between the unemployment rate and the average length of an ongoing spell of unemployment. i have to admit i was watching christina romer deal with the facts her figures were not on the slide, trying to figure how i might describe that. [laughter] that cloud looks a little like the state of kentucky. what [laughter] i am going to point out to you is the progression looks like west virginia. the red dots per cent monthly figures for 2008 and 2009. at the beginning of the recession and an atomic rate was 5%. the average duration was 17 weeks. -- at the beginning of the recession the average unemployment rate was 5%. this initial divergence is

largely accounted for by a secular shift towards longer spells of unemployment due to the aging of the work force at a much stronger labour force attachment. there is some secular change represented in these relationships we started out with. the first 15 months of the recession, average duration increased with unemployment at roughly the rate you would have expected. this is indicated by the series of red dots that all along the top of the blue cloud and are parallel to the black line. we started off following that trend. since the first quarter of 2009, the average duration has increased much more rapidly than the rise in the unemployment rate would predict. if the extension of insurance benefits while helpful in supporting unemployed house holds, likely accounts for a portion of the recent rise in the unemployment duration. even so, we look at the overall magnitude of the increase as an indicator that labor market

conditions are either bleaker than the unemployment rate alone suggests -- even bleaker. this may explain why the share of the outlook -- the people outside the labour force have grown so much. many people have simply stopped searching for jobs, given the lack of demand for their services and the wages. let's turn to the implications of rising long-term unemployment on the outlook. this -- the rise in long-term unemployment has ramifications for the economy going forward. the likelihood of finding a job tends to decline as an individual remains out of work. this reflects the fact that those who typically have a difficult time finding work will tend to be unemployed longer. longer spells are a symptom rather than a source of an underlying problem in this case. a long unemployment spoke could cause deterioration in the workers situation, leading some

of the long-term unemployed with less bright job prospects even as the economy begins to revive. this could contribute to high unemployment duration for some time. we can gain insights into this dynamic from earlier periods. the third figure highlights the path of vienna plummet rates and duration during the last two severe recessions -- the path of the unemployment rates. both measures rise in tandem during the recession, but during the recovery, unemployment duration remains consistently high for quite some time even as the on and on its rate declines. we expect to see a similar pattern in the near future. as i noted earlier, long-term unemployment tends to lead to permanent earnings losses particular for those who previously invested in a job and industry -specific skills.

to summarize this discussion, labor markets, plummet indicators appear to roughly follow the conventional track, given the severity of recession, but these measures may not fully capture the weakness in the rise in unemployment duration and withdrawal of workers from the labour force. this raises the risk that the recovery and labor markets could be slow even as output returns to a well-established growth pattern. the other side of an economy experiencing growing output but low labor utilization is high productivity growth. productivity has been strong lately, particularly in the past three quarters. this is often the case in the early stages of recovery. as firms meet higher demand for products and services without expanding their work force. a key question today is the degree to which the recent productivity surge reflects the temporary cyclical development or more in during increase in the level or trend raised

productivity. if the gains are predominantly driven by intense cost-cutting, they may be unsustainable once the demand is more resistant. if the level in productivity has risen due to technological or other improvements, hire structural productivity levels will continue. businesses, when i talk to them, are very clear that they have undertaken very deep cuts in their work force, but they have given strong consideration to this and have them just about the right size for how they expect to be producing and meeting customer demand for quite some time. they will tell you that they have achieved these efficiencies and they will continue. what if they are right? what if they are right this time in that implication? the implications for hiring are not clear in this case. tyra levels of productivity will show through in higher

potentials and actual output for the economy. it need not necessarily, because of lower input. technology advances could lead to more hiring and expansion or laborsaving activity. the relative importance of these factors also has consequences for our assessment of the degree to which resources lack exists in the economy. since a higher level of productivity implies a higher path for potential output, this would imply that the recent surges in gdp increased both actual and potential, and consequently no progress on resource closing would be implied by this, if that were the case. this is a stunning implications if that were true. in contrast, some are skeptical that the economy is even operating far below sustainable levels. they might argue that much of the drop in output during the recession is the result of the

