final demand and production, however, it will be especially important to look at information to assess the underlying pace of the economic recovery. at our january meeting participants agreed that strains in global financial markets posed significant downside risks to the economic outlook. investors' concerns about fiscal deficits and the level of government debt have led to substantial increases in sovereign borrowing costs, stressing in the european banking system and soeshlted reductions in the availability of credit in economic activity in the euro area. to help prevent strains to spill over in the u.s. economy, the federal reserve in november agreed to extend and modify the terms of its swap lines with other major central banks and it continues to monitor the u.s. financial institutions. a number of constructive policy actions have been taken of late in europe including the european central bank's program to extend

three-year collateralized loans to european financial institutions. most recently european policymakers on a new package of measures for greece which combines additional loans with a sizable reduction of greek debt held by the private sector. however a critical challenges remain p to the euro zone, the resolution of which it to boost growth and competitive innocence a number of countries. we are in frequent contact with the count parts in xhuk and follow it closely. as i discussed in july, inflation picked up during the early part of 2011. a search for supply disruptions associated with the disaster in japan pushed overall inflation to 3% over the first half of last year. as we had expected, however, these factors proved

transitionary and inflation moderated to an annual rate to 1.5% during the second half of the year, close to its average pace in the preceding two years. in the projections made in january, the committee anticipated that over coming quarters inflation runs at or below the 2% level we judge most consistent with our statutory mandate. specifically the central tennessee participants forecast for inflation in 2012 rain from 1.4 to 1.8% unchanged from the projections made last june. looking farther ahead participants expected the sub dued level of inflation to persist beyond this year. since these projections were made, gasoline prices have moved up primarily reflecting higher global oil prices, a development that is likely to push up inflation temporarily whul purchasing power. we will continue to monitor energy markets carefully. longer term inflation expectations as measured by surveys and financial market indicators appear consistent with the view that inflation

will remain subdued. against this backdrop of restrained growth, the committee took several steps to provide additional mane to her accommodation during the second half of 2011 and in early 2012. these steps included changes for the forward rate guidance included in the committee's post-meeting statements and adjustments to the federal reserves holdings of treasury and agency securities. the target range remains at zero to 1/4% and the forward guiding language provides how long they expect that target range to be appropriate. in august the committee clarified the forward guidance language noting that economic conditions including low rates of resources were likely to earn exceptional loy level to the federal funds rate through the middle 20613. by providing a longer time horizon than previously expected

by the public, the statement tended to put downward pressure on longer term sfw rates. at the january 2012 meeting they amended it further extended horizon over which this expects economic conditions to warrant low levels of the federal fund rates to at least through late 2014. in addition to the adjustments made to the forward guidance, the committee modified its policies regarding the federal reserves holding of the securities. in september they put in place the maturity extension programs that combines longer term with sales of shorter term treasury securities. the objective is to lengthen the average maturity without generating a significant change in the size of our balance sheet. removing longer securities from the market should put downward pressure on longer term interest rates and make financial conditions more supportive of economic growth than they otherwise would have been. to help support conditions in the mortgage markets, the committee also decided the at a

september meeting to reinvest principal received from the holdings the agency debt in agency mbs rather than continuing to reinvest those proceeds in longer term treasury securities as had been the practice in august 2012. the committee reviews the size and composition regularly and prepared to adjust those holdings as appropriate to promote a stronger economic recovery in the context of price stability. before concludingconcluding, i to say a few words about the statement of longer run goals and monetary strategy. the statement reafirms the commitment to the statutory objectives given to you of price stability and maximum employment. its purpose is to provide additional transparency and increase the effectiveness of monetary policy. the statement does not imply a change in you how the committee conducts policy. transparency is enhanced by

providing great specificity about our objectives. because it's determined by monetary policy, it's feasible to set a numerical goal for that key variable. the fomc judges that an inflation rate of 2%, as measured by the annual change in the price index for personal consumption expenditures, is most consistent with the statutory mandate. while maximum employment stands on an equal footing with price stability as an objective of mane to her policy, the maximum level of employment in an economy is largely determined by nonmane to her factors that affect the sfrushgt and dynamics of the labor market. it is not feasible for any central bank to specify a fixed goal for the longer run level of employment. however, the committee can estimate the level of maximum employment and use that estimate to inform its policy decisions. at our most recent projections in january, for example, the participants' estimates of the longer run normal rate of unemployment had a central

