open market committee. disposition, she served as vice chair of the board of governors. she is a professor emeritus at the university of berkeley where she was a professor of business and economics. she has been a faculty member for over 30 years. she also served as an economist for the federal reserve board of shernors and on the fact -- graduated summa cum laude from brown university with a degree in economics and a peach in economics from yale university. welcome. ph.d. in economics from young university. welcome. >> thank you very much. i appreciate this opportunity to discuss the current economic situation and outlook along with monetary policy for turning to

some issues regarding financial stability. real domestic gross product went up to an average annual rate of and a quarter percent over the second half of last year. a faster pace than in the first half and during the preceding two years. although real gdp growth is currently estimated to a pause in the first quarter of this year, i see that it is mostly reflecting transitory factors, including the effects of the unusually cold and snowy winter weather. with the harsh winter behind us, many recent indicators suggested a rebound in spending and production is already underway.

putting the overall economy on track for solid growth in the current quarter. one cautionary note is that readings on the housing activity is a sector that has been recovering since 2011. main disappointed so far and we will be watching. conditions for the market continue to improve. the unemployment rate is 6.3% in april, one and a quarter percentage points below where it was a year ago. moreover, gains in unemployment averaged nearly 200,000 jobs per month over the past year. recovery,economic employment has increased by about 8.5 million jobs. the unemployment rate is declined by about three and three quarters percentage points since it spake. -- its peak.

conditions have improved appreciatively, but still far from satisfactory. even with recent declines, the unemployment rate continues to be elevated. moreover, the share of the labor force that has been unemployed for more than six months and a number of individuals who work part-time, but would prefer a full-time job are at historically high levels. most compensation has been rising slowly. another signal that a substantial amount of slack remains in the labor market. inflation has been quite low even as the economy continues to expand. some of the factors contributing to the softness of inflation over the past year such as the declines in non-oil prices, will probably be transitory.

importantly, longer front inflation expectations have remained stable. that said, the market committee recognizes that inflation persistently below 2%, the rate the committee judges to be most consistent with its dual mandate, could pose this to economic performance. we are monitoring developments closely. looking ahead, i expect the economic timothy that will extract economic -- economic activity -- and later in will begin to move up toward 2%. a faster rate of economic growth this year should be supported by reduced restraint from changes in fiscal policy. gains in household in home prices and equity values

affirming economic growth and further improvements in household and business confidence as economy continues to strengthen. u.s. financial conditions remain supportive of economic activity in unemployment. , considerable uncertainty surrounds this baseline and economic outlook. , one risk is that adverse developments abroad such as heightened geopolitical tensions for an intent -- and densification of financial economiesmerging could undermine confidence in the global economic recovery. another risk domestic in origin is that the recent flattening out in the housing activity could prove more protracted than currently expected rather than

resuming its earlier pace of recovery. both of these elements of uncertainty woke their post observation. theing to monetary policy, fed reserve remains committed to policies designed to restore the label market -- labor market inflation to levels consistent with those the committee judges to be consistent with its dual mandate. as always, our policy will continue to be guided by the evolving economic and financial situation. we will adjust the stance of policy appropriately to take into account changes in the economic outlook. in light of the considerable degree of slack that remains in the labor market and the continuation of the inflation below the committee's two percent object to, a high degree of monetary accommodation remains warranted.

with the federal fund rate and the traditional policy tool near zero since late 2008, we have relied on conventional tools to provide support for the economy. asset purchases and forward guidance. because this list of tools are familiar, we have been attempted in recent years to communicate to the public about how we intend to employ our policy tools in response to the changing economic circumstances. our current program of asset purchases began in september 2012 when the recovery weekend and progress in the labor market has slowed. we said that our intention was to continue the program until we saw substantial improvements in the out look of the labor market.

the progress in the labor market warranted a modest reduction in the pace of asset purchases. at the first three meetings this year, our assessment was that there was sufficient underlying strength in the rotter economy to support ongoing improvement in the labor market conditions. further measured reductions in asset purchases were appropriate. i should stress that even as the committee reduces the pace of its purchases of long-term securities, it is still adding to the holdings. those sizable holdings continued to put significant downward pressure on long-term interest rates and support mortgage tokets and contributes favorable conditions in broader financial markets. tool intant policy recent years has been forward

guidance about the likely path of the funds rate. beginning in december 2012, the committee provided threshold base guidance that turned on the bigger of the unemployment rate. the unemployment rate nearing the threshold that had been laid out earlier, we undertook a significant review of the forward guidance. while indicating that the new guidance did not represent a shift in the policy intentions, the committee laid out a fuller description of the framework that would guide its policy decisions going forward. specifically, the new language explains that as the economy expands further, the committee will continue to assess both the

-- the maximum unemployment and two percent inflation. assessing the progress, we will take into account a wide range of information, including measures of the labor market conditions and indicators of the pressures and inflation of expectations and readings on financial developments. april,h and again last we stated that we anticipated that current target remains at federal funds rate and it would ofmaintained in a time purchase program is, especially if inflation continues to run the load 2%. provided that inflation expectations remain well anchored. information one of thinking the likely path

the race after the committee decides for policy commendations. even after they are near mandate consistent levels, financial and economic conditions may for some time war and keeping the target of the federal funds rate below levels that the committee views as normal in the longer run. the pollution is so certain -- they need to watch for signs they was diverging from the waistline outlook and in a way to stabilize the economy. for both the purchases and the forward guidance we've tried to communicate as clearly as possible and have changes in economic outlook to dr. policy stance.

