we'll get to the chairman. we all look forward today to chairman bernanke's report on the state of the economy and his perspective on additional actions that the federal reserve may take to strengthen the economic recovery. with the may jobs report, this past friday, it's clear that washington needs to continue our focus on creating jobs. today's hearing is especially timely for that reason. there are a number of bipartisan actions congress can take right now, right now, to create jobs and strengthen the recovery. we know that the transportation bill now is one opportunity to create jobs. we've got to get that legislation out of conference and signed into law. we know that that infrastructure, transportation infrastructure is central to our national competitiveness and the bipartisan bill passed in the senate with 70 votes -- 74 votes

i should say, would create almost 3 million jobs by accelerating those projects. second we should do more to support small business by targeting tax incentives to firms that expand their payrolls. we can help strengthen the recovery. a bill that i introduced would provide a tax credit of 10% for any increases to the payroll tax base that could be hiring workers, increasing hours or raising wages of existing employees. third the senate has taken up the farm bill which is legislation that cuts the deficit by some $23 billion. and i think has tremendous bipartisan support. it helps farmers manage their risks relating to rapidly fluctuating prices for their crops, and it provides critical support to rural america, part of our country that was especially hard hit in the recession and still has major

challenges. we have fiscal challenges to tackle in a bipartisan manner as well. without congressional action the automatic spending cuts contained in the budget control act of 2011, along with the expiration of several tax cuts, will present a significant economic headwind in 2013. the congressional budget office recently estimated that real gdp growth will slow to just .5% in 2013 unless washington, in fact, acts. chairman bernanke has expressed concerns regarding the risk that a so-called fiscal cliff presents to the recovery. i share that concern and i know a lot of others share that same concern. let's be clear, there are right ways and wrong ways to balance the budget. we have to be smart about the cuts we make so we can keep growing the economy and create jobs rather than make a bad situation even worse. that means we should not

increase taxes on middle income families. we can put america on the road to full recovery unless we all agree on tackling the huge budget deficit and debt that america faces. we need to continue to cut spending, no doubt about that. and certainly you cannot reduce the deficit by spending tens of boilions of dollars on tax cuts for the very wealthiest. additionally as chairman bernanke was before this committee when we spoke about this, i'd like to address very briefly currency manipulation especially on the part of china. because it has such a harmful impact on the american economy and american jobs. we recently learned that china allowed its currency to weaken more in may than any month since 2005. chairman bernanke has testified previously that allowing the yuan to appreciate would be good for both the u.s. and china's economy as well. the chinese government

manipulates their currency so that their goods sell for less than they should. some people may think it's some far off theoretical issue. it's not. when china cheats we lose jobs. so i urge my colleagues in the house to pass the currency exchange legislation that deals with this issue, it's passed in the senate in a bipartisan way and we want to get that out of the house. so to sum up our economy while in much better shape than three years ago is still recovering from the great recession. with unemployment above 8%, the labor market still needs to heal. europe continues to wrestle with debt issues as we'll. we know that, which will continue to impact u.s. financial markets and the global economy. against this backdrop it's clear we need the stay focused on promoting stronger economic recovery and of course that means jobs. chairman bernanke, thank you for your testimony and now we'll turn to vice chairman brady. >> thanks for holding this hearing and thank you chairman

bernanke for appearing before the committee at this critical juncture to discuss america's economic outlook. while we're all anxious for signs of a strong sustainable recovery, the recent jobs report from may was grim, with u.s. employers creating a mere 69,000 non-farm pay roll jobs, the fewest in a year. job growth has dropped by two thirds for the first quarter of the year, business and consumer confidence is down, first quarter gdp estimates were revised downward. 4 1/2 years after the recession began, americans are enduring the 40th straight month of an official unemployment rate at or above 8%, this is a post-world war ii record. in much of the drop in unemployment rate from its high of 10% in october 2009, is attributable to americans simply dropping out of the work force. the labor force participation rate is scraping a 30-year low. without the severe drop in the number of workers since the