tendency of 5.2% to 6.0%. as i noted a moment ago, the level of maximum employment in an economy is subject to change. for instance, it can be affected by shifts in the structure of the economy and by range of economic policies. if at some stange they estimate the maximum level had increased, for example, we would adjust monetary policy accordingly. the dual objectives of price stability and maximum employment are generally complementary. the committee judges that sustaining a highly accommodating chance for monetary policy is consistent with promoting both objectives. however when the objectives are not complementary, they follow a balanced approach in promoting them, taking into account the magnitudes of deviations of inflation and employment from levels judged to be consistent with the dual mandate as well as potentially different time horizons over which employment and inflation are projected to

return to such levels. thank you, and i'll be pleased to take your levels. >> thank you, chairman bernanke. chairman bernanke, the biggest driver of the every-increasing deficits this nation faces is the run-away growth and all of our major 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 fiscal budget does nothing to reform these programs and rein is the costs. we addressed it with cuts in the budget and sequestration. if we fail to reform the major entitlement programs, what will be some of the consequences and if we do make major long-term

structural changes, our entitlement programs, do you see immediate or short-term benefits? >> yes, mr. chairman. thank you. i've often, as you noted, talked about the importance of establishing long-run fiscal sustainability in the united states. if you take a look at the congressional budget offices report that recently 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 10 to 15 years you begin to see an increasing acceleration in the size of the debts and deficits. it reaches a point where it's not 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 would be a financial crisis or a sharp increase in interest rates aanalogous to what we see

in european countries, even absent that extreme result larn deficits and deaths raise interest rate levels and crowd out private investment and are bad for growth and productivity. they also may involve borrowing from foreign lenders, which is also a drain on current u.s. income. so it is important to address this ish. there are many dimensions of the issue. one point i would make is there may be some problems with the focus on the ten-year window that is part of the effective analysis of the congress. since many of the problems are most severe after ten years, so i would ask congress to consider not just the ten-year window but the longer horizon implications of their policy decisions.

a credible plan would strengthen the view that it would be fiscally strong in the long term with lower expected tax rates and greater confidence and lower interest rates. >> thank you. >> thank you, chairman bernanke. chairman bernanke, you're a member of the financial stability oversight council charged with responding to threats to financial stability and mitigating the problem of too big to fail. the economist recently published a piece on dodd-frank titled "too big not to fail," which noted that there's never more apparent risks that the harm done by the massive costs and complexity of its regulations and the effects of its international inconsistency will outweigh 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 that cost and complexity and how do you view the fed's role in that process. >> yes, i've been quite pleased with the functioning of the fsoc. we met regularly and the meetings involve every principal and comes to every meeting. in between the formal meetings we have extensive discussion among the various staff. there's a lot of interaction. there's lots of benefits to coordination. we have talked to each other to make sure the policies are as consistent as possible, that they provide a level playing field and they can avoid redundant see at the success and squall fikdzs and want to do that. at the federal reserve level we

support the basic goals of dodd-frank, which are to create a more macroapproach to maybe sure our large institutions have more capital and liquidity and are better supervised. we understand that the specifics of the regulations make a big difference. it's very important to make sure that we get the best result for the least burden, and we have a process of both comments, consultations, and, of course, cost benefit analyses to make sure we are putting out rules that are on the one hand effective of reducing the riskle financial crisis but that minimize the regulatory cost for the smallest banks, which are least able to deal with those costs. >> thank you very much. ranking member frank.