in doing so, we will help them better understand how the committee will respond to unanticipated developments and reduce the uncertainty. addition, the federal reserve works for financial stability. on identifying and monitoring vulnerabilities in the financial system and taking actions to reduce them. in this regard, the committee recognizes an extended period of low interest rates has the potential to induce investors to reach a yield by taking on sks, ored leverage, ri credit risks. some behavior might be evident in the lower rated corporate debt markets. issuance have anything high

yield bond that has continued to expand briskly. underwriting standards have loosened further. or'sfinancial intermediate -- intermediaries, it appears modest today. generally, valuation for the equity markets as a whole and other rod categories of assets such as residential real estate remain within historical norms. in addition, bank holding companies have improve the liquidity positions and have levelsapital ratios to significantly higher than prior to the financial crisis. for the financial sector more measures of short term

funding continues to be far below levels seen before the financial crisis. they have taken in a number of regulatory steps, mainly in conjunction with other federal agencies and to continue to improve the resiliency of the financial system. were recently, the fed reserve finalized a rule implementing section 165 of the dodd frank act to establish standards for the formking firms in of risk-based and leverage capital, liquidity, and risk management requirements. in addition, the rules requires large banking organizations to form a u.s. intermediate holding company and imposes requirements for the company's.

looking forward, the fed reserve is considering whether additional measures are needed to further reduce the risk associated with large interconnected financial institution. have seen substantial improvement in the labor market conditions in the overall economy since the financial .risis and recession we recognize that more must be accomplished. many americans who want a job are still unemployed. inflation continues to run above the projected work remains to strengthen our financial system. i will work closely with my colleagues and others to carry out the important mission that congress has given the fed reserve. thank you here i would be pleased to take your questions. >> thank you. i want to get a clear picture of

the strategy in a number of areas. purchase and a qe sometime this fall? >> we have indicated that as see as we continue to improvement in the week market and we believe that outlook is for continued progress and as long as we retain you to believe and see evidence that inflation will move back over time to our two percent longer run objective, we anticipate beginning to reduce the pace of the asset rich as is. worth to change the outlook, we would consider that plan. if those conditions hold, we would continue. >> i will leave it to my cause

to ask about the different changes beyond that. the $7 trillion on the balance sheet is extraordinarily large. when you expect to begin normalizing the size of the fed's balance sheet. is there a range of years? >> when we complete the asset purchase program, the community expectscated that it there'll be considerable time before we begin to normalize policy in the sense of beginning to raise our target for short-term interest rates? >> let's move to that. what is the appropriate size? do you have an appropriate size? >> i can give you a number that would be the inappropriate size. i believe that committee anticipates that our balance

sheet over time will move down the extension of the lower levels than it is now whether or not it will ultimately return to something levels is that we will remain and -- when way that we are likely to turn to normalizing our balance sheet eventually would be to cease reinvestment of sensible asset as it becomes due. committee is not given definite guidance at this point about when it will take this step of stopping reinvestment or principal and eventually as we come closer to realization, i expect we will get a search guidance.

that todo you expect begin? said in our most recent guidance is that in determining when that time is right, we would be looking at how much progress we have made in coming close to our mandate from congress to obtain maximum unemployment and inflation of two percent and we will evaluate the pace of which we expect progress going forward. concretely, the committee indicated that it is a kind of purchase program -- he thinks that it will be a considerable time beyond that before it will be appropriate to begin that progress. , wer its baseline outlook

would like to see or expect to see further progress in the labor market and it has emphasized that the level of inflation will also matter. >> if their projections, what is that range if i were to say the would begin normalizing interest rates in 2015, would i be wrong? >> there is no timetable for when that would occur. i know you work through projections going forward. , if thereere to hold was some range of time to begin that process, what range is it? saide committee has simply a time without mechanically stating what that time interval is. if i were to say this will begin normalizing in 2016, would

i be wrong? >> there is no specific timeline for doing that. individual members of the federal committee every three months provides their own forecast for how they see the economy evil thing under monitoring policies. that becomes a basis for discussion in the committee. you can look at those projections that include .ndividual participants membersd see that most believe that in 2015 or 2016, normalization would begin under their baseline outlook. you put into perspective what year or range of years can we expect that target rate to reach two percent for example? >> i think the answer is that it

depends on the evolution of the economy. what we are focused on is adjusting our monetary policy in light of the incoming evidence about the evolution of the economy. >> granted. projections, how far are we looking at to move about halfway to normalization? >> again, i'm afraid i can't give you a timetable, but the committee did try to in its recent statements in march and april provide some guidance to the public about the pace at which it expects interest rates, short-term rates to increase. once that process has started. and what they said is that they think it will take some time, even after the economy is in a sense functioning normally, namely we are operating at full employment and inflation's around 2%, they think it's likely it will take some time to come back to normal or historically average levels of interest rates.

short-term interest rates, they would see as normal levels based on history of something on the order of 4%. and they have indicated that they think it's going to take some time to reach levels like that. i would emphasize that that's a forecast. it's not a promise. but we have had head winds that have acted on the economy and head winds in the global economy and perhaps a slowdown in the pace of growth in the economy and those are some of the factors that lead them to believe a gradual pace of interest rate increases will prove appropriate. >> understood. fed holds about $1.6 trillion

residential mortgage bank securities, a large amount. so again assuming the fed's economic projections hold, when do you expect to begin moving them back into the market? reverse, or other approaches? what range of years -- i do worry i think there will be political resistance when you take those steps, but what years will you see that occurring? >> so we have indicated that we do not intend to steal mortgage backed securities from our portfolio except perhaps when the hole thing's through very small, eliminate some residual holdings. so eventually, and the committee hasn't decided on the timing of this, we are likely to cease reinvestment of principal and at that point our holdings of mortgage-backed securities would begin to decline over time as principal matures.

so it would take a period of some years for our holdings to diminish. >> i have a question about bank reserves, $2.6 trillion is for many, including me, potential fuel for inflation. when the economy strengthens and banks begin to lend, we hope sooner rather than later, to keep rapid inflation in check, will you raise reserve requirements or rate of interest paid on the reserves? do you have a view at this point? >> it's my expectation that when the time comes to raise the level of short-term interest rates, that we will certainly raise the interest rate that we pay on excess reserves and are likely to use a number of complimentary tools that we have developed, including our tool kid includes overnight, reverse repos, term repos, and our terms of deposit facility, we'll use those tools to push up the general level of short-term interest rates, but interest on reserves will be a key tool we will be using.

