would you ever dream of sending them a bill for a personal expense? if you were to leave them anything? would you leave them a bill? we cannot leave the children of america with any bills for any fiscal deficit either. it wouldn't be the right thing to do. but in order for us to do the right thing, it is time for a serious reality check. and that's the opportunity mr. dicks was giving us today, the rules committee rejected that, i hope that in the weeks ahead, depending on what happens here today, let's move on with it so we can spend whatever time it takes to do it right, nothing less is at stake than the economic security of our country , the well-being of our children , the well-being of our children and the confidence that the american people have in what we are sent here to do for them. with that, madam speaker, i

yield back the balance of my time. the speaker pro tempore: the minority leads back the balance of her time. the gentleman from kentucky. >> madam speaker, i yield myself one minute. the speaker pro tempore: the gentleman is recognized for one minute. >> to point out to the body that over the last two years, the congress went on a spending spree and increased spending by 84%. mr. rogers: in just two years. you ran the deficit up, the annual deficit, now two in a row, trillion-dollar-plus deficits a year, record breaking, we've never had that before, you've ran the debt up to now we're bouncing against the ceiling and the congress will be called upon to increase the debt ceiling. there were no appropriations bills passed last year at all, thus that's why we're here today. so let's talk about the spending

spree that we're trying to slow down and stop, madam speaker. with this bill. i yield back that time and yield two minutes, three minutes to the gentleman from georgia, a member of our committee, mr. graves. the speaker pro tempore: the gentleman from georgia is recognized for three minutes. mr. graves: thank you, madam speaker. and i appreciate the chairman for clarifying some things that we just heard because i was at a loss, thinking i was going to need much more than three minutes to, you know, rewrite some of what we just heard there and correct the historical account of the last several years. we heard the la. ing and wailing today from -- lamenting and wailing today of the other side of the aisle and it's amazing to hear about why are we here, why are we in this position today? deficits of over $6 trillion that they signed the bills to spend. over $6 trillion. bill clinton was president for eight years, the last four years

we didn't raise the debt at all, unlike every one of the republican administrations where we raised it on a regular basis. not at all during the last administration. the last four years of mr. clinton's. and he ran the only president in your lifetime, and mine and i'm older han -- than you are, a $69.2 billion surplus. look it up, no argument, but let me say something. irrespective of who's responsible, we are responsible for fixing it. republicans and democrats, the american people know that we have a crisis confronting us. they know there is no option other than to deal with this realistically. i would call everybody in this body, republican, democrat, liberal, conservatives, attention to an article that was written by david brooks today in "the new york times." read it. read it.

we all ought to read this, take it to heart. i call it to my conference's attention or caucus' attention this morning. our deep debt is a serious danger to our economy. to our future and our children's opportunities. the american people want us to bring the debt down, they said so very loudly. and i doubt there's a member who disagrees. democrats believe that spending cuts are part of the solution, let there be no mistake. we need to cut spending. but we also believe that those cuts must be smart and targeted, not pegged to an arbitrary number. one of your staffers, when you put the pledge to america, came forth with a figure, $100 billion. that's a nice, round figure. $100 billion sounds good. good p.r., good spin, $100 billion.

read david brooks, no ta analysis was given to that figure, no figures were held on that figure. nobody could testify on the cuts that were proposed to reach that figure. we have to cut the spending, we can do without some spending. not the vital investments, however, that are helping to grow our economy, helping our private sector innovate and creating the jobs of the future. during the clinton administration i will tell my young friend from georgia, 22 million new jobs. during the bush administration we lost eight million jobs. 30 million job turnaround. that's why there was so much spending on which mr. rogers spoke. $700 billion of that was asked for by the bush presidency, secretary paulson and mr. bernanke. so that we didn't fall into a depression for the first time since herbert hoover. this president has been trying to bring us out and frankly is succeeding.

unfortunately the republicans passed a spending bill full of short-sighted and indiscriminant cuts. do we need cuts, yes. do we need short-sighted and indiscriminant cuts, no. just over a week ago you would cut billions in energy and medical research, kick 200,000 children out of head start, make college more expensive and stop 21st century infrastructure projects in 40 states. that's what mr. zandi was talking about, that's what goldman sachs is talking about. cuts like these could cripple america's competitiveness and job growth. according to moody's analytics' chief economist mark zandi, republican cuts would cost america a total of 700,000 jobs. the economic policy institute puts it at 800,000. rather than such job destroying policies, both of us, both parties need to come together

and reason together. frankly the american public doesn't care who works with whom, they just want it to work. this is no way to fund the largest enterprise in the world on 14 day cycles. the gentleman criticized us for doing it. we should have been criticized, but let me tell my friend when he didn't mention, one of the reasons we did it, can i have an additional minute? the speaker pro tempore: the gentleman is recognized for one additional minute. mr. hoyer: we could not get 60 votes in the united states senate. in order to move a bill forward. keeping our government running is vital to our economy. none of us should want to shut down the government. it is also vital to the millions who rely on government every day , the sooner we can agree on a long-term package of smart cuts, not reckless, arbitrary job-destroying cut, the sooner we can stop funding the government in disruptive

two-week incements. the gentleman was correct, we ought not to do that. we need to pass a seven-month funding so the government and all who rely on the government, who work for the government, who have contracts with the government, can rely on some certainty. you've talked a lot about certainty on your side of the aisle. you're absolutely right. we need certainty. the business community needs certainty. individuals need certainty. and the government needs certainty. rather than passing two-week continuing resolutions, i urge republicans and democrats to work together on a long-term solution in this case, long-term is seven months. to reduce spending, to help balance our budget and to try to bring rashality to this process -- rationality to this process. we cannot, my friends on the republican side of the aisle and the democratic side of the aisle, continue to look at 15% of the budget and expect us to get to where we need to be from

where we now are. and i yield back the balance of my time. the speaker pro tempore: the gentleman's time has expired. the gentleman from kentucky. mr. rogers: may i inquire of the time remaining? the speaker pro tempore: the gentleman has 9 1/2 minutes remaining. and the gentleman from washington has four minutes remaining. the gentleman from kentucky. mr. rogers: madam speaker, i yield two minutes to a brand new member of the committee, the gentleman from kansas, mr. yoder. the speaker pro tempore: the gentleman is recognized. mr. yoder: thank you, madam speaker. we can debate who is at fault but i think we have an agreement. with record deficits and debt, coupled with 20 months straight unemployment, of 9% unemployment, it is time for us to get serious about the crushing affect of our runaway debt that is having on our economy. as speaker boehner has said, just like a bankrupt business can't create jobs, a bankrupt country can't create jobs. . it's not democrats

or republicans but families and individuals and business owners, they are the casualties of this government spending spree and we are at a crossroads. reasonable spending reductions or head towards crushing deficits. the tax increases that will be needed to alleviate would wipe out individuals and family businesses. current income tax rates would need to double across the board to close the deficits of this administration. you can't create jobs under these devastating taxes. we must reduce spending. we have a choice as the american people. we can choose prosperity, lower taxes and reduced debt or go the other direction and choose record-breaking deficits. we have a choice to make today and it's my hope that members will choose to keep government open and make modest reductions

and we will pass this necessary resolution to begin the pathway towards the necessary prosperity in this country. i yield back. the speaker pro tempore: the gentleman yields back the balance of his time. the gentleman from washington. mr. dicks: i reserve. the speaker pro tempore: the gentleman reserves the balance of his time. the gentleman from kentucky. mr. rogers: i yield two minutes to the the gentleman from virginia, mr. hurt. the speaker pro tempore: the gentleman is recognized for two minutes. mr. hurt: last november, the people i represent, virginia's fifth district sent a message that america must make a bold departure and put a stop to the out of control spending. no longer can we continue on the path of unchecked reckless spending that has crippled our economy and left us with $14 trillion in debt, 1.6 trillion in deficit spending and high unemployment rate. last year, the 111th congress completely failed in its

fundamental responsibility to adopt a budget for the american people. remarkably they punted that responsibility and have kept the federal government operating over the last five months by adopting continuing resolutions. fortunately, the new 112th congress has accepted this responsibility to clean up the mess. republicans and democrats worked late into the week to get a proposal to the senate that recognizes the critical need to adopt the budget while cutting $100 billion in spending. after five months of failed leadership by senate democrats, we now find they need more time. this is truly unbelievable. over the past week, back at home in the fifth district, i was reminded again and again by my constituents that now is time for leadership, not for excuses. while the house takes up another resolution today that will continue to temporarily fund the government while keeping our

commitment to the people to cut an additional $4 billion in spending, it is critical that the sthat join us to produce a responsible funding resolution that makes the cuts necessary to get our fiscal house in order. for the sake of the next generation of americans, we must act and must act now to secure our future. i yield back. the speaker pro tempore: the gentleman yields back the balance of his time. the gentleman from washington. mr. dicks: i yield two minutes to the gentleman from virginia, the ranking member of the interior and envirmente appropriations committee, jim moran. the speaker pro tempore: the gentleman is recognized for two minutes. mr. moran: so many of our brand new colleagues seem to have run on the thesis that government can't be the solution to the problems but it's the problem, that it can'ted be counted upon to help people and can't be