that the financial reerchl bill is causing people all these terrible problems. it's bipartisan nature has not been fully understood. in addition to yourself one of the major contributor is president bur who admired sheila bear of the fdic. i note the portrait of hank paulson went up in which a write-up that was with his approval at least noted initiated many of the reforms that wound up in the financial reform bill. so mr. paulson was also there. i do want to go back again to the deficit, because the chairman said to me yes, he agrees it should be the military. he talks about the entitlements. when you talk about the level of reduction we need, if you get it all out of social security and medicare and gnt elsewhere, you do danger. i believe you start with overseas military expenditures that are excessive. from the economic standpoint, given the point of a longer term policy to reduce deficit of the

purely economic standpoint, but from the purely macro economic standpoint, is it different those came from reducing the cost of living increases or restricting medicare or from some change at the tax code at the upper levels of income. is there any macro economic difference? >> from a macroeconomic perspective, the main thing is to achieve sustainability. >> it make that much difference which way you did from the macroeconomic standpoint? i want to go back to this question of the dual mandate. and the notion that somehow you really can't do much about employment, and you repudiate that. you've done it in practice. about a year ago two very distinguished economists did a parm about how the great recession was brought to an end. he was a democrat rat and price

chair with you at the fed, but mr. zandy has been bipartisan. let me quote from them. they talk about aggressive fiscal and monetary policies that not only averted a great depression but result in the beginnings of a recovery. when we divide these effects into the two components, including the fed's quantitative easement, we have to estimate the latter was substantially more powerful than the former. this assessment of how we did better says that monetary policy and things within the jurisdiction of the fed were more important than the stimulus. this effort to denigrate the role you can play in that seems to me to be greatly mistaken. look to page 17 of your report. there is a chart on the bottom, and net change in private payroll employment, 2005 to 2012. what it shows is and it measures

monthly job loss. the lowest point, the worst monthly job loss comes in early 2009, in other words, just after the change in administrations. then beginning in february or march of 2009, you get one of the steepest rises you have ever seen. you get a substantial, almost vertical increase in employment. it takes the place in the drop of the numbers losing, and then it hits in early 2010 and then it starts to rise again. i would note not only does this show a very significant -- it shows the worst employment condition was around the choice in the changes of administration's. very substantial increases beginning with early 2009 and a point now where the monthly increases in 2012 are equal to what they were in 2005. we've come back now with the

total losses so great during that period below the line we haven't i couldn't tell undercut it. you protect kri point out while we have done substantial improvement in the private sector and not yet what we want, that has been diminished somewhat by reductions in state and local government. the fact is p if state and local government hiring was even, no gains, but hadn't lost over half a million, unemployment would now be under 7%. let me ask you, because we are moving well, as i see it, one of the major problems we've got and i guess i won't ask you to comment, that one of the major obstacles with the major problems that might keep us from a continued upward trend, which is a good trend, although slower than we would like, would be troubles in europe. i should note that i think the role that you and your agency have played in helping to get yurl to avoid greater troubles has been very helpful. i think it is striking you're getting criticism particularly

on the republican side but some from people on the left for a series of very constructive action. i want to express my support for what you've been doing with the swap agreement and in other ways, because the greatest thing to the american economy at this point is in europe. i should note, by the way, thanks in part to what we do here while there were problems, the american economy is the best performing economy in the world of any size. you have helped that. the attacks on what the fed kee continuing to encourage the right kinds of things in europe are about as disastrous a prescription for american policy. >> do you do your own shopping at the grocery store? >> yes, i do. >> so you're away of the prices. this argument that the prices are going up 2%, nobody believes it. the old cpi says the prices are going up but 9% believe this.

people on fixed incomes are really hurts, the middle class is hurting because their inflation rate is very much higher than the government tries to tell them, and that's why they lose trust in government. you know, this whole idea about prices and debasement of currency, if you loan me $100 and two years from now i gave you 90 back, you'd be pretty upset. we hand that money back, and it's worth 10 or 15 or 20% less and nobody seems to be able to do anything about it. it's very upsetting. it's theft. if i don't give you your full $100 back, p if you loan $100 i'm stealing $10 from you. somebody is stealing wealth, and this is very upsetting. in january at one of wrur press conferences you said that -- you sort of poked a little bit of fun at people to down-play the 2% inflation rate. if you say it's 2% and i say it's 9%, let's compromise it's 5%.