>> what impact will have that on economic growth? >> we'll only be taking that step when we have judged that the economy is strong enough, that economic growth is sufficient, the labor market has recovered enough, and inflation is moving back toward 2%, we will have judged that the time is appropriate to tighten financial conditions in order to make sure that we don't overshoot our inflation objective. so the effect it will have on the economy is to restrain the economy, to make sure that we don't allow inflation to rise above our longer term objective. >> thank you.

my main concern having served on the committee in the early to mid 2000's, very able and highly predecessor sat where you sat and assured the committee maintaining low interest rates for an extended period wouldn't cause general price inflation or inflate -- which didn't prove to be the case. after the credit fueled housing bubble burst in 2007, the predecessors assured the committee that this would -- the committee, this resulting weakness would be confined to the subprime segment of the housing market and the damage would be limited to about $150 billion. roughly the cost of the s&l crisis. some financial crisis in the fall of 2008 we were repeatedly assured the fed had its strategy exit from a large expansion of the balance sheet to normalize the policy. yet the goal posts have been moved time and time again, now removed. today you have assured the committee once again, and i so appreciate your testimony, that the fed is confident it can exit without sparking high inflation, but that we can't know the details or the timetable, but that the fed have essentially handled.

i don't expect the fed to be perfect. yours is a tough job. theirs is a tough job. but it just strikes me this -- over time this don't worry, be happy monetary message isn't working. at least in my view for the committee. certainly not for the economy at this point. i know my colleagues will ask about today's "wall street journal" where noted economist, federal reserve historian makes a point never in history has a country that's financed big

budget deficits with large amounts of central bank money avoided inflation. my worries that the track record of central banks, including the fed, in identifying these economic turning points, acting quickly to prevent inflation, that track record is not as good as we would like. forgive me for being skeptical. i believe we need more specifics and clear timetable on the comprehensive exit strategy. with that again thank you so much for being here. advice chair. >> thank you. as the chairman was talking about with the change to the forward guidance policy in the past it was tied, of course, rising interest rates was tied to the 6.5% unemployment rate, and now the feds said it will consider a wide range of economic indicators and not just the unemployment rate. he questioned you a little bit about this with the other indicators, but could you tell me what you see the benefits of this new approach and what are the drawbacks of moving away from an exact number? >> so let me, if i might explain about the number, the 6.5%, we issued the number 6.5% at a time when the unemployment rate was around 8%, and we were very far from what anyone could call full employment. which is our goal. we wanted to indicate to markets

that we would need to see a lot of improvement in the labor explain about the number, the 6.5%, we issued the number 6.5% at a time when the unemployment rate was around 8%, and we were very far from what anyone could call full employment. which is our goal. we wanted to indicate to markets that we would need to see a lot of improvement in the labor market and assuming inflation was under control before we would dream of raising our target for short-term interest rates. and to make that clear we took the number 6.5%, we felt confident that we would not, if inflation was under control, consider it appropriate to begin that process as long as unemployment -- the unemployment rate was over 6.5%.

the gap would be sufficiently wide that something we should -- should consider as a possibility. and so we gave the number 6 1/2 considerable distance from where we were to the public to say we will wait at least that long. now, we did not say that we would raise the -- our target for the federal funds rate when we reached the level of 6.5%. what we said was that would be close enough that we need to look very carefully at what to assess using many different metrics of the labor market, where is it, and what is appropriate policy. now it's appropriate to really look at many more things. and we changed our forward guidance only because we were coming close to 6.5% and we have now crossed it. there's no change in the guidance, we are saying now that

we are there, we want you to understand we have to develop a more nuanced approach to what's going on in the labor market. now, the unemployment rate is a good indicator of the state of the labor market, and if i could only have one, i think that's the metric i would probably choose. but there are different things happening in the labor market we need to take account of. for example, part-time employment that's involuntary. people working part-time, who want full-time jobs. want to work more. it is at exceptionally high levels, 5% of the labor force. it's unusually high relative to the unemployment rate. we have really never seen a situation where long-term unemployment is so large. so large a fraction of total unemployment, around 35%. that's very unusual. other things are happening that we really in evaluating how much

slack is there in the labor market? labor force participation rate hags fallen -- has fallen a lot. there's some structural reasons for that demographics, baby boomers are aging and getting into the years when they retire and their labor force participation naturally declines. so the declines we have seen, it's not entirely because of a weak economy. but i think some of it is because of a weak economy and in a sense it's hard to give you a precise number for how much of that decline is cyclical, but to the extent there is a cyclical decline that's more slack, and that's what we are looking at and trying to judge. we are also looking at wage developments and the level of payroll employment creation. >> let me follow up on a few of those.