permanent reduction in the economy's productive capacity perhaps because certain financial market practices that had enabled additional investment have now been discredited. according to this view, the straw productivity growth of recent quarters continues to offset this decline in the level of potential output. the implication is that vastly less resource black exists. this would have a sobering evocations for forecast going forward, given the level of accommodation in place. -- the implication is that vastly less resource lack exists. >it is possible that longer durations and lower labour force attachment could reflect broader structural changes in the economy, such as a mismatch between the skills of the

unemployed and those demanded by employers. there may be other impediments that currently prevent workers from shifting to the industries where locations where jobs are available, he might have a house you cannot sell easily for the price you paid for it. labor market slack might be lower than what one might infer from the on agglomerate alone. -- from the unemployment rate alone. i have given you several minutes of classic two-handed economist speak. in the final analysis, the sheer magnitude of unemployment today is so large, but there's little doubt in my mind if there is considerable slack in the economy, incorporating alternative views do not alter this general conclusion in my opinion. the debate boils down to whether the amount of slack in the economy is large or extremely

large. having said that, the question i would ask myself many times is should the fed have done more. given this large degree of slack, there's a legitimate question of whether monetary policy could have done more to combat the deterioration in labor markets. as we all know, many policy actions were taken. as the crisis arose, we first used our traditional tools, substantially cutting the federal funds rate and lending to banks to our discount window. as we neared the zero funds rate, we turned to a non- traditional tools, providing liquidity directly to non- banking financial institutions, and supporting a number of short-term credit markets. finally, we reduced long-term interest rates further if, by purchasing additional medium and long term tre is responsive, mortgage-backed securities, and a debt of government sponsored

enterprises. these non-traditional actions helped us avoid what easily could have been an even more severe economic contraction. if the unemployment rate still hit 10% this fall. had we done more, the most plausible action would've been to expand our large-scale asset purchases program. precisely quantify the effect this would have had is difficult. a good place to start is to look at the recent empirical evidence. i think brian was here yesterday to talk on some of this. when significant new asset purchases were announced, are big fluid financial markets build that information immediately into asset prices. right after the march 2009 treasury purchase announcement, 10-year treasury yields fell 50 basis points. comparable declines occurred in option adjusted spreads on the announcement of agency mortgage- backed security purchases in

november 2008. it might be reasonable to infer that doubling the size of the lsats might have doubled the impact on rates. however, i would attach more than usual amount of uncertainties to such an effort. we have a lack of understanding about the interaction between nontraditional policy, interest rates, and economic activity. research efforts at the federal reserve and elsewhere to assess the effects of non-standard monetary policy have been increased significantly, today don't have reliable models to reliably calibrate interventions. there are reasons to expect the impact of recent nontraditional policy actions might not have scaled up those implements. initially responded to the financial crisis with our highest value toole, a reduction in the funds rate. then moved to our best alternative policy, with

interest rates close to zero. finally, we turned to the elsa lsat, to stimulate demand for spending, such as business fixed equipment, housing, and durable- goods expenditures. the influence of lower rates on private sector decision making may have reached secondary importance, relative to the prevailing forces of the housing overhang, business and household washing, and considerably tighter lending standards. moreover, although it's impossible to quantify, a portion of the impact of our non-traditional actions may have come simply from boosting confidence. in the very dark times, it was a year ago this month, i believe households, businesses, and financial markets were reassured that policy makers were acting in a decisive manner. further asset purchases would

not have had an additional effect of this kind to the confidence boost. it was already there presumably. our track -- on a practical level, a portfolio of future purchases would likely have looked differently and their overall effectiveness might have been less effective than our recent experience. the typical monthly purchases of new issuance were so large that led to very little floating supply for private investors. this could have forced a larger lsat program to concentrate more intensely on treasurys. these assets are likely less close substitutes than new ones for many of the instruments used for spending on new capital goods, housing, and consumer durables. -- and durables. finally, we must keep in mind that more monetary stimulus has a cost. these can be considerable at