recession began, the unemployment rate would be nearly 11%. since the recession ended our economy has struggled to grow at an annualized quarterly increase of 2.4% and to place in perspective of the ten economic recoveries since world war ii, lasting more than a year, this recovery ranks, regrettably, 10th. and dead last is unacceptable by any standard. today, because our economy isn't flying strong and steady at 50,000 feet as it should be at this point, but rather flying low and slow, we are increasingly vulnerable to ternle shocks. a bank run has begun in greece. banks are depleting their eligible collateral from the european central bank, not just greece but the european union as a whole appears to be in recession. questions of whether greece orther member states of the

european monetary union will exit the euro, and reissue national currencies are dominating the news. i hope we'll get your perspective on europe including the likelihood of a greek exit from the eurozone, the risk of other member states and the consequences of these possible events for the european union, united states, and the rest of the world. when you appeared before this committee last october in response to a question about the tools you're considering to mitigate and limit the adverse economic impact on the united states, you testified that you believe european central bank has enormous capacity to provide liquidity to european banks, that traditional currency swaps can provide dollar funding for money markets, that the main line of defense is adequate supervision of well capitalized american banks, with the fed standing ready to provide as much liquidity against collateral as needed as lender of last resort to the american

banking system. is that still your assessment? and are you considering any tools beyond those? in addition, american taxpayers and lawmakers, like their counterparts in germany, are becoming increasingly concerned that they will be asked to bail out how ever indirectly, struggling european governments and banks. there is a growing concern that the u.s. treasury will try to bail out the eurozone directly through the exchange stabilization fund or indirectly through the international monetary fund. the fed has a challenge as well, explaining to a skeptical congress why traditional currency swap lines with european central bank will not turn into an indirect bail-out of eurozone countries. at the same time the european economies are weakening growth is slowing in both china and india. given the prospects of a global slowdown, some economists are speculating that the federal reserve may initiate a third round of quantitative easing. during the questions i would like to discuss with you whether

and under what conditions the federal reserve would consider launching a third round of quantitative easing. it's my opinion the fed has done all it could do and perhaps too much. further quantitative easing won't stimulate growth and create jobs, there exists a real risk that the massive amount of liquidity the fed has already injected into the economy could trigger higher inflation before the fed can execute its exit strategy. i also believe another round of fed intervention will increase uncertainty among job creators while ignoring the genuine reason for low business investment and job creation which is sound, timely, fiscal policy. the businesses i look to along main street aren't holding back on hiring because they are waiting to learn what the government will do for them. they are holding back on hiring for fear of what the government will do to them. the obsessive push for higher taxes on job creators, the

unprecedented tax and fiscal cliff we face at the end of this year, the unsustainable structural federal debt and deficits along with the flood of red tape and fear of the consequences of the president's health care law, these are the two drags on the economy. no matter what actions the fed take, without strong leadership by the president today, and action by congress now, on these fiscal issues, americans will not see the jobs or the strong recovery we deserve. of course, the combination of sluggish growth and rapid accumulation of federal debt is a toxic brew that could eventually spark a debt driven economic crisis here at home unless the united states soon reverses course. finally mr. chairman, last january federal open market committee adopted an explicit inflation target of 2% measured by the price index for personal consumption expenditures by doing so the fed has taken important step toward establishing a rules based monetary policy going forward that should help to achieve

price stability and protect the purchasing power of the dollar over time, nevertheless, your adoption of the target raises many questions as it answered, is the 2% target a minimum, a mid point or a maximum. how wide is the range? and how long will the federal reserve tolerate a deviance from the range before taking action? i appreciate that you distinguish between that which monetary policy can control, namely prices, and that which monetary policy cannot, namely, employment. my letter i request further on this policy statement in more depth. with that chairman, i again thank you for appearing before the committee. i look forward to your testimony. >> thank you, vice chairman brady. just to housekeeping matters before i introduce chairman bernanke. one is we'll keep to our time limits more strictly sometimes than we do because of the number of members here. two, the senate has a vote at 10:30, unless that -- i don't think that's going to change. we will accommodate members for