what do you think the fed can be doing about long-term unemployment which we all acknowledge is too high? >> i think that a stronger economy as we have growth in the economy, my expectation is that long-term unemployment is going to come down. short-term unemployment is around normal levels. but i fully expect long-term unemployment to decline as the economy strengthens. there is a debate about whether or not long-term unemployment may have less effect on wages and in turn on inflation than short-term unemployment, and that's something that's receiving a great deal of public attention and discussion, rightly so. but i have very little doubt that if growth in the economy picks up and continues long-term unemployment will come down. >> one of the hearings i chaired this last year was with robert rush, it was about income inequality.

he talked about how right now we have a situation in our country where the wealthiest 400 have the same amount of wealth as the bottom 50%. and the international monetary fund recently warned that income equality is actually a drag on our country's economy. why do you think we have seen this rise and how does it affect economic growth on the country as a whole? do you think it's a factor? >> we have seen a trend towards rising inequality in income and also in wealth, and i personally view this as as a very disturbing trend that policymakers should be looking at and considering what is the appropriate response. in part a weak economy, the people who are affected by unemployment are disproportionately people at the lower income end of the spectrum.

so a weak economy contributes something to income inequality, and i think what the state can do is to promote a stronger economy, a stronger job market, generally and that will help. but the trends that are responsible for rising inequality go much deeper than the fact that we have had a deep recession. we can see those secular trends in operation at least since the mid 1980's. there's a great deal of discussion about what they are. but they probably have to do with technological change in the way it's increased the demand for skills in the work force with globalization. so the return to education and to skill has gone up dramatically. there may be institutional changes that are at work as well. so there are deeper forces that are affecting this that go

beyond anything that the fed can do. but i really do think -- >> it's something we should be taking up? >> we should be thinking about very carefully. >> one of the things you mentioned in your opening was about how how the thing has flattened out. could you expand on that? i think what we have seen while the housing market has come back with housing prices in my state's one of the ones where they have gone up the most, residential construction moving up, one thing that's held housing back is the significant drop in household formation which gets to the income equality during and after the recession. about 800,000 fewer households were created each year than in the previous seven years. young people aren't forming households as much and getting new houses. can you comment on this? >> i agree with the data your -- you're citing. we have seen very slow household formation. many young people who are living with their parents, it also is very difficult for people hoe come out of school with heavy burdens of student debt to be able to qualify for morlts. a -- mortgages.

>> it's very timely since my daughter is arriving at 10:00 p.m. she's only a first year in college. still. >> my expectation is that as the job market strengthens and the economy strengthens we'll see household formation pick up. but it's hard to note here exactly what the new normal is. and i think we need to see some pickup in household formation in order to see continued recovery in the housing market. mortgage rates went up quite a lot over the spring and summer. they're still quite low by historical standards so when that -- in that sense housing remains affordable, and i expect housing to pick up, but really it has been -- has flattened out and recovery seems to be in

progress really has now flattened out. heavy burdens of student debt to be able to qualify for mortgages. >> the first quarter, as one of the major reasons we saw a slowdown in the first quarter and will you see anticipation of improvement in the first few quarters? >> yes. we've heard many pieces of evidence as well as what we see in broader statistics that suggests that the weather played a role and recent data is certainly much more encouraging on a wide range of fronts from car sales, retail sales, industrial production. so i'm quite hopeful that we are seeing a pickup in economic activity. >> in my opening i talked about how we don't foresee a rise in inflation in the significant future. do you agree with that? >> that is my forecast. inflation has been running under 2%.

we expect it to move gradually back over time up to 2%. there are some transitory things that can give it a boost over the next year or so but my expectation is that it will be gradual, gradually moving back to 2%, but obviously this is something we will watch very closely. >> yeah. i asked that guy that tweeted me and said i was wrong. i thought i have you -- >> i'm with you. >> so whoever he is with that strange handle he knows the answer now. so, ok, i mentioned -- my last question here. i mentioned in my opening about what we can be doing to continue to -- i mentioned a bunch of things. immigration reform, tax reform, to make the things more straightforward.

not playing red light/green light every single year with our tax code and incentives. i mentioned to you as head of the mappings federal reserve talked to me in my office last week was the section 179 deduction limits for depreciation of business investment, that they were increased to $500,000 in 2010 but the increased depreciation deduction expired at the end of the 2013. and when i -- ironically after i met with him i met with small businesses through the next few days. as they had said to me during the height of the downturn they thought this was a very useful thing to stimulate investment and add more jobs. and i wanted to get your thought about that as we look at these tax extenders. >> so you know, i think the cost of capital is an important factor that influences investments although the state of the economy and business confidence and optimism about growth is a very important role as well. and the tax provision that you mentioned is something that was put into effect at a time when investment spending was very

weak and i can't quantify what its impact was but it probably played a role in having it pick up. there are a number of different tax provisions that affect the cost of capital and so tax policy generally, including the provision that you mentioned, are definitely relevant to the strength of investment spending. >> thank you very much, chair yellen. >> thank you. members should note we've been very generous to make sure the chairman has plenty of time to answer questions. we will be returning to the five-minute question period. representative hanna. >> thank you very much. thank you very much for being here. i want to follow up on

something that chairman brady talked about briefly. milton friedman once said inflation is always and everywhere and today we see that the united states department of agriculture estimates that food costs may go up as much as 3.5% this year and that is the highest potential rate in the last i think three years. in this morning's "wall street journal" allen melzer, a distinguished federal reserve historian writes, the fed focuses far too much attention on distracting monthly and quarterly data while ignoring the long-term effects of money growth. beyond the pure inflationary concerns, he said some of the side effects of the fed policies has the ugly consequences which is the low interest rates for retired persons that forces them to take substantially greater risks than bank c.d.'s and that many of them relied on in the past. he says -- goes on to say -- this usually ends in tears for a lot of people. and we see people who planned on retirement and simply based on historic rates and they are just not there for them anymore. is maintaining an extraordinarily low interest