counted to invest on america's long-term interests. seems as though now they have been elected, they are doing everything to prove themselves to be right. this is no way to run a government, a two-week c.r.? we don't have any great problem with the components of this c.r., except for the fact that it's two weeks. it should be a seven-month c.r. and we should tackle the appropriation bills themselves. if it is a seven-month c.r., it shouldn't be a dump truck of legislation that includes in it virtually every controversial issue that this congress has dealt with over the last 20, 30 years. my good friend from kentucky, the chairman of the committee, will recall that quaint phrase that we would employ in committee, that this amendment

is not in order because it constitutes legislating on an appropriations bill. well, we legislated everything. this bill has more poison pills in it than rasputen's medicine cabinet. everything is thrown in here and thrown in the middle of the night. bills we had considered carefully in committee and were debated carefully and then resolved. and yet, sometimes a 10-minute debate, those bills were dispensed with. that's not the way an appropriations bill should be brought to the floor. it ought to be a clean continuing resolution if we are going to do a c.r. can i have another 30 seconds. the speaker pro tempore: the gentleman is recognized for 30 seconds.

mr. moran: the fact is we know we can do this. we can get a good appropriation bill. we can make surgical cuts and we can agree on those surgical cuts. but let's not try to put together a dump truck that includes in it every possible controversial issue that we know we can't resolve. that's not in the long-term best interests of the american people. and it ought to be an embarrassment to our appropriations process. i would hope we would vote against this continuing resolution simply because it's only a >> secretary of state hillary clinton testified about muammar gaddafi the and the political unrest in the middle east. that is next on c-span. then ben bernanke on the state of the u.s. economy. one washington journal, topics

include congressional efforts to reduce the federal deficit. fed chairman ben bernanke is back on capitol hill tomorrow for the second time this week. he will testify about the u.s. economy at a house financial services committee hearing beginning at 10:00 a.m. eastern. you can watch it live on our website, c-span.org. secretary of state hillary clinton testified earlier about libya, iran, egypt, and the political unrest in the middle east. she said that with these challenges around the world, that the foreign-aid budget could not be cut. she testified that the house foreign affairs committee. this is a to our-15 minute portion of the hearing. -- this is the 2.25 our portion

of the hearing. >> it is a pleasure to welcome you to the committee for the first time as chairman. in order to maximize discussion, after my opening remarks and those of the ranking member, i will ask you to summarize and then we will move directly to questions from members. we must face it -- we must maintain firm ties with our allies, and enemies must remain clearly identified. i hope this administration can tell who is to. in lebanon, we have witnessed the conquest of the country by the iran-syria-hezbollah axis. the u.s. should never have been supporting the u.s. -- a government with hezbollah. now let them in control, what is the justification for continued

u.s. taxpayer investment? in egypt and elsewhere, successive u.s. and ministrations failed to move beyond the status quo and prepare for the future. we should not associate those protests with events transpiring in tripoli, cairo, and beirut. there is one constant -- we have failed to effectively use our resources to help build strong, accountable institutions that protect basic human rights. this administration's prior decision to cut support to pro- democracy civil society groups in egypt, and only fund groups pre-cleared with the mubarak government, is a mistake we must never repeat. then there is the mistake of the bush administration and continued under the current administration to conduct business as usual with the libyan regime, following the lifting of un security council sanctions imposed in response to libya's estate-sponsored attacks, which claimed the lives of many, including melina

husband -- hudson and john cummock, and john's wife, victoria, my constituent, and molina's father and aunt are in the audience today. madam secretary, of the letter they have written requesting yours and director mueller's help in securing information on the role of gaddafi and others in attacks on western targets in the 1980's and 1990's. some of us objected to the normalization of relations with the libyan regime, raising its deplorable human rights record. regrettably, libya's deployment of fighter jets and tanks to murder those daring to express a desire for libya is gross human rights abuses. on the contrary, it was elected to the human rights council last year. days ago, the council was forced to act due to that gaddafi's regime's slaughter of hundreds of people in the street. however another un entity did find time just weeks ago to target our democratic ally,

israel. the united nations to condition its funding for the un on real reforms. just as the administration officials talk about smart power and smart sanctions, when it comes to the un, we need smart withholding. in our hemisphere, the u.s. approach is one of misplaced priorities. the havana tyranny has again ramped up its assault against the democracy movement in cuba by detaining dozens of peaceful protestors, beating mourning mother, and this weekend sending its shameless thugs after the ladies in white. yet the administration has repeatedly eased regulations on the castro rising. just weeks after the latest appeasement, the dictatorship announced its intention to seek a 20-year prison sentence for u.s. citizen alan gross, whose show trial starts on friday. when it comes to those countries that do share our values and priorities, there appears to be no end to the stall tactics and

empty rhetoric. all partners in colombia -- our partners in colombia and panama have gone above and beyond meeting the politically determined and ever-changing benchmarks placed in the way of long-awaited free trade agreements. hondurans who fought for their constitution and rule of law against mel zelaya's attacks on their democracy are still suffering under the veiled reprisals of the state department. these examples crystallize the complaints that the american people have about foreign assistance programs. my constituents are asking, what is the return on our investment? one from miami whose letter was posted in the "miami herald" last monday wrote -- we are the most generous nation in the world, and foreign aid should go to those countries friendly to us. when was the last time we heard of good will toward america? the majority of us have not, and

do not expected. some attempt to obscure the fact for novel ways of slicing and dicing the numbers. but the budget request for the international affairs continues to sit back increases of recent years. the cumulative 64 -- $61.4 billion international affairs request is a 42% increase over fiscal year 2008 levels. the increases are more dramatic when we focus on the state department's own salaries and operations. the $12 billion state program request is a 25% increase over 2010 actual levels, and nearly 75% since 2008. there is also the problem of misplaced priorities. the administration should not promos -- propose massive increases in global health and climate change programs while cutting key programs such as the trans-the sahara counter- terrorism partnership and the

partnership for regional east africa counter-terrorism, particularly as al qaeda affiliates in africa set their tights -- their sights on american targets, and american citizens are being captured and killed by somali pirates. the safety of our men and women serving with distinction in afghanistan, and that countries demonstrate -- transition for a more stable and democratic future, must further guide is. pakistan must also do more to meet pressing united states concern, including the release of roommate -- raymond davis, our detained american diplomat, and shifting its approach to afghanistan away from on proxies and toward constructive and legitimate political partners. and we must make those decisions in light of the unfortunate fiscal realities facing our government and every american family. those who complain about diminished levels of international affairs funding need to ask themselves -- how much less would an insolvent united states of america be able

to do? our funding baseline has to change. the real question is not, it is this activity useful, but rather, is this activity so important that it justifies borrowing money to pay for it and further endangering our nation's economy? at this point, i would like to recognize my good friend and partner, the ranking member, for his opening remarks. thank you. >> thank you very much, madam chairman. before i start my opening remarks, i like to a knowledge the tremendous work of the man sitting behind the secretary. the assistant secretary of state for legislative affairs. he will be leaving the state department shortly. it was a tireless advocate for the secretaries agenda and the administration's agenda and other interest to great interest to this committee. i want to thank him for his service and wish him all the

best in his next endeavor. madam secretary, thank you very much for being with us here today. geneva yesterday, washington today -- it sounds like a repeat of their regular schedule. we appreciate this opportunity to discuss this topic in the various policy initiatives you championed as secretary of state. in these challenging economic times, it is critical that we make the most of whole, the resd the responsible approach taken in the qddr to achieve cost savings stands in stark contrast to the republican appropriations bill passed by the house two weeks ago. the reckless cuts in that legislation were not chosen because they looked at programs and said, here is something that is not working, or, here is something we do not need to do. no, the total level of reductions purely arbitrary, plucked out of a hat, and unrelated to any calculation of what was actually needed and how much that should cause.