that reason. but let me briefly introduce chairman bernanke. dr. bernanke began a second term as chairman of the board of governors of the federal reserve on february 1 of 2010. dr. bernanke also serves as chairman of the federal open market committee, the systems principle monetary policy making body, he originally took office as chairman on february 1, 2006, when he began a 14-year term as a member of the board. dr. bernanke was chairman of the president's council of economic advisers from june ever '05 to january of '06. dr. bernanke was a chaired professor at princeton university, he has been a professor of economics and public affairs at princeton since 1985. mr. chairman, welcome. >> thank you. chairman casey, vice chairman brady and other members of the committee, i appreciate this opportunity to discuss the economic outlook and economic

policy. kplik growth has continued at a moderate rate so far this year. real gdp rose at an annual rate of 2% in the first quarter, after increasing at a 3% pace in the fourth quarter twof 011. growth last quarter was supported by further gains in private domestic demand which more than offset a drag from decline in government spending. labor market conditions improved in the latter part of 2011 and earlier this year, the unemployment rate has fallen about one percentage point since last august and pay roll employment increased 225,000 per month on average during the first three months of this year, up from about 150,000 jobs added per month in 2011. in april and may, however, the reported pace of job gains slowed to an average of 75,000 per month, and the unemployment rate ticked up to 8.2%. this apparent slowing of the labor market may have been exaggerated by issues related to

seasonal ajuriesment and the unusually warm weather this past winter but it may also be the case that the larger gains seen last year and early this year were associated with some catch-up in hiring on the part of employers who had paired their work forces aggressively during and after the recession. if so, the deceleration in employment in recent months may indicate that this catch-up has largely been completed and consequently that more rapid gains and economic activity will be required to achieve significant further improvement in labor market conditions. economic growth appears poised to continue at a moderate pace over coming quarters supported in part by a monetary policy. in particular, increases in household spending have been relatively well sustained. income growth has remained quite modest but the decline in energy prices should provide some offsetting lift to purchasing power. while the most recent readings have been mixed, consumer

sentiment is up noticeably from its levels late last year. and despite economic difficulties in europe the demand for u.s. exsupports has held up as well. the u.s. business sector is profitable and has become more competitive in international markets. however, some of the factors that restrained the recovery persist. notably, households and businesses appear cautious about the economy. for example, according to surveys, households continue to rate their income prospects as relatively poor and do not expect economic conditions to improve significantly. similarly, concerns about the developments in europe, u.s. fiscal policy, and the strength and sustainability of the recovery have left some firms hesitant to expand capacity. the depressed housing market has also been an important drag on the recovery. despite historically low mortgage rates and high levels of affordability many prospective home buyer cannot

obtain mortgages. at the same time a large stock of vacant houses continues to limit incentives for the construction of new homes, and substantial backlog of foreclosures will likely add to the supply of vacant homes. however, a few encouraging signs in housing appeared recently including some pickup in sales in construction, improvements in home builder sentiment and the apparent stabilization of home prices in some areas. banking and financial conditions in the united states have improved significantly since the depths of the crisis. notably recent stress test kons deducted by the federal reserve of the balance sheets of the 19 largest u.s. bank holding companies show that those firms have added about $300 billion to their capital since 2009. the tests also showed that even in an extremely adverse hypothetical kpl lal scenario. lending terms and standards have

generally become less restrictive in recent quarters though some borrowers such as small businesses and as noted potential home buyers with less than perfect credit are still reporting difficulties in obtaining loans. concerns about sovereign death and the health of banks in a number of euro area countries creates strains in global financial markets. the crisis affected the u.s. economy as a drag on our exports waeg on business and consumer confidence and pressuring financial markets and institutions. european policymakers have taken a number of actions but more will likely be needed to stabilize euro area bank, calm market fears about sovereign finances, achieve a workable fiscal framework for the euro area and lay the foundations for longer term economic growth. u.s. banks have greatly improved their financial strength in recent years as i noted earlier. nevertheless, the situation in europe poses significant risks to the u.s. financial system and