rate for a decade creating market distortiones that will have long-term effects on the economy? and you know, it's nice to talk about being able to control inflation going forward and you'll respond to keep it below 2%. last year it was a percent and a half. account federal reserve identify, you think accurately, a change in economic conditions and execute an exit strategy before inflation occurs? just as mr. brady said, never anytime in history of this country that finance big budget deficits with large amounts of central bank money avoided inflation. >> well, i do believe that we have the tools and absolutely the will and the determination to remove monetary

accommodation at an appropriate time to avoid overshooting our inflation objective. everybody on the committee, the experience for them was the 1970's when we saw very high inflation and a huge effort by chairman volcker to tighten monetary policy to bring it down. we lived through a period in which fed policy wasn't sufficiently tight and high inflation led to a rise in inflation expectations. we saw that those inflation expectations could become a persistent source of high inflation and that it could be very costly to lower inflation. the lessons from that period are very real for all of us, and none of us want to make that mistake again. i do believe we have the tools and the determination to avoid

that. we indicate inflationary developments and inflationary expectations are part of our focus. as we watch what the likely evolution of inflation is and i can't say that, you know, that we will get it perfect but i can tell you that the committee has adopted 2% inflation objective in order to make clear our commitment to achieving that objective and to be held accountable for it and we're determined to have that happen. >> of course, if we raise interest rates, our debt payments, our interest payments will exceed our national defense budget i think within eight or -- seven or eight years. i think 2021 is the estimate. so all of that working together we really need to grow our

economy to afford to be able to manage that. >> we want to be able to, and we expect as the economy recovers that a point will come when it will be appropriate to raise short-term interest rates , long-term interest rates are likely to be rising over time as that occurs, and this is something i think congress should certainly be taking into account as you look at what fiscal burdens will be down the road. >> thank you. my time has expired. >> thank you. representative delaney. >> thank you, mr. chairman. and thank you chair yellen for being here. i also want to comment, i was stunned at how remarkably clear and linear your remarks have been here today. it is good to see firsthand. you touched on some deeper structural trends going on in the employment market and the job market and you tied those i think very appropriatery to the trends of -- to the macro

trends of global technology. which as we all know have benefited people with terrific educations or with access to capital or with highly refined skills but they have been very disruptive to the average american. and in my judgment this is the root cause of some of the concerns that we have around income inequality and job creation, particularly job creation of jobs that have decent standard of living. we're created high skilled jobs and low skilled jobs. is it possible -- and you hate to use those four words that people always regret, quote, this time is different, is it possible that these trends, as they continue to play out in our economy and in our job market put us in a position that we have -- the fed would have accommodating monetary policy for a sustained period of time as we work through these things?

particularly absent congress doing things like immigration reform, greater investment in infrastructure, more targeted weighted work through these challenges, is it possible that that is the new norm and that the size of the federal verve's balance sheet in fact stays quite large for a reasonable period of time? which i don't think necessarily is a problem which is my second question. i would be curious on your thoughts on that. >> so -- i think these longer term trends have to do with relative wages in the work force and have been going on for a long time for reasons that you stated. i don't think that those trends are ones that the federal reserve can really address the appropriate policies where they may have to do with education and training.

in that sense, when the labor market has returned to normal, in the sense that most people who were looking for work are able to find work for which they are suited and skilled in a reasonable period of time, there really won't be much more that is in our domain that we can do. so we wouldn't keep our balance sheet large or refrained from raising interest rates for that reason. but there are some people who have suggested that the distribution of income and rising inequality are pulling down spending and holding down spending growth. and it's hard to get clear evidence on that. to the extent that that's frew, it would be a way in which inequality would be slowing the pace of recovery and that would be how long we would hold interest rates where they are. >> and my second question is around -- and you mentioned in

your testimony how you think about certain financial indicators at the polls in particular because we've definitely seen in the last couple of years a delinking that's gone on between leverage spreads and leverage, right, which as leverage goes up others go down? just as we have seen the delinking of market values with corporate earnings. so this delinking i think more as froth as opposed to formation asset bubbles. how do you think about these things or what kind of benchmarks do you use to indicate that we may in fact be using asset bubbles? >> so we can't detect within any certainty whether or not there is an asset bubble. but we can look at a variety of different valuation metrics akin to price earnings ratios in the stock market. a variety of ways of measuring

those and we can look to see how valuations in that sense moved out of historically normal ranges. and i would say for the equity market as a whole, the answer is that valuations are in historically normal ranges. now, interest rates, long-term interest rates are low, and that is one of the factors that feeds into equity market valuations. so there are pockets where we could potentially see ms. but overall the broad metrics do not suggest we are in august we bubble territory we cannot detect if we're in a

bubble with certainty. >> thank you very much. >> thank you. i want to ask you if you would be willing to step aside for a moment in terms of responding in terms of representing the fed and give us your personal blog if you think of it is appropriate relative to this question in particular. indiana andfrom talk to businesses, so many of the ceos and owners of the almost indicate they are underperforming.

they are underperforming because of the uncertainties they face, to fiscal policies, prospects of uncertainty about what the taxation is going to be, and particularly regulatory policy. say thisly they incentive to the private sector business investment, which as we know is the foundation of job predecessor, i asked your predecessor the question of whether or not of what his opposes men -- opinion was. was we pretty much exhausted the major tools that we have to address some of the problems.