you said that it doesn't hurt you unless you're a people that sticks the money in the mattress. but where are you going to put it. they didn't have any money at all. it doesn't make sense or encourage the savings and discouraging people. i want to make a point about prices because prices go up. that, to me, is not the inflation. it's one of the bad consequences of the inflation which comes from the increase in the money supply. that's one of the bad effects. you know, you took over the fed in 2006. i have a silver ounce here. this ounce of silver in 2006 would buy over four gallons of gasoline. today it will buy almost 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 edict, not by governments declaring it is money. why is it that we can't consider, you know, the two of us an option? you love paper money. i think money should be honest, constitutional, still in the books, gold and silver legal tender. why don't we use it? why don't we allow currencies to run parallel? they do around the world. one of my options, you know, as much as i would like to do something with the fed, i say the fed is going to self-destruct eventually anyway when the money's gone. why wouldn't we legalize competing currencies? can't people save and put this in a mattress and get four or five times 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. a competing currency, we already have a silver eagle. it's legal tender for a dlal, and some pim say well, it's legal tender, and it's a dollar and it's on the books and they use it and get into big trouble. the government closes them down and you can get arrested for that. what's wrong with talking about parallel currencies and competing currencies. this is something that i think would be a compromise and that we could work along those views. >> first of all, good to see you again, congressman paul. one word on the inflation. of course, those numbers constructed by the bury reof labor statistics and not by the fed, they're done in a serious and thoughtful way on alternative currencies, nobody prevents you from holding the silver or gold. it's perfectly legal to do that. it's also perfectly fine to hold

other currencies or whatever else. in that respect, you can do that. i'd be happy to talk to you about other options. >> that's not money. when you pay taxes to buy a coin or have capital gains tax. 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. you have to get rit of the capital gains taxes people in mexico are talking about this. they're trying to have competing currencies. they've been wiped out too many times with inflation that wipe out the middle class. they allow people to save in a silver currency. i hope we move in that direction. people can vote to.

maybe they can vote for real money. >> i'd be happy to talk with you about it. >> thank you. >> can i make an announcement for the democratic members. we're going to follow the policy on our side. we can't get to everybody here. the committee is too big. our policy will be when mr. bernanke comes back for the second appearance this year, we will begin where we left off so members who don't ask a question today, we will start from there and they will get to ask the question the second time. thank you. >> miss waters, we hope you continue this kor jalt. >> i'm interested in housing. everyone agrees this economy is not going to rebound until the housing market is vigorously

operating. i want to find out what's happening with the servicers and maybe something about principal reduction. on february 9th the federal reserve assessed monetary penalties totaling 776 million on the five largest mortgage servicers pursuant to the orders you issued in april of 2010. they happen to be part of the settlement between the state attorneys general and the federal government announced on the same day. as i understand it, the penalties paid by the servicers issued by fed can be satisfied by loan mottifications that they make under the state ag settlement. in other words, unless the servicers fail to comply with the settlement with ags,le there will be no monetary penalty servicing violations identified by the consent orders. though we don't know all of the details yet because the state ag settlements terms vn released, i

understand that servicers can satisfy at least some of the requirements of the 26 billion ag settlement by writing down loans investor owned loans. can servicers use the write-down of loans held by investors to satisfy the penalties levered by the fed in response to the unsafe and unsound practices? that's the first part of our question. >> no. we're part of the overall agreements, and by participating we helped make it happen. we just released or plans for the companies we oversee. the banks will have to verify that they have reduced 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 have to pay the rest in cash.

on the issue to spur sue residential mortgages, your report -- your federal reserve white paper report acknowledges some of the problems with negative equity, but it never endorses principal reduction as a stabilization strategy. with that said i wanted to ask you what you thought of a speech by the new york fed shortly after your paper came out. mr. dudley suggested that principal reduction could minimize the loss in value on the delinquent loans they guarantee and that a shared appreciation approach could help policy makers to give certain homeowners a windfall. he suggests limits principal reduction people current on their payments. what do you think about the ideas proposed by mr. dudley in ms. spee his speech? couldn't this shared appreciation approach discourage homeowners from defaulting when they could otherwise pay their

mortgage? >> we thought that was to congressional prerogative to make those determinations. we tried to provide a balanced nalgsz of principal reduction. i think it's a complex subject. it's not that we disagree in the goals. we want to reduce foreclosures and delinquencies, and we want people who want to move to be able to do that. there are often a number of alternatives in different situation. if the idea is to just move, than a short sale or deed in lieu might be the effective way to do it. if the goal is to reduce payments then refinancing might be the most effective way to do it in terms of the dollars spent. i think there's 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.