their bill is not about making government more cost-effective or more efficient. it does the report that kind of reforms and streamlining needed to ensure our aid reaches those who need it most in the most efficient manner. it is a slash and burn process with no consideration for all the critically important work that is being destroyed or how it undermines our national security. the bill savages nearly every program that protects the poorest and most vulnerable people. humanitarian assistance for victims of natural disasters -- pakistan, haiti, i could go on and on -- slashed by 50%. bassett cuts and refugee aid. but is going on in egypt. today, water and sanitation, programs to fight aids, malaria, and tuberculosis. meanwhile funding for the diplomats and aid workers to carry out these programs is also slashed. if there is anything we learned of the past few years, it ought

to be that we do not hand over money to contractors and other governments without adequate oversight and accountability. the supporters of the republican bill overlook two critical facts. as you, madam secretary, secretary gates, and our senior military leadership have said repeatedly, america's national security depends not only on our men and women in uniform but also on the diplomats and aid workers who risk their lives every day to support america's interests abroad. in fact, 15% at the fiscal year to dozens of international affairs budget request is dedicated to supporting critical u.s. efforts in the frontline states of iraq, afghanistan, and pakistan. in the face of mounting deficits, it is a board to remember that these civilian efforts are more cost-effective than deploying our military. and second, aid to others is not

a gift. united states provides a foreign affair -- foreign assistance because it serves our interests. of intent to become more diplomat -- democratic, more stable, more capable of defending themselves, and better pulling themselves out of poverty is just as important for us as it is for them. the more we slash our foreign a distance -- assistance, the more we cede that the playing field to china. over the past month, we witnessed a stirring series of popular revolutions across the greater middle east. as americans, we are inspired to see the people of tunisia, egypt, libya, and other countries rise up the fight for universal values that all of us hold dear, freedom, democracy, and human rights. we all hope the upheaval in the middle east will lead to a brighter future for the people of the region.

but we must guard against the possibility that these movements will be hijacked by those determined to restore an autocratic form of government, or by forces hostile to the united states and our allies in the region. madam secretary, as we all know the iranian regime is continuing its efforts to develop a nuclear weapons capability, and this remains one of the most pressing foreign policy challenges facing our nation and the international community. when you testified two years ago, you place the administration would pursue crippling sanctions and we have moved in that direction. last year the obama administration had unprecedented success in building diplomatic support for tougher sanctions on iran at the un security council.

and legislation signed into law eight months ago today helped galvanize international opinion on iran's nuclear weapons program, and lay the groundwork for other countries to impose their own national sanctions. madam secretary, we appreciate the fact that you have pursued the iranian nuclear threat with great urgency, and look forward to work with you to ensure that our station laws are fully implemented, including against chinese firms that as you have indicated continue to engage in sanctionable activity. my concern is this. we had not yet seiche in any non-iranian bank or energy company even though we know several are engaged in sensitive -- engaged in sanctionable activities. companies need to know that there are consequences for these types of activity. so far, no company has any reason to think there are such consequences. i do want to express my appreciation for the

administration's recent veto of a security council resolution targeted at israel, a powerful reaffirmation of your support for israel and for direct israeli-palestinian negotiations, leading to two states living side by side and a permanent israeli-palestinian peace. it is a pleasure that have with -- it is a pleasure have you with us today. >> thank you so much, mr. berman. we are honored to welcome you know -- before our committee. hillary clinton is the 67 the secretary of stateited

i want to thank chairman bernanke for being here today to deliver the semiannual monetary

for part of the congress. chairman bernanke, your participation in this committee is a reminder of how far we have come in just a few short years. but it's also the challenges our nation continues to face. i'm pleased that our economy continues to show positive signs recovery. 2.8% growth in 2010 is a start. but we're concerned by sustaining the recovery and being able to strike the right balance, positive growth, lower inflation, increased employment and long-term deficit reduction. as chairman of the fed, you'll strive to strike that balance. without some controversy. the fed has taken unprecedented

steps to minimize the negative impact of the financial crisis and get us back on track, including a second round of quantative easing. while some critics have been very vocal, even going so far as to call for an end to the fed's dual mandate, i believe you should be committed for your work. as the economy continues to struggle to recover, we should be using every tool in the toolbox to create jobs and spur growth. taking tools away from the fed now is the wrong idea at the wrong time. clearly, there are many challenges ahe and the fed has an important role to play. american conception continues to be depressed and without increased demand, businesses will be reluctant to expand,

increase output or hire new employees. it was encouraging to see that unemployment rate drop to 9. in december. but the duration of the average unemployment period has increased. while subprime mortgages right up the initial wave of the foreclure crisis were announced also seeing billions of families facing foreclosure because of unemployment. event optimistic forecasters say it will take several years before the unemploynt rate returns to precrisis levels. but it's going to require effective pauses to jump strt hiring and exexports.

congress has taken steps to increase growth and provide needed certainty and protection in the financial system. there's certainly more we can do and must do ensure our economy is on solid ground and only can we turn our focus entirely to this deficit reduction. chairman bernanke, today, i'm very interesd in hearing your analysis of our current economic situation and what more congress and the fed can do to increase output, employment, and overall economic growth. i would also like to hear your thoughts on how we balance sustainable economic growth, amid calls to cut government spending and reduce the nation's deficit. as a nation, we face significant

challenges, and i appreciate your cost on these challenges today. >> thank you. thank you chairman johnson. airman bernanke, welcome, again, to the committee. over the past year, the fed's balance sheet has increased by $200 billion and now stands at over $2.5 trillion. over the next years, the balance sheet is expected, mr. chairman. last november, the federal open market, ofmo announced its departure from an additional 600 billion of treasuries by the middle of this year. the second round of so-called quantitative easing, commonly referred to as qe-2, means that the fed will be purchasing the equivalent of all dt in june. chairman bernanke has said that the qe-2 is necessary because of

the high unemployment rate, low inflation rate and near zero federal funds rate. qe-2, however, has not been strongly embraced by all of the federal market comittee. from the beginning, one fed bank president has voted against qe-2 because the purchase of additional securities could cause, he thinks,n increase in long-term innationary expectations. three other members of the ohmec has sa it will lower inflation pleasure. and the fifth member has said we are pushing the envelope with the qe-2 purchase. in addition, several common economists have said it risks sparking inflation and it is not helpful in addressing our

fundamental quick problem. these are serious questions, mr. chairman. after all, once price instability has been launched, as you well know, it's difficult and very costly to regain. i think we need to remember the soaring interest rates and high unemployment that followed chairman volcker's efforts in the early '80s to regain control over inflation. in light of the risk at that fed is taking with qe-2, i believe it is appropriate at that fed provide a more thorough explanation of what it hopes to accomplish with qe-2. is it an effort to reduce unemployment by tolerating a higher inflation rate? is the purpose to help the administration out of its physical problems by monetizing federal debt? is the purpose to inflate our way out of our housing problems, or is it something else? additionally, the fed has not yet clearly articulated the basis on which qe-2 should be

judged. for example, if inflation rises to 3%, is qe-2 still deemed a success? if unemployment stays above 8%, is qe-2 a success? if the inflation falls to near zero, is qe-2 a success? these basic questions cannot be answered witho clearer guidance from the federal reserve. today, mr. chairman, i hope that you explain how the fed will determine if qe-2 is working and how the fed believes qe-2 should be evaluated. i hope to hear what indicators the fed will use to determine if the qe-2 needs to be scaled back or expanded. make no mistake, we all know the fed has had to respond to the worst economy in a generation. unemployment stands at 9:00%. home prices continue to decline, and the federal deficit exceeds .3 trillion.

monetary policy is always a difficult tas but our fragile economy and perilous fiscal decisions have presented new challengesor the fed, as you know. however, i think the american taxpayer deserves to have clear measures by which it can easily evaluate fed policy, especially extraordinary actions like qe-2. without clear methods, the public cannot determine if qe-2 was a success. nor can it hold t fed accountable for failure or success. thank you, mr. chairman. >> thank you, senator shelli. i would like to briefly introduce our witness, ben s. bernanke as chairman othe board of the federal reserve system, currently serving his second term, ich began on february 1, 2010. prior to him becoming chairman,

dr. bernanke was chairman of the president's council of economic advisers from 2005 to 2006. in addition to serving the federal reserve system in a riety of roles, dr. bernanke was previously a professor of economics and public affairs at princeton university. i want to thank you again for being here today. chairman bernanke, you may begin your testimony. >> thank you, mr. chairman. chairman johnson, ranking member shelby andther members of the committee, i'm pleased to present the federal reserve's semiannual monetary policy report to the congress. i'll begin with a discussion of economic conditions and the outlook before turning to monetary policy. following the stabilization of economic activity amid 2009, the u.s. economy is now in its seventh quarter of growth. last quarter, for the first time in the expansion, our nation's

gdp matched its precrisis peak. job growth remains relatively weak. economic recovery was largely attributesable to the stainlessization of the financial system the effects of financial, monetary and fiscal policies and strong boost to production for businesses rebuilding their depleted inventories. economic growth slowed significantly in the spring and early summer of 2010 as the impetus for building of fiscal stimulus diminished. more recently, however, we have seen increased evidence that a self-sustaining recovery in consumer and business spending may be taking hold. notably, real consumer spending has grown at a solid pace since last fall. and business investment in new equipment and software has continued to expand. stronger demand, both domestic and foreign, has supported steady gains in u.s. manufacturing output.