economy and must be monitored closely. as always, the federal reserve remains prepared to take action as needed to protect the u.s. financial system and economy in the event of financial stresses escalate. another factor likely to weigh on the u.s. recovery is the drag exerted by fiscal policy. reflecting ongoing budgetary pressures real spending by state and local governments has continued to decline. real federal government spending has also declined on net since the third quarter of last year, and the future course of federal fiscal policies remains uncertain as i will discuss shortly. with regard to inflation, large increases in energy prices earlier this year caused the price index or personal consumption expenditures to rise at an annual rate of 3% over the first three months of the year. oil prices and retail gasoline prices have retraced those earlier increases. increases in the prices of oil or other commodities are

unlikely to result in persistent increases in overall inflation so long as household and business expectations of future price changes remain stable. longer term inflation expectations have been quite well anchored according to surveys and as derived from financial market information. for example, the five-year measure of inflation dependtation from yields on nominal and inflation protected treasury securities suggest that inflation expectations among investors have changed little on net since last fall and are lower than a year ago. meanwhile, the substantial resource slack and u.s. labor and product markets should restrain inflationary pressures. given these conditions inflation is expected to remain at or slightly below the 2% rate that the federal open market committee judges consistent with our statutory mandate to foster maximum employment and stable prices. with unemployment still quite high and the outlook for

inflation subdued and in the presence ever significant downside risk to the outlook posed aboutpy strains in global financial markets, the f-1 c has continuesed to maintain a acdaytive stance of monetary policy. the target range for the federal funds rate at 0 to .25% and the committee indicated that it anticipates economic conditions are likely to warrant low levels to the federal funds rate at least through 2014. in addition the federal reserve has been conducting a program announced last september to lengthen the average maturity of its securities holdings by purchasing $400 billion of longer term treasury securities and selling equal amount of shorter term treasury securities. the committee also continues to reinvest principle received from holding of agency debt and mortgage-backed securities, in agency mbs and roll over its maturing treasury holdings at auction. these policies have supported the the economic recovery by putting downward pressure on

interest rates including mortgage rates and making broader financial conditions more acdaytive. the committee reviews the size and composition of its security holdings regularly and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability. the economy's performance over the medium and longer term will depend importantly on the course of fiscal policy. fiscal policy makers confront daunting challenges. as they do so they should keep three objectives in mind. first, to promote economic growth and stability the federal budget must be put on a sustainable long run path. the federal budget deficit which averages about 9% of gdp in the past three fiscal years is likely to narrow in coming years as the economic recovery leads to higher tax revenues and lower income support payments. nevertheless, the cbo project current policies continue the budget deficit would close to 5% of gdp in 2017, when the economy

is expected to be near full employment. more over, under current policies and reasonable assumptions the cbo projects that the structural budget gap and the ratio of federal debt will trend upward there after in large part reflecting escalating health expenditures and the aging of the population. this is clearly unsustainable. at best, rapidly rising levels of debt well lead to reduced rates of capital formation, slower economic growth and increasing foreign indebtedness. at worse provoke a fiscal crisis that could have konss for the economy. to avoid such outcomes fiscal policy must be placed on sustainable path that results in a stable or declining ratio of federal debt to gdp. even as fiscal policy makerses address the issue ever fiscal sustainability, a second objective to be unnecessarily impeding the current recovery. indeed a severe tightening of fiscal policy at the beginning of next year that is built into