sitting in unused capital. he is right, it is. statement was in your to the new york fed. it is going to be a gradual return are the next 2-3 years of economic conditions. . would you be willing to give us thection relative to policies we could take or not take and the consequences of

accelerating the movement to where we want to get to be on two or three years or disincentive rising and pushing it further out. that is causing businesses to underperform. >> i agree with you, my own discussion with businesses, i hear the same thing you're citing. concern about regulation, taxation, uncertainty or fiscal policy. long-term budget deficits, we can see in cbo's very long-term projections that they remain. tot there is more work to do

put fiscal policy on a sustainable course that progress has been made in bringing down deficits in the short term but a combination of demographics and structure of entitlement programs and historic trends in health care costs. we can see over the long term deficits will rise to unsustainable levels relative to the economy. we also can see very clearly for example that the kinds of regulations we are putting in place during the process of uncertaintyreate

and burdens. we hear this from community banks all the time. regulationsnt the we are doing this for very good reasons. we had of financial crisis. important to make them safer and founder. for our own part, we will try to make sure we worry about regulatory burden. design regulations that are different and appropriate for different sectors of the economy. is important to be sensitive to regulatory burden in order to minimize the impact on the economy. >> thank you for the answer.

in closing, you generate a long list of very responsible americans who have through screwed and expertise to give us warnings about what may happen in the future and consequences of the inability to act over the past several years now in addressing the major problems that will have significant consequences on the economy of the country and future generations. i do not know what it will take for us to summon the will to do what we all know we need to do but i appreciate adding your .ame to the long list >> thank you. madam chair, thank you and welcome. good to be with you this morning. i wanted to ask you about jobs in manufacturing.

i will ask you about perforation for job growth and the preparations we are not making an children. we have a lot to be positive about with the cautionary notes your testimony articulates. from the national perspective with good jobs numbers and the recent reports a lot less in terms of labor participation rate which i'm told is that a 35 year low. noticed on page one during the economic recovery so far, paved role as increased by 8.5 million jobs since the low point and unemployment rate has declined. that is good news in terms of

recent news. or main cautionary note and can youoncern speak to that in terms of what you would hope to see and what you are concerned about with regards to that number. . we have seen a substantial decline in labor force participation. it is clear part of it is , secular and will continue and peer lee respects slack -- the fact that we have an aging population. despite the fact that retirees are working more and

participating more than earlier vintages. it would not surprise me at all if we did not see more participation in the labor force by retirees. in addition, we're seeing for all age groups, prime age workers and younger people, reduction in labor force participation. for young people it's partly related to going back to school but eventually, of course, those people will enter the labor force and seek jobs. especially in those nonretiree demographic groups, to me it's clear that the weak state of the labor market, partly explains why we're seeing a decline in labor force participation. so i will be looking very carefully at trends in labor force participation as the

economy strengthens, as the unemployment rate comes down. we need to really figure out what portion of the labor force participation decline is secular and what portion is cyclical and that's what we're going to be looking at very closely. i guess i would expect as the economy recovers we might see labor force participation strengthen rather than continue to decline. >> one thing we talk about a lot is the skills gap and the disconnect there between the jobs that we need to fill or the need -- that need to be created in the future and the skill level of folks that are seeking those jobs or looking for work in the marketplace. i guess one of the questions that i have for you, you look at trends all the time. you look at the economic impact of policies that we put in place here, and you see those trends and the kind of skills that folks would need for jobs of the future.

i guess i'd ask you. my youngest daughter is a junior in high school. if she were 3 or say, 2 or 3 years old right now, what do you hope she would get to be placed in the high-skilled jobs that we hope we have policies that has a strategy to get us to the point where we no longer have that skills gap? what would you hope that either i or -- in terms of a healthier smart start? >> i hope that you and society at large will make sure that she has access to a good college education. the gap in earnings between those with a college degree and those with less education has increased enormously. good opportunities to get advanced training in skills i

think will clearly -- every bit of evidence suggests that will make a difference to her life-long earnings. >> i'll send you some questions for the record as well. thank you very much. >> thank you. >> don't worry, madam chair. knowing senator casey, she will get a good education. >> i have no doubt. >> senator wicker. >> thank you, dr. yellen. this has been very enlightening. let me first just try to clean up a few things. in his very fine opening statement chairman brady got to a point where he said he was hopeful he would enlighten the committee on six specific points. there's no time for you to answer those. i would like to submit those questions as my questions for the record and ask you if you'll answer them on the record, will you do that? >> i'd be glad to. >> and the last is about transparency. also, i understand your reluctance to be tied down to specific predictions of when this or that will happen. but i do think we got a yes

from you on one thing and that is when the asset purchase program will end. as i understand it, you have a set of expectations for the rest of the year. and if those expectations are met, you expect the asset purchase program to end this fall. is that a yes? >> that is correct. if the labor market continues to recover and we continue to see -- see the evidence as pointing to inflation moving up over time to 2%, the committee is likely to continue taking further steps that would end the program next fall. >> in the fall of this year? >> correct. >> ok. and so -- and senator klobuchar said she saw no sign of inflation in the foreseeable future. you don't agree with that. and ideally inflation should increase to 2% and that would be a better result as far as

you're concerned? >> 2% is the committee's longer term objective, and we would not want to see a persistent deviation either below or above 2%. so it won't be at that level at every moment but we expect it to move up gradually over time back to 2%. >> great. you mentioned during your testimony today, maximum employment and full employment. would you just define those for the committee? >> i'm using those terms interchangeably. maximum employment is the wording that's used in the federal reserve act. it's our goal that congress defined for us. i'm using the term -- >> and what is -- could you use that to a percentage rate, what is maximum employment? >> so i determine maximum employment as meaning a level