the combination of rising household and business confidence, accommodative monetary policy and improving credit conditions seems likely to lead to a somewhat more rapid pace of economic recovery in 2011 than we saw last year. the most recent economic rejections that we saw by the bank presidents prepared in conjunction with the meeting in late january is for real gdp to increase by 1.5%. and while indicatorsof spending and production has been encouraging on balance, the job market has improved only slowly. following the loss of about 8.75 million jobs from early 2008 to 2009, private sector employment

expanded by a little only of 1 million with recent graduates to the labor force. we to see grounds for optimism about the job market over the next few quarters, including notable declines in the unemployment rate in december and january. a drop for new claims in unemployment insurance and an improvement in the firm's hiring plans. even so, if the rate of economic growth remains moderate as projected, it can be seral years before the unemployment rate has returned to a more normal level. indeed, still in the range of 7.5 to 8% in the end of 2012. until we see a stronger period of stronger job creation, we cannot conside recovery to be truly establishe likewise, the housing sector remains exceptionally weak. the overlanguage of vacant and foreclosed houses is still weighing heavily on prices of new and existing homes. and sales and construction of

new sing 8-family homes remain depressed. although mortgage rates are low and house crisis has reached affordable lenders, more home buyers are finding mortgages difficult to maintain. inflation has declined on balance with the onset of financial crisis reflecting high-levels of resource slack and expectations. indeed, over the 12 months ending in january, prices for goods and services are measured by personal expenditures increased only from 1.2% down from 2.5% in the earlier year period. wage growth has slowed as well with average hourly earnings increasing 1.9% in the year ending in january. in combination with product tiftd, slow wage growth has required very tight restraint on labor costs per unit of output.

most project is that overall inflation will be $1.25 to 1.75% later this year. private sector forecasters generally also anticipate subdued inflation over the next few years. measures of immediate and long-term inflation derived from treasury bonds appear broadly consistent with these forecasts. survey of households project that the expectations remain stable. although overall inflation is low, since summer, wee have seen significant increases in highly visible prices, including those of gasoline and other commodities. notably, in the past few weeks concerns about unrest in the middle east and north africa and the possible effects on global oil supplies have led oil and gasoline prices to rise further. more broadly the increases in

commodity prices in recent moss have largely reflected growing demand for raw materials, particularly in fast-growing emergent economies, coupled with restraints in global supply. commodity prices have risen significantly, suggests that changes in the foreign exchange valuing of the dollar are likely to have been an important driver of the increases seen in recent months. the rate of pass-through from commodity price increases to broad indexes in the u.s. consumer prices has been quite low in recent decades, partly reflecting the small weight of material inputs in total production costs, as well as the stability of longer-term expectations. higher commodity prices are also being offset by the instability in labor costs. thus, the most likely rise will lead to a temporary in price inflation.

an outlook consistent in participation of f-1-c participate pavntss. that said, sustained rises in prices of oil or other commodities would recommend a threat both to economic threat. we will continue to monitor these developments slowly closely and are prepared to respond as necessary to best support the ongoing recovery in the context of price stability. as i noted earlier, the pace of recovery slowed last spring to a rate that if sustained would have been insufficient to make meaningful progress against unemployment. with job creations falling, concerns about the sustainability as recovery increased. at the same time, inflation already at low levels continue to drift downward and market-based measures of inflation compensation moved lower as investors appear to become more concerned about the possibility of deflation or falling prices.

under such conditions, the federal reserve would normally ease monetary policy by reducing the target for short-term policy interest rate to federal funds rate. however, the target range for federal funds rate would be near zero for 2008, and 9 federal government reserve has indicated that economic conditions are likely to warrant an exceptiolly low target. consequently, another means has been necessary since that time. in particular, over the past few years, the federal reserve has eased monetary conditions by purchasing longer term serities, agency debt, and agency-back securities on the openmarket. the largest program purchases which lasted december 2008 through march 2010 appears 0 to have contributed to an improvement in financial conditions and a strengthening of the recovery. notably, the substantial expansion of the program announced in march 2009 was followed by financial and economic stabilization and a significant pickup in growth in

economic activity in the second half of that year. in august 2010, in response to the already mentioned concerns about the sustainability of the recovery, the continuing declines in inflation to vur low levels, the f1-c authorized the policy ever payments into longer term treasury securities. by reinvesting agen securities, rather than allowing them to run off as previously dictated, it assured that high-level accommodation would be maintained over subsequent weeks, federal reserve officials noted in public remarks that we were considering providing additional monetary accommodion through further asset purchases. in november, the committee announced it intended to purchase an additional $600 billion in longer-term treasure curities by the middle of this year. large-scale purchases of longer-term securits are a

less means of providing monetary stimulus than reducing the rate. but the two affect the economy in similar ways. conventional monetary policy easing works by lowering expectations for the future path of short-term interest rate which is in turn reduces the level of longer-term interest rates. this easing of financial condition bolsters household and business spending and thus increases chick activity. by comparison, the federal reserve's participation put down pressure on longer term interest rates by easing crit and financial markets these actions encourage spending by households and businesses by is he-e essentially the same channels as conventional monetary policy. a wide range of market indicators supports the view that the federal reserve's recent actions have been effective. for example, since august when we announced our policy of

reinvesting principal payments, equity prices have risen significantly. voluntarily in the equity market has fallen, corporate bonds has narrowed and inflation as measured in securities has rsen to historically more normal levels. yields on five to ten-year phenomenal treasury initially declined marketedly. these yields subsequently rose, however, as investors became more optimistic about economic growth and as traders scaled back their expectations of futures securities purchases. all of these developments are what one would expect to see when monetary policy becoming more accommodative wther through conventional or less conventional means. interestingly, these market responses are almost identical to those that occurred during the earlier episode of policy easing. in addition, as i already noted,

most forecasters see the economic outlook as having improved since the actions in august. downside risk to recovery have receded and the risk of deflation has become negligible. at of course, it's too soon to see how much can be tributed to economic policy, but consistent with having had a beneficial effect. my colleagues and i continue to regularly review the asset purchase program in light of incoming information. and we will adjust it as needed to promote the achievement of our mandate from the congress of maximum employment and stable crisis. we also intend to plan from the eventual exit from monetary policies and the normalization of the federal reserve's balance sheet. we have all the tools we need to achieve a smooth and effective exit at the appropriate time. cuently because the federal reserve's asset purchases have settled through the banking system, dmros tore institutions hold a high level with the

federal reserve. even as bank reserves remain high, our ability to pay interest on reserve balances will allow us to put upward pressure on short-term interest rates and thus to tighten monetary policy where required. moreover, we have developed and tested additional tools that will alou us to drain or immobilize bank reserves to the extent needed to tighten the relationship of rates. if necessary, the federal reserve can also drain reserves by ceasing the reinvestment of principal payments on the secures it holds by selling some of these securities on the open market. the f-1c remains unwaving under that control. and consistent with the federal reserve's mandate. the congress established the federal reserve and set as monetary policy objectives and provided it with operational independence to pursue those objectives. it's critical as it allows the

f1-c to make conditions based slowly on the economy. considerable evince supports the view that countries with indepeent central banks enjoy better economic performance over time. however in our democratic society, the federal reserve's independence brings with it an obligation to be accountable and transparent. the congress and the public must have all the information needed to understand our decisions, to be assured of the integrity of the our operations. and to be cough accident that our actions are consistent with the mandate given to us by the congress. on matters related to conduc of the monetary policy, the federal reserve is one of the most transparent central bnks in the world, making available extension suffer records and materials to explain i policy decisions. for example, beyond the semiannual monetary report that i'm providing today, the f1-c prides meetings, quarters with

a narrative and a five-year lag, a transcript of each meeting and supporting materials. in addition, participants also discuss the economy and monetar policy in public forumsand board members testify frequently before the congress. in recent year, the federal reserve has substantially increased the information it provides about its operations and its balance sheet. in particular, for some time, the federal reserve has voluntarilbeen providing operational andunctional information regarding the special credit liquidity put in place, including the full-terms of each facility, monthly reports, and the collateral posted. week updates about borrowings and payments about each facility and many other details. first, on november 1st, as provided by the dodd-frank act, the federal reserve posted