current law, so called fiscal cliff, would if allowed to occur pose a significant threat to the recovery. more over uncertainty about the resolution of these fiscal issues could itself undermine business and household confidence. fortunately, avoiding the fiscal cliff and achieving long term fiscal sustainability are fully compatible and reinforcing objectives. preventing a sudden and severe contraction in fiscal policy will support the transition back to full employment, which should aid long term fiscal sustainability. at the same time a creditable fiscal plan could help keep longer term interest rates low and improve household and business confidence, thereby supporting improved economic performance today. a third objective for fiscal policy is promote a stronger economy in the medium and long term through the careful design of tax policies and spending programs. to the fullest extent possible

federal tax and spending policies should increase incentives to work and save, encourage invs.ment in work force skills, promote research and development and provide necessary public infrastructure. although we cannot expect our economy to grow its way out of federal imbalances without significant adjustment in fiscal policies, a more productive economy will ease the trade-offs that are faced by fiscal policymakers. thank you. i'd be glad to take your questions. >> thank you, chairman bernanke. i'll start with the first round of questions. and i'll set forth the predicate for the question before i ask. based upon three news items i'll call them. first of all we know that china announced just today i guess, that it's cut its bench mark lending rate for the first time in nearly four years. in order to reverse an economic slowdown. secondly, the european central bank hinted at least, that it would take no further action to

aid the faltering european economy. third, two federal board reserve governors and vice chair yellen have hinted at additional action by the federal reserve. so based upon those three items and based upon your testimony, the basic question i have for you, is the federal reserve planning to take any additional action in the short-term to spur economic growth and create jobs? >> m chairman, first i think china and europe face rather different economic situations than we do. we obviously have to make our judgments based on what's happening here in the united states. looking forward to our meeting in about 10 or 11 days, i think the main question we have to address has to do with the likely strength ever the economy going forward. as i discussed in my testimony,

the weakness in labor markets in the last couple of months may reflect the end of a catch-up period in which employers were offsetting the very sharp declines in employment that occurred during and after the recession. if that analysis is correct, then going forward in order to see continuesed improvement in employment and lower unemployment rate, we'll need to see growth at or above the trend rate of growth. so that's the essential decision and the central question that we have who look at. will there be enough growth going forward to make material progress on the unemployment rate? so, my colleagues and i are still working on our own assessments, staff are working on their updated forecasts, we'll have a new round of economic projections by all the participants in the f 1 c between now and the meeting.

and that's i think a key question. if we decide that further action is required, then of course we also have to decide what action is appropriate or what communication is appropriate. we have a range of options. obviously the traditional reduction in the short-term interest rate is no longer feasible but we have options that we can consider, in looking at those we have to make some difficult assessments, both about how effective they would be and whether there are costs and risks associated with those steps that would outweigh the benefits they might achieve. so we have obviously i can't directly answer your question, it's too soon for me to do that. and we have a committee meeting which will try to evaluate these questions but we both i think the key question we'll be facing will be, will economic growth be sufficient to achieve continued progress in the labor market. and our mandate for maximum employment says that we should be looking to try to achieve

continued improvement. >> thank you. that helps to give us a sense of how you are approaching the question. i want to ask you about the so-called fiscal cliff you have spoken to a number of times. a number of americans have a sense of it. when you line up the matters that we've got to confront in literally just a number of months, the question of tax cuts, the automatic spending cuts that are put into placely last year's budget control act, the payroll tax cut expiration, federal unemployment insurance expires, and a whole host of other challenges. can you assess, if you can assess it, we'd want to hear your assessment, of the impact on the economy just on one of those items, specifically, if the tax cuts for middle income folks were to expire. just that particular question.

if you can make an assessment of that. >> well, the potential expiration, i'm not sure i can break it down to the different components but the potential expiration of the so-called bush tax cuts, 2001-2003 tax cuts is the single biggest item in the fiscal cliff. and would have, i think, if everything else held constant, would have an adverse effect on spending and growth in the economy that would be significant. now, in saying that, i'm, again, talking about the size, the fiscal impact of that. i'm not necessarily saying that the right thing to do is to extend those cuts, it could be there are other steps you could take that would have a similar impact. but that is the single