higher levels. many are already wearing about the inflation implications of the fed's expended balance sheet and the associated large increase of the monetary base. most of the increase in the monetary base is sitting idle in bank reserves because banks are not lending those reserves directly. they're not generating spending pressure. leading the current monetary policy in place intoo would eventually -- leaving the current monetary policy in place for too long would have increased inflation. policy-makers already faced the task of unwinding a sizeable balance sheet at the appropriate time and place. substantially increasing the size of asset purchases could have further complicated the exit process down the road. not today but down the road. changes in economic conditions could alter the cost benefit

calculation with regard to withlsap. hope -- with regard to the lsap. as we have repeatedly indicated, the committee will continue to evaluate its purchase of securities in light of the evolving economic outlook and conditions of financial markets. i will stop there. thank you very much for your attention. [applause] >> thank you very much, charlie. charly has agreed to take some questions from the audience. if we can restrict those to the members of name, that would be appreciated. the microphone? >> one of the things that was striking was when you spoke about the implications if this

is a structural moved in unemployment on our productivity. can you tell us what the full rate of unemployment might have changed to? how much higher could be? >> that is a good question. it depends on how you like to think about the national rate of unemployment. i think of it as much more slowly moving measure of employment. according to some measures. we used to think it was 4.75. i thought 5% was a better, rounder number. some of the structural issues i was talking about that affect unemployment duration, you could probably get estimates substantially higher, maybe as much as a percentage point. that is not how i like to think about it.

audra for longer terms. maybe it's up to 5.75. for what you're looking at in terms of policy issues over the medium term, over the next four years, the gap of an islamic rate todthe unemployment rate t, should be as large as we can keep our focus. >> a few years ago the prime instrument of fed policy was the fed funds rate. the fed is managing the economy with other instruments. yesterday brian talk about the interest-rate on access reserves -- assets reserves. >> i did not have the benefit of hearing brian yesterday, an

excellent presentation on shore. in terms of exit strategy, we have a lot of accommodations in place with a large amount of excess reserves. when the time comes, when it's time to move to less than highly accommodative policy to only accommodative policy to eventually neutral policy, we will have to either find a way to withdraw these reserves or somehow extinguish their power. one way to extinguish their power would be to provide an opportunity calls for banks to not be in the mood to lend as much. remember, we're talking about an environment where the economy is growing, so we want to make sure lending does not get out of hand. we want lending to take off. if interest on excess reserves is a possible tool to do that. reverse re-purchase actions would also have that effect.

but i think, for myself, as the fed funds rate got close to zero and excess reserves were very large, the funds rate was soft, relative to what our intentions were at that time. i would be a little concerned that there will be softness in the fed funds market as we moved up with excess reserves at levels like what we are talking about. i won't be surprised if we rely heavily on interest on excess reserves. we increase that. we expect the funds rate to follow that. we would probably talk about that rate first, primarily in that environment. along with other tools we would be using. eventually when the funds rate which establishes itself, up around 1% or 2%, we will likely go back to that. but frankly we will reexamine that.

>> i would like to follow up on that question. i thought brian did an excellent job yesterday evening. as in the stands it, once the exit strategy has been implemented, we will have a short-term interest-rate and it will be closely related to the reserve. maybe the funds rate will be affected by the other two. that is not clear. the thing i'm wondering about is two of the interstates are not set by the fomc. monetary policy is the job of the fomc. at the fed reminded as recently when they changed the discount rate, changes in the two rates are set by the boards but don't necessarily coincide with the fomc. i'm wondering if this is an issue, if it makes any difference, this legal distinction that the rate paid on reserves and the discount rate are determined by the boards and not by the fomc,

which is the monetary policy maker? >> that is a fair question, given our different governments structures. it's more theater than actually what will matter. during the current environment, the fomc, as we have for all the years i have been observing this, have a very collaborative approach to looking at monetary policy. the regional bank presidents come to washington. we work with governors. we do that's as the federal open market committee, we exchange views and talk about what the proper level of accommodation or restraint is, given what we are looking at. over the past many years, that has translated into what should the funds rate become should be higher or lower. the discussion about do we need more accommodation or less, we continue to have those discussions. the actions will reflect the best thinking from the entire group. i hesitate to even say the