21,000 individual and other credit transactions adopted to stabilize and support the economic recovery. this transaction demonstrate the breadth of these operations and the care that bass taken to protect the taxpayer. indeed, despite the scope of these actions, the federal reserve has adopted no credit losses in any programs and no credit losses in the few programs that have loans outtang. moreover, we're fully confident that independent assessment of these programs will show they were highly effective in helping to stabilize the markets. indeed, the operational effectiveness as recently supported is part of the comprehensive review of six lending facilities by the board's independent officer inspector general. in addition, we've been working closely with the gao, the office of the sig-t.a.r.p., the congressional oversight panel, congress and auditors, as well as a range of matters relating

to the federal reserve's operations and governance. we will continue to seek ways of enhancing our transparency without compromising our ability to conduct policy in the piubli interest. thank you for yo attention. i'd be pleased to take your questions. >> thank you, mr. chairman. i will remind my colleagues that we will keep the record open for seven days for statements, questions and any other material you would like to submit. and i will ask the clk to put five minutes on the clock for each member's questions. i will not cut you off midsentence, bud i'd appreciate if you would begin winding down with the clock. mr. chairman, has the bipartisan tax cuts enacted last december been a boost to economic growth? and to what extent does it

complement the fed's qe-2 program short term? >> yes, mr. chairman, everything else equal, at additional tax cuts, includinged payroll tax cut and the business expensing provisions should add to aggregate demand and contribute somewhat to growth in 2011. and 2012. i should say, in that respect, 's complementary to the fed's monetary policy actions. i should say in our projections and forecasts, we try to make an assessment of what we think is most likely in terms of fiscal policy. and we had anticipated, as of november, for example, that many of these provisions, including the ui and most of the tax cuts would be extended. and so we had taken that into account in o analysis. that being said, there was some

additional stimulus coming from the payroll tax cut, for example, which we had not anticipated when we wereooking at our forecast in novembe >> what do you see as the impact on rising gasoline crisis? >> well, this is something we have to pay very close attention to because it affects both sides of our mandate. on the one side, obviously, directly affects the inflation rate. and to the extent it raises inflation expectations or reduces confidence in the public, in the maintenance of low inflation, it can be an inflation risk. at the same time, higher gas prices take income out of the poets of consumers, reduces their spending and their confidence. and so it can also be a problem for recovery. so we have to look at it from both perspectives. my sense is that the increases that we've seen so far will obviously be a problem for a lot

of people, do not yet pose a significant risk eher to the recovery or to the maintenance of overall stable inflation. however, we'll just have to continue to watch, as we see any significant additional increases, we'll obviously have to take that very seriously. >> what is your perspective on how we can promote long-term growth, in light of the need to reduce the size of the deficit? are there particular policies or government investments that will promote u.s. economic growth and our international commitment over the long term even as we work to reduce spending overall? >> mr. chairman, i spoke about this ait in the testimony before the senate budget committee. the fiscal situation is very challenging, so on the one hand, it's clearly important, and indeed, a positive thing for

growth to achieve a long-term fiscal sustainability that will help keep interest rates down that will increase confidence and would mean that future taxes would be a that would be beneficial to growth. at the same time, to the extent possible, i hope that congress will not just look at the inflow and outgo, but will also think about the composition of spending and the structure of the tax code. on the tax side, i think there's a good bit that can be done to make the tax code more efficient and more fair and less difficult to comply with. on the spending side, i think attention should be paid to important areas like research and development, education, infrastructure, and other things that help the economy grow and provide a framework through -- you know, that allows the private sector to bring the economy forward. it's a double challenge, on the one hand, the need to control

spending, on the other hand, not to lose sight of making sure importance of making sure the money spent is spent effectively and with attention to long-term growth. >> senator shelton. >> thank you. >> thank you, mr. chairman. chairman bernanke how did the federal reserve initially determine that $600 billion was the appropriate amount for qe-2 and that eight months was the appropriate time frame? >> well, first, senator, i want to emphasize that last august or so when we were looking at this possibility, we were quite concerned about where the economy was. inflation was declining and inflation risk was rising. and growth had slowed to the point where we were unsure that employment would connue to rise. we felt we needed to take some

action. in terms of the $600 billion, we tried through a number of meods to establish a correspondence between these purchases and what our normal interest rate policies would be. a rule of thumb is $150 billion to $200 billion in purchases seems to be roughly appropriate to a cut in federal rates in terms to the economy. $600 billion is roughly a 75 basis cut in the policy rate, in terms of its broad impact. 75 basis points in normal times could be considered a strong statement, a powerful move, but not one outside of the range of historical experience. it would be one that would be taken at a period of concern. and then we would observe the effects. so that was roughly the analysis that we did. >> in your testimony, you state, and i'll quote you teoday, the federal resves independent brings with it the obligation,

via transparent. as i mentioned a statement here, i believe there has to be a clear basis in judng if qe-2 is a success or failure. what specific metrics should the public use, in other words, what basis should we judge the success or failure of qe-2? >> i thank you for your question. it's a very fair question. the question of whether or not it actually works, whether it has effects. some will claim that it doesn't. as i talked about in my testimony, as we look at financial markets which is the way all monetary policy is transmitted to the real side of the economy, the movement of a wide variety of financial crisis and returns are quite consistent with what you would expect to see with that 75 basis-point cut in interest rates. i mentioned the stock market

spreads, inflation expectations, interest rates and the ke. so our assessment of the effects of the policy are that it is providing stimulus through the usual mechanisms that monetary policy works. and we can use our metric tools to judge how important, how powerful that stimulus is. now, for the blic, of course, what they want to see is results. and i would argue that we have basically two objectives. corresponding to the two sides of our mandate. the first is to stabilize inflation at a long-run normal rate which is about 2% which is nsistent with international standards of where inflation should be to appropriately trade off the benefits of low inflation again the risks of being too close to a deflationary zone. and we are clearly moving towards that risk and clearly,

deflation is decned. on the other side, it's hard to be quantitatively consistent. but the see is, instead of unemployment stagnating or going up, that we see a sustainable recovery moving forward. over the next few moss, we'll be ab to make a judgments to whether the economy has the ability to make a move on its own. and therefore, the additional support for policy can be withdrawn. every out past few years, the total debt spending increased by $1.7 trillion to advance the spending policy of the administration. over that same time period, the fed increased its holdings of u.s. treasury securities by $337 trillion. the fed alone is responsible for financing almost 20% of the massive increase in government spending. how has the lack, mr. chairman,

of fiscal discipline, complicated the fed's conduct in monetary policy? and when the fed ends its large-scale purchases of treasury debt, what impact will it have on the ability of the treasury to finance that debt? >> well, the intent of the program first was to hold down interest rates, relative to where they otherwise would be. >> has that worked? >> that seems to be working, yes. >> a lot of people dispute that. but go ahead. >> well, as i noteded in my testimony, interest rates have gone up. the same thing happened in 2009 after our previous policy because interest rates depend on future expectation of growth, as well as on policy actions. with that being said, we certainly want to be sure to remove that stimulus the at the appropriate time. so at least as coerned as you, senator, about inflation, we

want to make sure we don't have an inflationary effect. so we must remove that at the appropriattime. we learnedhat in the first quarter of last year, when we ended our previous program, that the markets had anticipated that adequately. and we didn't see any change in interest rates. i don't expect that we'll see a big impact. i think it's the total ability of holings, rather than the flow that affects the interest rates. all that being said, you asked whether the fiscal policy was a problem. i think the long-term unsustainability of our debt is a significant problem because it threatens higher interest rates, less confidence, and it could have impact on the current recovery. and so i have been urging congress to address these problems, not just in the current fiscal year. but looking over longer time frame because it is, in fact,

over the next 10 or 20 years, that these problems are going to be extraordinarily pressing. >> senatis that the number one problem, as you see, is our unsustained -- i mean, our continued spending and our accumulation of the debt? >> yes, i would say it is. >> number one economic problem facing this country? >> over the longer term, certainly. certainly something to be addressed to get us back on the sustainable path. that can't be done over the next week. we need to look over the next five, ten, 15 years how we're going to get on a sustainable path. >> thank you. >> senator reed. >> thank you very much, mr. chairman. i assume you're familiar wi two recent reports by moody's analytics and goldman sachs which talked about the proposed house republican budget. their conclusion is it passed without modification. there could be as much as a 2%

decrease in the growth next year, going forward. as many as 700,000 jobs lost because. contraction of spending at the federal level. do you agree with those -- that analysis? >> i that's referring to a $60 billion cut, obviously, that would be contractionary to some extent. our analysis doesn't give a number that high. >> well, the close cut this year is $100 billion in the house. is that you what used for your job s report? >> we're assuming 60 this year, and 100 next year. we also have the spend-out, the impact is spent out over time. the reduction is effective over time. and we get -- i have to say -- a smaller impact of that. >> what is your impact?

