expansion subsequently. however, our economy has been hit by two unusual shocks. one is the housing boom and bust, and we know from history that -- and recent research supports this -- that housing busts tend to take some time to be offset. in particular, since housing is an important part of the recovery process in most expansions. additionally, we've had a severe financial crisis, which has left many stresses in the banking system and on the financial system.

again, research has pointed out that historically recoveries following financial crisis tend to be slower than they otherwise would be. so with housing problems still being important, as you noted, and as financial conditions, including some of the stresses coming from europe still being dragged to some extent on economic activity, we've had a slower recovery than we otherwise would have anticipated. we have had now growth since mid 2009 and unemployment has come down. but of course, not -- the growth is not as strong and the improvement in the unemployment rate is not as we would like. >> u.s. consumers are deleveraging to reduce high debt levels. credit is still tight for u.s.

companies and households, and fiscal policy has begun to tighten. as we consider economic growth in the near and long-term, should congress enact drastic spending cuts and balance the budget this year or would a plan to curb deficits and address structural issues over a longer time horizon make more sense economically? also, what sectors of our economy could provide sustainable growth for the long-term? >> mr. chairman, first of all, senator shelby correctly pointed out the fed doesn't make recommendations on specific fiscal policy decisions. but in the broad context, let me make two points. the first is that, as i said on a number of occasions, including in front of this committee, the united states is on an unsustainable fiscal path over the next couple of decades.

if we continue along that path, eventually we will face a fiscal and financial crisis that would be very bad for growth and for stability. so therefore, whatever we do, it is very important that we be planning now for a long-term improvement in our situation in terms of long-term fiscal sustainability. at the same time, it is important that we keep in mind that the recovery is not yet complete. unemployment remains high. the rate of growth is modest. under current law as you know, on january 1 of 2013, there will be a major shift in the fiscal position of the united states, including the expiration of a number of tax cuts and other tax provisions, together with other provisions that, together, create a very sharp shift in the fiscal stance of the federal government.

i think that we can achieve the very desirable, long run fiscal cop sol dags that we need, and we need to do soon. but we can do that in a way that doesn't provide such a major shock to the recovery in the near term. so i'm sure that congress will be debating the details of this o over the next year and taking into account protecting if recovery and assuring we achieve sustainability in the long-term. the second part of your question, mr. chairman, we are seeing manufacturing and industrial production in general that have been leading the recovery. housing, of course, is lagging. but generally it's been automobiles, of course, being one part of manufacturing. but generally it's hard to predict what sectors will be

most -- have the greatest growth in the longer term. you asked me earlier in the first question about potential growth. we don't see at this point that the very severe recession has permanently affected the growth potential of the u.s. economy, although we continue to monitor productivity gains and the like. but one concern we do have is the fact that more than 40% of the unemployed have been unemployed for six months or more, they're either leaving the labor force or having their skills eroded. although we haven't seen much sign of it yet, if that situation persists for much longer, that will reduce the human capital that is part of our growth process going forward. >> i have been working with my colleagues in the senate to move forward a set of proposals to update securities laws and make