committees. the federal open market committee is 12 individuals, and that's not the entire 18 at full strength that are in attendance and contribute to the discussions. there are many ways in which our letter of the law governance structure does not really capture how we go about doing the decision making process. >> you make an interesting and compelling case for the changed labor market situation affecting your assessment of monetary policy. at the same time, you say we don't have a reliable tool for assessing the impact of monetary policy on employment curious >> that particular comment was about our non-traditional policies. >> i would assume the same would be for the traditional monetary policy. what i'm driving at is do you have any way of getting at

changes in the labour market which clearly to affect monetary policy, at least your questioning of monetary policy, to assess the changes in the monetary policy for labor policy structure, which are not r directly related, such as outsourcing labor? >> those are difficult issues to reliably calibrate, the effect of different business practices on the aggregate data. that is why research is such a vibrant activity at universities and research institutions. there's a lot we don't understand and a lot we can learn. from the standpoint of making monetary policy and living within our dual mandate, focus on maximal employment and price stability, when i was talking about the labor market implications, the first thing on

my mind was not what is the best way to engineer the lowest possible unemployment rate, because it has to be a sustainable level of unemployment, it has to be sustainable levels of growth. what are the implications of these developments for our inflation outlook, because we have a lot of accommodation in place? if you did not have some confidence that there were factors holding back inflation, holding firms back from marking up prices in some very large fashion, then it would give you great pause to the undertaking these policies. as i look at the unemployment rate and long-term duration, measures of output, there seems to be many things holding back inflation expectations. that is the way we tried to use this spirit integrating these into a formal statistical model is a great thing for researchers to do. i have contributed to that

literature. when i say we need a robust suite of models to capture all these things, that is going to keep macro economists busy for the next few decades. >> a quick question, charlie, procedural, not detail and not issues. could you -- i spent a lot of time explaining to audiences and students how the fomc makes decisions and how you make decisions. could you briefly run through how you prepare for a meeting? what sorts of paper is, materials, etc., procedural, not any detail? >> with the reserve bank's we have dedicated research staffs that supports me in the thinking about how the economy -- in how things are playing out.

we also have our bank supervision staff which reminds me of what banking conditions are and at a grassroots level how things are recording well with local conditions in our beige book type of operations. we begin this before -- two weeks before the fomc meeting. when the beige book is published we have already been given a lot of information. the research staff starts to put together a forecaster talk about special issues and nontraditional policies we are contemplating, what effect might they have. when i said we announced there would be 1.5 trillion dollars and that announcement changes interest rates by 50 basis points, there's a ton of research that goes into that assessment and understanding the uncertainty that is attached to that. we need before we go to washington. from the reserve bank standpoint, we bring information

to washington from outside of washington, to see that it accords with financial data. we also have the benefit of seeing the board's forecast from their analysis, so it is a value added process for my department in terms of you get to see this and your are other things you should look at. then we go to washington and you have 18 people sitting around the table. all of their views are listens to. the german plays a strong role. chairman bernanke -- the chairman plays a strong role. he has been a leader and a collaborator and a listener. i think we have gotten about as good monetary policy as we could under the circumstances. maybe not in exactly the sequence that would have been perfect, with the benefit of hindsight. but everybody talks. 12 votes. but everybody talks and listens. >> thank you very much, charlie.

we really appreciate it. [applause] so, we have a net working break until 10:45. then we will resume in the breakout sessions in this room. thank you. >> which four presidents lived past 90 years old? john adams, herbert hoover, ronald reagan, gerald ford. find these and other presidential fax at our newly updated book "who is buried in grant's tomb?" >> its a guidebook and a travel log and a history worked, biography of each of these presidents and what you tell about people dead end of their lives. >> of resource guide of every presidential gravesite, the story of their final moments, and insights about their lives.

it's now available at your favorite bookseller or get a 25% discount at the publisher's web site. >> "washington journal" is next. we will look at today's news and take your phone calls. the house gavels back in this morning and will work on the war powers resolution on afghanistan sponsored by clause in it. live coverage on c-span at 10:00 eastern. .