>> several tenths or gdp. >> and jobs? >> i don't have that number, but certainly much less than 700,000. >> and i just wa to say, what the assumed cut would be in this year, some of the things we've heard in the house proposal, it's a $100 billionut for this year. >> this year. >> which would be $40 billion larger than you would estimate -- that you're using as a parameter? >> well, then i would multiply it, you know, by -- you know, two-thirds greater. but i still don't -- i'm happy to send you our analysis, senator. i frankly don't understand -- 2% is an enormous -- 2% of the gdp is $300 billion right there. so auming a multiplier of 1, you know, 60 to $100 billion, it's not sufficient to get to

that level. but it would, of course, have the effect of reducing growth on the margin, certainly. >> it would have the effect of reducing growth which would -- again, the question is how much, which would be contradicting or at least to your stimulus effect, qe-2? >> that's right. that's why i tried to emphasize. i know that congress will be looking at this, the need to think about the budget issue, not as a current year issue. because obviously, whatever can be done, 60 billion is not going to have much impact on the long-run imbalances in our economy, in the fiscal policy. i think it's much more effective, both in terms of short-term effects on the economy, but also in terms of longer-term sustainability and confidence to address the budget deficits over at least a five to

ten-year window. >> the issue that confronts us is this year's budget and next year's budgets, that's the issue du jour, literally? >> right. >> again, my presumption that last quarter gdp was originally estimated at 3.2%, downgraded to 2.8%. is that your rough understanding,oo. >> that's the what the bureau of economic analysis said, yes. >> and their conclusion was that a lot of that was the result of spending at the state and local governments? >> that's right. >> i'm just wondering if we contract at the federal level which has a ripple effect at the local level very quickly because many of the programs that we support are really run by, relegated to and staffed by ople and local employees. you don't understand a fall-off, a deliberate fall-off in growth? >> it would have a negative pact. but, again, i think the 2% --

i'd like to see their analysis. it just seems like somewhat a big number, relative to the size of the cut. and, again, for the record, you're assuming this year's budget, a reduction of $60 billion from the president's proposal? >> yes. that's right. >> that's right? >> uh-huh. >> and we've heard from the republican side of the house, $100 billion. there's $40 billion which you have not factored into your estimates? >> is it 1 billion? >> fiscal. >> excuse me, talking calendar year 2011. >> we're talking fiscal. >> well, in terms of growth numbers, it would be a effect this year of a tenth or two, then an additional tenth in 2012, also if the effects of

them spread out over time, beyond the fiscal years. >> thank you. >> senator crepel >> thank you, mr. chairman. i'd like to follow imon that line of questioning for just a minute. because we get into these constant debates here when we try to reduce spending at the federal level about whether that's going to cost jobs or a decrease in the economy. don't you believe at some point, congress has to start paring back the spending? >> certainly. i've said so many times. but again, we don't have a single year problem. we have a long-term problem that needs to be addressed in a long-term basis. several economists talked about the president's fiscal commission about this, and they talked about the long-term commitment that's needed it indicated that one of the best thing we could do for our economy, was to i as a congress, adopt a long-term plan

that made sense and that would show the world economies thate were committed with dealingith our fiscal problems. would you agree with that? >> yes, senator, i was the first commission. to the extent we can we address the longer term trajectory, which was not sustainable, we could ensure lower interest rates, great confidence and it would be, in a minimum, helpful to theurrent recovery. but more importantly, it would protect us from fiscal or financial crisis down the road. >> you don't need to comment on this if you'd like to. i would add that congress budgets at a one year at a time basis, frankly, we have to look at the year we're dealing with as we move forward. although i'd agree we have to look long term, we don't adopt long-term budgets here. at least historically.

thank you very much for your involvement in that context. in the context of the transparency issues that you've discussed, i'd like to focus on gse reform, fannie mae and freddie mac in particular. i'convinced that congress grapple with the need to deal with fannie mae and freddie mac and how we should proceed. i have my opinions on how we should proceed in that context. at least as a with regard to t federal obligations represented by fannie mae and freddie mac. in a janry 2010 cbo report, it was concluded that fannie mae and freddie mac have effectively become government entities in the way that they are now managed. and their operations should be includedn the federal budget. do you agree with that cbo report in that ontext, in the context -- in other words, whether the debt obligations of fannie mae and freddie mac

should be included in our federal budget? >> well, i'm not an accountant and i defer to those with better knowledge on that point, but i would just say that if you do that, of course, you would add the debt to the federal debt, but you would also have to offset that to some extent with the assets that the fannie and freddie holds. so whether you consolidate or whether you simply take as a charge the obligations that the government has to support fannie and freddie, you would still have the same net effect on the government's fiscal position overall. >> at a minimum it seems to me we ought to acknowledge the taxpayer is on the hook or the debt and we ought to let the american public know what that is. and i fully agree that if we need to also show the assets, so be it. but right now the american public is on the hook for the debt, we're not necessarily going to be able to obtain access to the assets. it is going to be very interesting to see how congress moves forward to deal with this.

other question just shifting subjects for a minute is do you believe an explicit inflation target would help promote the credibility of the federal reserve by being explicit about its subjectives and help it to anchor inflation expectations? >> well, i supported this idea for many, many years. and the subtlety is helping everyone understand that by giving a number, which would help clarify what the fed is trying to achieve and would help, we hope, anchor expectations more firmly, that we would not be abandoning in any sense the other part of the congressional mandate to maximum deployment. we have moved part way in that direction in that we provide information in our projections about what the committee individually thinks is the best long run inflation goal -- inflation outcome and that currently is somewhere between 1.5% and 2% on the pce price

index. but weave t gone all the way to a formal inflation target. again, the communication issue here is to make people undersnd that this is a way of improving communication in generalithout necessarily abandoning the -- without abandoning the other aspect of -- the other side of our mandate. >> thank you. i see my time has expired. >> senator menendez. >> thank you, mr. chairman. thank you, chairman bernanke for your service. my main goal every day is how do we agree the economy, how do we get people back to work, certainly from my hometate of new jersey and for that fact every american. and it was my hope that the quantitative easing that the fed was in the midst of would produce more jobs, more exports, more investments and ultimately a smaller budget deficit by obviouslgenerating profits

that would go into the treasury's coffers. but as we expand this balance sheet, and buy treasuries and buy goldman sachs and expect that these ultimately get deposited in banks so that those banks would ultimately lend, i have to be honest with you, i'm not quite sure, and this is where i'm headed in terms of my question, i'd like to t a grasp from you, i don't see that lending still taking place and i hear it all over my state. i see food prices risin i see gas prices rising, even before what was happening in north africa. that certainly is an exacerbating reality. tuition rates rising. and so while we are worried about deflation, i just see a combination of rising prices for e average family of a lack of investment that i had hoped that would take place here and so would you get me your view of how the first and second rounds

of quantitative easing are working? >> i think they're working. i think they're working well. the first round in march 2009 was almost -- almost the same day as the troth of the stock market and since then the market has virtually doubled. the economy was going from total collapse at the end of the first quarter of '09 to pretty strong growth in the second half of '09. as i said, it is now in the seventh quarter of expansion. so i think that was clearly a positive. the current -- the current qe, as it is called, as i have said, it appears to have had the desired effects on markets in terms of creating stimulus for the economy and i cited not just federal reserve forecasts, b private sector forecasts which have almost uniformly been upgraded since august, since november, suggesting that private sector forecasters are

seeing more growth and more employment this year than th had previously expected. i think it is in fact having benefits for growth and employment. on the inflation side, i, as i said before, i think the bulk of the commodity price movements are not resulting from federal reserve policy, but are resulting from global supply and demand factors. for example, in the case of food, there have been major crop failures and weather issues and things around the world which have affected supply. and on the demand side, you have emerging market economies which are growing very quickly and creating extra demand for raw materials. that's what's happening there. ev with that increase in commodity prices, overall inflation, as i mentioned, still remains quite low in the united states and we are determined to make se that higher gas prices and food prices don't become

embedded in the orall inflation. >> i appreciate the market going up, we're thrilled to see that. but to be honest with you, if you ta to an average family in new jersey and you say, what is your food bill, what is your gas price, what is your tuitio rising, they're not going to tell you theres deflation. and so in a real context, i'm wondering how this macro economic policy is going to get to the average person in a way that changes their life in a more positive way. and certainly the market is a nice indicator in one sense but it isn't for everybody in their lives. and that brings me to the question, how -- when are you going to -- how will you decide how to tighten monetary policy? how do you know when you've reached the point where that is wise and what type of considerations are you going to take into account? >> well, monetary policy works with a lag and therefore we can't wait until we get to full employment and, you know, target

inflation rate before we start to tighten. we have to think in advance, which means we have to use our models and our other forms of analysis and market indicators and so on to try to project where the economy is heading over the next 6 to 12 onths. once we see the economy is in a self-sustaining recovery, and employment is getting to improve and labor markets are improving, and meanwhile that inflation is stable at approaching roughly 2% or so, which i think is where you want to be in the long-term in inflation, at that point we need to begin withdrawing. it is the same problem, i just want to emphasize, it is not at all different from the problem that central banks always face which is when to take aay the punch bowl and the only way you can do that is by making projections of the economy and moving sufficiently in advance that you don't stay too easy too long. and we're quite aware of this issue and quite committed to

price stability and we will continue to analyze our models and our forecasts and move well in advance of the times that would -- well in advance of the times that the economy is completely back to full employment. >> well, thank you, mr. chairman. my time is up. i look forward,aybe off the hearing, to pursue some of this with you. >> certainly. >> senator corker. >> thank you, mr. chairman. and chairman, thank you for your testimony and your service. i appreciate your comments regarding the goldmans report and i know a lot of people may not have seen it, but 47 economists came out quickly thereafter to basically say the goldmans report regarding cutting spending was way off base, and the thing we can do to get our country moving ahead is to begin having some fiscal discipline. i agree with you, we need a long-term plan, can't all happen in one year, but we have to begin at some point and we're working together, i hope, to put