of employment in the labor market where people are able in a reasonable amount of time to gain work -- >> so -- >> they're qualified. >> for today's purposes, you're not going to put a percentage point? >> i'm not going to put a percentage point. >> in terms of economic -- income inequality -- and let's get back to the metzer article in today's "wall street journal." he suggests that actually the policies of the obama administration and the federal reserve are responsible for the income inequality, and he says ironically despite often repeated demands for redistribution to lower income groups that policies pursued by the obama administration, supported by the federal reserve, have prished the -- accomplished the opposite. he goes on to say, voters should recognize that goosing the stock market through very low interest rates, not to

mention the subsidies and handouts to cronies, have contributed to that result. we'll leave the subsidies for another discussion. but don't you acknowledge, dr. yellen, that the interest rates, which you've achieved, have driven people to the stock market, therefore, goosing the stock market and contributing to this maldistribution of income? >> well, i would not deny that the level of interest rates affects the stock market. i would hardly endorse the term goosing the stock market. we have no target for stock prices. the policies that we've undertaken are meant to ease financial conditions in a whole variety of ways that will be

conducive to generating greater spending and greater spending means that we create jobs throughout the economy. so to think of that as something that is promoting an increase in income inequality i would take issue with. i think a stronger economy brings benefits to a wide variety of households throughout the economy, including lower income households who are gaining jobs. so we do probably have an impact on the stock market. we also an an impact on stock -- on housing prices, and house prices have come back up again. and for so many households, middle income households, that's their most important asset. that return of house prices to more normal levels i think has been a major benefit to many, many american households. they've seen themselves move from situations where they're underwater on their mortgages to being, you know, back in the black. and it also helps give them

access to credit if they want to send a kid to school or have an emergency or want to start a small business. and so there have been benefits in this policy and the policies and so there have been benefits in this policy and the policies we've pursued for main street as well as for those who hold equities in their portfolios. >> thank you. >> thank. senator sanders. >> thank you, mr. chairman. dr. yellen, welcome, and good luck on your new endeavor here. >> thank you. >> mr. chairman, with your permission, i'd like to put into the record a recent bbc article entitled "study: u.s. is an oligarchy, not a democracy." mr. chairman, can i place that in the record?

>> without objection. >> thank you. madam chair, in the u.s. today, the top 1% own about 38% of the financial wealth of america. the bottom 60th own 2.3%. one family, the walton family, worth over $140 billion. that's more wealth than the bottom 40% of the american people. in recent years, we've seen a huge increase in the number of millionaires and billionaires while we continue to have the highest rate of childhood poverty in the industrialized world. despite this, as many of my republican friends talk about the oppressive obama economic policies, in the last year charles and david koch struggled under these policies and their wealth increased by $12 billion in one year. despite the oppressive obama

economic policies. in terms of income, 95% of new income generated in this country in the last year point to the top 1%. now, a study, which i just introduced into the record, by two professors from princeton university, professor martin gillens and northwestern professor benjamin paige basically suggests that while historically we have considered our society to be a capitalist democracy, we may now have entered into a phase of an oligarchic society. given your power held by the billionaire class and their political representatives, are we still a capitalist democracy or have we gone over into an oligarchic form of society in which incredible economic and political power now rest with the billionaire class?

>> so, all of the statistics on inequality that you cited are ones that grately concern me and i think for the same reason that you're concerned about them, they can shape the determined availability of groups to participate equally in a democracy and have grave effects on social stability over time. and so i don't know what to call our system or how to -- i prefer not to give labels, but there's no question that we've had a trend toward growing inequality, and i personally find it very worrisome trend that deserves the attention of policymakers. >> thank you. i think the point that the professors are making and others have made is that there comes a point where the

billionaire class has so much political power, where the koch brothers, now because of citizens united, able to buy and sell politicians, they have so much political power, at which point is that revirsible? that is a great concern to me. i want to go to another point. some of my colleagues, especially in the house, believe that we can improve lives for the middle class and create jobs by completely repealing the estate tax which applies now to perhaps less than .1% of the wealthiest families in this country. would it make sense for you to give enormous tax breaks for the families of the top 1% of people in this country? >> so i've indicated that i share your concern with inequality, but i just i'm going to say on this that it's up to the congress to decide what's appropriate. there are a number of different ways to address it that certainly is on the list. >> all right. well, let me ask you another question. some of my friends in the house, the ryan budget and so

forth, suggests one way to stimulate the economy, to create decent-paying jobs is to give more tax breaks to the wealthiest people in this country and the largest corporations despite the massive wealth and income inequality we have right now. if we give tax breaks to the koch brothers who are worth $80 billion, do you think that will create jobs in this country? >> i think most of the evidence we have suggests that transfers to lower income people tend to be spent a larger fraction of the dollar is spent than when there's a transfer to a wealthy individual. but changes in tax policy -- so that's from the demand side. tax policy also has supply side effects that one should take into account. >> ok. thank you, mr. chairman. >> thank you. representative paulsen. >> thank you, mr. chairman. dr. yellen, thank you for being here and offering your testimony today. you mentioned several times that the unemployment rate is still too high and clearly we

as elected officials who represent our constituency would agree with that. in april, you made some remarks to the economic club of new york. at that time, you said that the central tendency of the federal market committee participant projections for the unemployment rate at the end of 2016 -- so this is still out a year and a half -- would be 5.2% to 5.6%. for inflation, the central tendency is 1.7% to 2%. you kind of mentioned the 2% today. if this forecast were to become reality, you mentioned, the economy would be approaching what my colleagues and i view as maximum employment and price stability for the first time in nearly a decade. so i guess i'm kind of wondering because you didn't want to put a number on maximum employment. in light of the unemployment being -- full employment or maximum employment is significantly higher at 5.2% to 5.6%, is that the new normal that you're potentially targeting for full employment?