congress in a straight jacket so that over the course of the next ten years we'll have the discipline we need. you talked a little bit with senator crapo about -- about inflation and explicit tget and you now have a dual mandate, unlike the european central banks, unlike the bank of england. what policy rubs does that create internally or perception issues having the dual mandate that you now have? >> well, it means that we have to look at both sides of the mandate in making our policy decisions. sometimes that causes a conflict where, you know,for example, in a stagflationary situation where unemployment is too high, but inflation is also too high, currently there is not really that much of a conflict because inflation and employment have been quite low and so accommodative policy has been appropriate in y case. >> i guesst rare times you have high inflation and high

unemployment and i think that's what people are concerned about possibly happening now. that would create a conflict with that dual mande, is that correct? >> it would pose a very difficult situation. what chairman volcker demonstrated, i think -- i think we have learneddhat t there is o way to have sustained economic growth with high invariable inflation. so keeping inflation low and stable is whatever your mandate is absolutely essential and we are committed to doing that. >> would it give the -- would it give the fed greate credibility if you had the single mandate since in essence i know we had a lot of conversations, price stability, ihink, by most people is the thing that helps create maximum employment more than anything else. would it help if we clarified that for you? >> well, we, you know, we have been functioning under the dual mandate. we think it is appropriate and we're not right now seeking any

change. congress, of course, you know, can certainly discuss that issue. and we will do whatever congress tells us to do. >> but it does create a policy rub from time to time or it can, they have a bipolarmandate. >> it can. but on the other hand there may be circumstances where a monetary policy can be constructive on the unemployment side and we wouldn't want to ignore that. >> you're lauded for being a great student of the great depression. and have tre, as we have gone through hopefully three-quarters of what it is we're dealing with, again, hopefully, what is it about that model that is relevant to what we have been dealing with over the last couple of years and what is not? >> well, i have done a lot of work on the depression and thought about it quite a bit. there are two basic lessons that i personally took from my studies of the depression, the first had to do with monetary

policy. the federal reserve and other countries were very, very passive on monetary policy and as a result permitted a deflation of actually about 10% a year for several years, which was highly destructive to the economy. this was a point that milton friedman made in his history of the -- monetary history of the united states and he argued that was the primary cause of the great depression. so we were, in the federal reserve in this particular episode was actively more proactive and aggressive in terms of easing monetary policy to ensure that we didn't have deflation risk a excessively tight monetary policy. the other -- the other aspect, the other lesson take is that financial instability can be extremely caustic to the economy. and we had in the fall of 2008 a financial crisis which was in many ways as big or bigger than

anything they saw in the 1930s. but we know that the 1930s the collapse oa big austrian bank and a number of other problems including the failure of about a third of the banks of the united states was a major blow to credit extenon, to confidence and to prices and was a big source of the depression. and so for that reason we --we were very aggressive working with the treasury and others to try to stabilize the financial system as quickly as possible. even so, as you know, the impact on the economy was quite substantial. >> my time is up. i thank you for your testimony. >> senator bennet. >> thank you, mr. chairman. chairman bernanke, nice to see you again. thank you for your testimony. you talked a little bit in your remarks about the importance of not just about cuttin what the composition of the spending looks like, what the

comprehensive approach to taxation looks like. your view is more nuaed than the heaines that come out of this place and i appreciate it very much. and i wanted to ask you in that context how you evaluate the product of the fiscal commission. what do you think of their suggestions about their mixes of cuts versus -- cuts to spending versus revenue? do you think it should weighted one way or another? i know you're here to talk about monetary policy, but not fiscal policy. i wondered if you would spend a few minutes sharing your views on it. >> what i think was impressive about the deficit commission is that it -- first of all, it highlighted the size of the problem. secondly it, for the most part made a set of proposals that while obviously painful would address the problem.

i say that for the most part because, you know, in some areas they kind of punted, like in health care spending, for example, which is really the biggest single issue. they justort of assumed that cuts would be made and they didn't give many details. so i -- i appreciate that it was a bipartisan effort and i think it was very successful in the sense that it showed, you know, gave a sense of the magnitude of the response that is needed and showed least e path forward to addressing the problem. and some other commissions like the rivlin commission and others have done similar things. i wouldn't want to tie myself down too much to the details of that commission. i'm sorry. but -- because ihink there are many different ways you could address it. and ultimately, of course, fiscal priorities are the congressional productive, not the federal reserve's.

but one -- certainly one element there was pointing out the importance after dressing the long-tm entitlement issues which are going to become bigger and bigger and needs somehow to be managed in a way that will provide essential services, but will be affordable to the country. >> i appreciate your not wanting to endorse the specifics of the plan. i guess directionally, let me try this way. we're in place now where we have 1.5 trillion, roughly, trillion dollar deficit, $14 trillion of debt, fed's balance sheet expanded dramatically to deal with this crisis. one of the things that i worry about is that if the capital markets decide one day that they don't want to buy our debt at the price that they're now buying it, that the result of that is going to be catastrophic and because of the position we're in today with our -- your balance sheet and with the

federal government's balance sheet that there is no room for a policy response at that point. so while you talked about how painful some of the suggestions are from the commission report, i wonder if you could tell the committee a little bit how painless that would seem compared to the pain we would go through in the scenario that i just described. >> no. there i'm in complete agreement. the -- i think the thing to understand is that the long-term imbalances are not just the long-term risk. they're near and present danger. to the extent that markets lose confidence in the congress' ability to make tough choices and they're going to be tough, there is the risk of a -- an increase in interest rates, which would just make things worse because it means that a higher deficit, you know, it would increase the deficit because of higher interest rates. so i think the sooner that a

long-term plan is put in place to make significant and credible reductions in thpath of the deficit, that it would have -- the better it will be and it will have benefits in the near term, not just 20 years from now. >> right. i think that's very important because earlier there was some discussion about ten years, 20 years. i want to underscore and underline your observation that this is actually a near and present danger, and that the soon we get after it, the less painful it is actually ultimately going to be and the more likely we are to protect ourselves. you said financial instability is extremely costly to the economy. i would argue that the financial instability that would come in this scenario i was talking about actually would be more costly than what we have just been through. i wonder if you've got a view on that. >> no. that's very possible. it would create both aiscal crisis and require a scramble by the congress to try to find any kind of cut or tax increase to address the problem.

but a spike in interest rates would have also very adverse effects on a lot of institutions and portfolios and could create a financial panic as well. so it is really a very worrisome situation. now, fortunately, the markets to this point seem to have a lot of confidence that we will address the problem and i hope we can, you know, make that confidence that we can meet that expectation. >> thank you. thank you, mr. chairman. >> senator vitter. >> chairman, thank you, mr. chairman, for your work and your testimony. i want to build on some of the discussion we have been hang about the fiscal situation. i think you've said we're on -- fiscally we're on an unsustainable pa. that challenge is a long-term

challenge. however, it can have very immediate consequences. who knows when it can break in terms of the consequences if we don't start to deal with it. is that a fair summary of some of the thgs you've said? >> yes, senator. >> in that context i'm wondering the following, we're coming up on a big deadline, sevel big deadlines, probably the biggest is our reaching our debt limit as a nation sometime between late march and may. what do you think it would do to the viewpoint on all of this, on our seriousness about our correcting our fiscal situation if congress increased that debt limit without at the same time passing some meaningful budget reform? >> well, senator, as i hope i made clear, i think it is extremely important that you

address this issue. so in no way am i, you know, disagreeing with your basic premise that you have to address this long-term budget issue. i'm just worried about using the debt limit as the vehicle, the reason being that if it were en a possibility that the government would default on its existing debt andnot pay the interest and principal on existing debt, some of the financial crisis issues that senator bennet mentioned would immediately happen because currently there is absolute confidence that the u.s. government will pay its bills. and if you don't do that, it would have very negative effects on financial markets and the economy. for a very long time afterwards, the u.s. would have to pay higher interest rates in the market and that would make our deficit problems even more retractable. so, again, i very strongly support efforts to address the long-term deficit problem, but

i'm a little nervous about taking the chance that we would not be paying the interest and principal on our debt. >> let me ask the same qestion a different way. would it be better to increase the debt limit and go along our merry way on the present fiscal path or would it be better to increase the debt limit and at the same time pass meaningful budget reform? >> well, clearly thelatter. you want to make sure that the debt is paid, interest is paid, meaningful budget reform is highly desirable. i'm just concerned that there be a significant probability that we would not raise the debt limit and that would cause real chaos. so i'm completely with you, senator, on the need for budget reform and i hope that congress will be able to come together and make some tough decisions. >> well, again, let me go back to my first point.

i understand your concerns about the consequences of not raising the debt limit. however, that event i so big, it seems to me if we do it and don't do any meaningful budget reform, that is a very clear, very strong negative signal about how serious we are about correcting our fiscal path. that's my point. would you disagree with that? >> i guess i would draw a distinction between not increasing the debt limit and maybe, you know, even shutting down the government. those sorts of things. not increasing the debt limit is like saying, you know, we're going to solve our family's financial problems by refusing to payur credit card bills. these are bills that have already beenccrued as opposed to cutting up the credit card and say going forward, we're not going to do any more spending. these are -- this is money we have already borrowed. these are commitments we have already made to contractors, to senior citizens and so on and what we're saying here is we're not going to make these payments

that we promised. so i would rather that we be forward looking and say, you know, we're going to hold -- we're going to restrict new spending or new commitments until we have reform. >> well, maybe you misunderstood me. i wasn't suggesting doing -- i wasn't suggesting not acting on the first. i was just suggesting that we should act on both together because if we don't, i think that is a very strong negative signal about our lack of commitment to changing our fiscal path. >> i really support a program to improve the long-term fiscal sustainability. >> thank you. >> senator merkley. >> thank you, mr. chair. and thank you mr. chairman. you commented that our deficit is not a single year problem, but a long-term problem, our deficit, our debt. the budget committee planned

from last year sought to essentially stop digging the hole any deeper after about four years. the -- but to avoid driving us into a double dip recession, a more serious recession in the short term, when you're talking about a long-term oblem and as we wrestle with the short-term impacts, is that type of framework where within a couple of years you're getting to a point you don't dig the hole any deeper and than at that point you're reducing it, is that the kind of type of profile you're talking about in terms of the long-term/short-term trade-offs? >> well, one criterion which is very useful, i think, is looking at t primary budget deficit which is the deficit less inrest payments. and currently you need to get the primary budgeteficit down to zero in order to avoid

increases in the debt to gdp ratio. currently under current cbo projections, the primary budget deficit is 2% in 2015 and 3% in 2020 of gdp. that gives a sense of the kind of cuts we wouldike to see over the next ten years, that over the next ten years would help stabilize that gdp ratio over that period. that's the criterion i'm looking for, over the next ten years, reducing the deficit, the structural deficit by 2% to 3%. >> thank you. let me switch to energy policy. there is a lot of discussion now about the impact of foreign oil, price shocks and the possibility that oil at $125 or higher might trigger a real hallenge. does it make sense for us to have a national strategy to radically reduce our dependence on foreign oil?

>> i think that anything we can do to diversify our energy sources is probably helpful. we want to make sure what we do is economic. but it is true that oil does come -- bring with it geopolitical risks and uncertainties that other forms of energy might not have. and that probably should be taken into account as we think about the range of energy sources. i think the recent developments in natural gas here in the united states and increased supply of that is a very good development. it is going to be very helpful. i know that some people are pport additional nuclear power utilities, energy producing. so, yes, i think some attention to diversifying the energy sources that we use is a -- is a

good idea to avoid some of these risks. >> i'll keep jumping topics here, given the short time i have. but commercial ending has been in a real chaenging position with a lot of balloon mortgages, 7 to 10 year mortgages coming through and banks reluctant to relend because of the declining value of the buildings. the fed was involved in the term asset-backed loan security or talf which helped in the short term but pulled back from that. where are we now with it being a major structural challenge for our economy? >> well, the talf was abo stimulating the commercial mortgage-backed securities market, and that was a story in the paper this morning that the cmbs market, not in a big way, but a modest way, is coming back and that at least for the better -- better properties. so that's a positive development.

we have also -- the fed has also worked with banks providing guidance about how to rework, restructure cre loans which seems to be having some beneficial effects as well. i would say overall and we had a fed testimony by pat parkinson recently on this topic, i would say overall at some of the worst fears about commercial real estate seem not to be coming true, that there is some stabilization of vacancy rates and prices and so on in this market. that being said, there is still a lot of, as you say, a lot of properties that are going to have to be refinanced, and probably some losses the banks are still going to have to take. it is still a risk to the financial system, but it does seem to be looking at least marginally better than we were fearing six months ago. >> thank you. senator johanns.

>> mr. chairman, thank you. mr. chairman, good to see you again. as i was listening to the scussion about qe-2, which you know i've been a critic of that, i'm not supportive of what you'redoing, but having said that, it occurred to me that maybe we're focusing on consequences and not focusing enough on the reasons that maybe got you to that decision point. so let me, if i might, offer a thought about that and i would like your reaction to it. never in the history of this country has there been a greater need for people, foreign countries, whoever, to buy our debt than now. in fact, nothing comes close to it. it is kind of breathtaking in its magnitude.

just week after week after month after month, somebody has to be out there buying this massive amount of debt. i look at what has happened to commodity prices, which have been so very strong. i look at what has happened to the dow and the nasdaq and that also has been strong, it has been on quite a run. there is so much competition out there. until the economy improves, there is more reason to be in those investments than getting less than a percent return on a two-ye treasury or on a 2% plus on a ten-year treasury. so it just occurs to me, mr. chairman, that part of what is driving this is the real genuine bona fide worry that in order to attract people to buy treasuries, the government would

have to entice them with higher yields. and eventually, you know, heaven forbid, good lord forbid the is a day at which there just isn't an appetite to buy more paper because those who are in that marketplace look at the united states government and say, you know, you've so detached the joy of spending from the pain of taxation that you don't have a fiscal plan. and then i look at the impact on real people like there was talk, well, we don't have to do anything about social security, well, that assumes we can keep borrowing because there is no trust fund. it is just paper again. and if we're not able to borrow more money, we can't evenay current beneficiaries.

so it seems with those kinds of weighty issues, all of which i think are accurate, if i'm reading this correctly, you almost had no choice. you've got to be in this marketplace to keep interest rates slow to start out with. and you've become a big player in buying our debt and you must lay awake at night wondering if i exit this marketplace, what happens? tell me where i'm wrong in that thinking. >> well, that was not our motivation for geing into this. our motivation was the state of the economy, which as of last summer and fall we were -- we had significant concerns that the recovery was going to stall, that growth was not sufficiently fast to bring down unemployment, and that inflation was moving down and down and down to where we're getting closer and closer to the deftion zone. that was the reason we took the action and we felt although there are admittedly risks with

the qe-2 program that there are also very significant risks to not taking the action. so we did it for the same reasons that monetary policy is always used, which is to try to meet our dual mandate for employment and inflation. going fward, i think it is, you know, our policies affect interest rates in two ways, one is as we promote growth, that's causing interest rates to rise for the reasons you were describing because other investments become attractive, but also it is important for us to keep inflation low and well under control because inflation also affects the level of nominal interest rates. so we were not motivated by anything related to the deficit or the debt, and i don't -- i make two points. one is, whenever we stop buying, whenever that may be, our previous experience suggests that the market takes it in stride because the market anticipates that at some point that the purchases will stop. and then we are notonetizing the debt because we will be

returning our balance sheet to a more normal level ultimately. i think what is all comes down to, and this is the point we have made in the discussion several times already is that what the markets are looking at is the long-term fiscal discipline of the u.s. government and whether or not interest rates will spike or whether they will remain reasonable depends far more on congress' decisions about long-term fiscal planning than anything the fed is going to do. >> thank you, mr. chairman. >> senator hagan. >> thank you, mr. chairman. i'm honored to be on this committee. thank you so much. chairman bernanke, in your last monetary policy report to congress, you touched on housing finance. when you noted that on balance terest ras on fixed rate mortgages decreased over the first half of 2010.

but you also acknowledged that despite the further falling mortgage rates, the availability of mortgage finance continued to be constrained. and i hear time and time again from constituents throughout my state in north carolina that they're having difficulty taking advantage of the low rat that are out there. and as you know, one of my biggest priorities during the dodd-frank was to include a qualified residential mortgage standard in the bill. i worked with senators landrieu and senator isakson and we worked to include a standard that would provide access to a safe, stable and affordable home loans for credit worthr borrowers. i understand that risk retention may serve as a deterrent to types of excessive risk taking. but i am concerned that risk retention could impose significant costs and reduce liquidity in the mortgage market. as a result, we tried to fashion an amendment that addressed the primary causes of the problem directly and yet also provide an

inisn incentive for lenders. was hoping you would talk more about the impact that the qualified mortgage definition that is currently being written will have on housing finance and are we going to continue to see constraint credit and if regulators were to draw too narrow an exemption, for example if they required 20% down advocated by some would credit further be constrained? and i'm really concerned that i loans don't meet the qualified residential mortgage standards and lenders have to set asi the extra capital to meet this risk retention requirements, we're going to see constrained credit going forward. >> well, senator, of course we're working very hard on the qrm in conjunction with the fdic and other agencies and we expect to have some rules available for comment very shortly.

we have been discussingn particular, you no he, to what extent servicing requirements should be attached to the qrm. so the goal ere, as i understandt, is to have a definition of mortgages that are sufficiently high quality and meets sufficiently high underwriting standards that the risk retention is not necessary and that would reduce the cost of the mortgages. on the one hand, i understand you don't want it to be too narrow or too tough, but on the other hand y don't want to make it -- you want this to be a good r