>> so this is a number that is purely a guess based on empirical evidence that every member of our committee is asked to give each few months. it's what they think would be consistent with stable inflation rather than gradually rising inflation over time. and based on the evidence that they see -- these are just estimates and something that changes but their best assessment, most of them are in a range of 5.2% to 5.6%. now, when unemployment was as low as 4% previously, to some extent, that may be overshooting.

nothing that says that 5.2% to 5.6% is a floor on how low unemployment can go. for example, in the late 1990's unemployment fell well below those levels, but there may have been special factors. an increase in productivity growth and a strong dollar appreciation, the dollar that was holding inflation down and made that happy coincidence of very low unemployment and stable inflation possible. so at the moment, this is their best guess and it's where they envision the economy is being in 2016. >> you mentioned, too, it was nice -- well, in general with the april jobs numbers that came out it was nice to see the unemployment fall, right, to 6.3%, but the labor force participation rate which you said you wanted to look at the

details of that labor force participation rate, it fell to essentially tying a low. that was the most concerns for me, 800,000 people that have now left the work force, right, or the labor force has declined by 800,000. that's a pretty significant number. what do you envision the labor force participation rate be if we hit that 5.2% to 5.6% unemployment rate? >> it's hard for me to give you an estimate of that. we had a huge move. it is very unusual to see a .4% decline in the unemployment rate in a single month with a comparable move in labor force participation. we always tell ourselves and i'll state i think one should not make too much of any single month's numbers. my preference would be to look at those labor force and labor market statistics over three or six months to get a read on things.

if we do that, what we see is the unemployment rates come down. for the last six months, job growth has been -- employment has been gaining about 200,000 jobs a month and somewhat higher over the last three months. the labor force participation rate, it's bounced around, but it's been roughly stable. so it came down. it had gone up previously. over the last six months, it's been roughly stable. which is -- i think there is a declining labor force participation rate as a trend, so a stable labor force participation rate could signify that some cyclical slack in the labor market is gradually diminishing over time. so looking over three to six months i would say the patterns we're seeing are consistent with improvement in the labor market.

>> ok. thank you. >> thank you. representative cummings. >> chairman yellen, in february, senator elizabeth warren and i wrote to you urging that a formal vote of the board of governors be required before the fed entered into consent orders over $1 million. my staff reviewed all fed enforcement actions between 1997 and 2013 and found that only about 2% resulted in penalties over $1 million. during a hearing before the senate banking committee on february 27, senator warren asked whether you agreed with our proposal. you answered, i do think it is appropriate for us to make changes and fully expect we will . yesterday senator warren and i received a response letter from you in which you wrote, i agree it is appropriate for the board of governors to be fully

involved in decisions related to and supervisory matters and steps are underway to develop new processes and procedures for review and approval of significant enforcement actions. can you tell me what's pacific steps are underway? bel the board procedures changed to require formal vote on major enforcement actions. what new processes and procedures for review and approval of enforcement action. so, we have met and it is in the public record we have had a number of meetings at this point over the past couple of months. to discuss enforcement actions. we are participating in those discussions with staff early.

we can guide the handling of the matters. i think it is a fully -- fully appropriate. we have taken a vote on one very important enforcement matter. i want to take more time working with the staff to decide exactly what the guidelines will be for when we should delegate and when board action is required. we want to think more carefully about how to define precisely actions should require votes when it is appropriate for us to vote, but what i want to pledge is the board will be very the need toscuss discuss major enforcement actions. and we have done so. >> your vice of the chair order

of governors when the chair and the occ terminated the independent foreclosure review and agree to a settlement and january 2013. that the amendments to the consent decrees that terminated? onthe board did not vote that agreement. under the procedures in place, this was a matter delegated to the staff. the staff consulted closely with members of the board before they took those actions, so the board did have input in an informal way when the decisions were made, but there was no formal vote. >> on march 4 i joined with errol issa in a letter requesting that the fed and occ rick -- release documents related to the decision.

fed documentse yesterday. thank you and are still reviewing them. the documents produced show there were no reliable data or but there are preliminary data showing double-digit error rates in some categories at some services. dives for plan to identify the full extent of harm but could not be completed because it was terminated. it was know this terminated? it was decided the process in terms of the moneynd ability to get into the pockets of homeowners who had been harmed. it was a decision that the occ

took the lead in an federal reserve went along with. after consulting closely with community groups and looking at the process that was taking place with the independent consultants reviewing the files. not a happy outcome. >> a horrible outcome. i do not know if you have looked into it, but very sad commentary on what happened. iknow i am out of time, but will send you follow-up questions, along with senator warren. >> a be happy to answer them. >> thank you for being here and for your testimony and answering questions. you have a difficult job. we wish you well and look over to future hearings to come. the hearing is adjourned. [captioning performed by national captioning institute]

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>> today on c-span, " washington journal" is next.. coverage of the u.s. house. members will consider a bill to make the research and development tax credit permanent and look at a resolution creating a select committee on the benghazi attacks. and 45 minutes, we will discuss the investigation of the and got the attacks with adam schiff -- benghazi attacks. toole lee on u.s. efforts

help in the search for nigerian schoolgirls kidnapped last month. ♪ to the washington journal on this thursday, may 8. burwell becomes the next hhs secretary. live coverage on c-span3. on the house side, the budget affairs committee will focus on the veteran affairs hospital after allegations that 40 bits vets diedng for -- 40 waiting for care.