Transcripts For CSPAN3 Janet Yellen Testimony On The Federal Reserve System 20151203

We are very, very happy to have congressman teeberry take over as vice chair. Welcome. I also want to welcome our distinguished chair of the Federal Reserve janet yellen and thank her for appearing before us this morning. This committee has a long tradition of receiving regular updates from the chair of the Federal Reserve and were pleased to be continuing that tradition today. U. S. Economy has struggled through a long season of at tted growth. Over that time, our economy has grown at a historically slow pace averaging 2. 2 per year. Some had suggested that a 2 growth rate is and will be the new normal for the economy. All of us should view these low Economic Expectations as unacceptable. The fed certainly has an Important Role to play in setting Monetary Policy. And that is where its focus should be. There will no doubt be discussion of fed policy and Interest Rates during todays hearing as Monetary Policy by the fed has been the norm for some time now. We should also be mindful that changing Interest Rates is not a longterm prescription for achieving a more dynamic economy. Unlock the full potential of our economy will require policy decisions that incentivize the private sector including better fiscal management of spending by the federal government as well as pursuing progrowth policies such as tax reform and Regulatory Environment and passage of trade agreements and other policy commitments. Our commits to successfully addressing these other policy issues, by our i mean the United States congress, not the Federal Reserve, will go a long way toward creating certainty and confidence among both businesses and consumers. If we do not succeed in furthering progrowth policies, we may face an Economic Future of diminished standards of living. Questions arise regarding the impact of weakening economies in europe, china, and emerging market countries. The European Central bank announced its expanding stimulus measures. China devalued its currency in august in response to financial turmoil and other Major International trading partners face significant economic challenges. The actions taken by these countries will have an impact on the value of the dollar and the u. S. Economy. We look forward to hearing the chairman address that issue also. These are some of the major issues we will discuss and i certainly look forward to hearing chair yellens thoughts on this. There is global uncertainty also, i think that we should add to this equation. Too many mornings we tune into breaking news or pick up the newspaper and find headlines that we dont want to read. That appears to be a spreading cancer, not only in the United States, but also throughout the world. And so the uncertainty that that levels and that impact that it has on economic policies is perhaps another issue that we ought to be discussing. This morning, unfortunately, the house of representatives has a series of votes coming up shortly. So there may be some in and out of members having to deal with that as we are trying to wrap up our session. Im going to try to ask our members i will ask our members to try to keep their remarks to and questions to five minutes. If we need a second round, we will try to accommodate that and try to accommodate those that have had to run out for votes and will come back. Chair yellen, most of us sitting if not all of us sitting up here today, would love to wake up to headlines in the wall street journal, headlines in the new york times, pictures on the front page of financial times. I have all these things that highlight you this morning as the person of the day. And i dont expect that you have that same enthusiasm for waking up every morning. But were really pleased to have you here and look forward to your testimony. First, though, id like to turn to congresswoman maloney our Ranking Member and then ask mr. Teeberry take a minor so to introduce himself to our new vice chairman on the house side. Thank you so much mr. Chairman. And so welcome chair yellen. I am so pleased youre here today for this important and timely discussion. I look forward to your testimony in advance of the federal open Market Committees meeting at which you will decide whether or not to raise the federal funds rate. I am interested in hearing your perspective on the following issues and others. What Current Trends do you find most important in helping you assess the short and longterm challenges facing our economy . Secondly, how can the Federal Reserve time future rate increases so we dont jeopardize the current economic recovery or hurt American Families . Thirdly, what do you think of the legislation recently passed by the house of representatives that would compromise the independence of the Federal Reserve . Before i turn to these issues and others, i think its important to put this hearing in perspective. At the end of the bush administration, just a little less than seven years ago, we faced what former fed chairman bernanke called and i quote, the worst financial crisis in global history including the great depression, end quote. We have come a long way since economic crisis, and that progress is in no small part due to the bold actions by the nonpartis nonpartisan, nonpolitical Federal Reserve. In the month when president bush left office, we lost almost 820,000 private sector jobs. Over the past year, we have gained an average of 226,000 jobs per month. In fact, weve added 13. 5 million private sector jobs over a recordbreaking 68 consecutive months of growth. I have this chart, and id like to put it in the record which explains and documents this growth. In october 2009, unemployment reached 10 . Since then, it has been cut in half. It now stands at 5 . There were about seven unemployed workers for every job opening in july of 2009. Now, there are 1. 4 unemployed workers per job opening, the lowest this ratio has been since early 2001. Real gdp fell 4. 2 between the end of 2007 and the Second Quarter of 2009. But gdp has increased by more than 14 since then. Growth has been positive in 23 of the last 25 quarters. Average home prices dropped 19 between 2007 and 2011, but now theyre back up to where they were in 2007. About 17 trillion in wealth evaporated between the summer of 2007 and the beginning of 2009. All of those losses have been recovered and now total wealth is about 10 trillion, higher than it was at the onslaught of the financial crisis. The Federal Reserve played an extraordinary role turning around the economy. It quickly acted to lower rates to almost zero and held them there for about seven years. Which has been a principal factor in our economic recovery. The fed did this despite the opposition of those who claimed that inflation was on the horizon and who were later proven wrong. Then having exhausted the conventional tools of Monetary Policy, the fed deployed several rounds of quantitative easing aimed at keeping longterm rates low and further stimulating our economy. These efforts helped haul our country after the depths of the Great Recession. Without the feds actions, things would be very different today. A recent study by economists found that efforts by the Federal Reserve and the Obama Administration with support from democrats in congress dramatically reduced the severity and length of the Great Recession. Specifically the report found that without their joint efforts, the recession would have lasted twice as long. The Unemployment Rate would have reached nearly 16 , and we would have lost twice as many jobs, more than 17 million american jobs. Id like to enter the blinder zandy report into the record. Ironically republicans in congress made recovery more difficult. As former reserve chairman bernanke wrote in his new book, which i recommend, and i quote, the economy needed help from congress, if not from additional spending on roads and bridges for example, then at least in areas such as retraining unemployed workers, end quote. But the Republicanled Congress demanded deep spending cuts at a time when we needed aggressive fiscal policy to boost the economy. They ended up doing more to hurt than to help. And now republicans complain that the economic recovery has been too slow. Now, they have gone to one step further. Two weeks ago, republicans in the house of remembpresentative passed in my opinion damaging legislation, the form act, that would fundamentally hamper the feds ability to conduct Monetary Policy. It would hurt the feds independence for example by forcing it to determine target Interest Rates using a mathematical formula while ignoring a broad range of important economic indicators. Chair yellen, as you have noted before, if the fed had been forced to follow such a rule in recent years and i quote from you, millions of americans would have suffered unnecessary spells of joblessness other that period, end quote. If the form act had been a law during the time of the recession, the Federal Reserve would not have been able to take the aggressive steps needed to help pull our nation out of the greatest economic crisis since the great depression. I hope today that we can focus on the Critical Issues before us, how the Federal Reserve should act to strengthen our kmiblg recovery. But if necessary, we must clearly show that efforts to m hamstring the Federal Reserve are misguided and dangerous. Chair yellen, thank you for appearing before the joint Economic Committee today and i look very much forward as always to your testimony. Thank you. Thank you for your courtesy chairman. I want to thank chairman ryan for giving me this opportunity and i want to thank you for your your indiana hoozier niceness in that process. I look forward to working with my colleagues from the senate as well as the house. I know we have in ohio at least still many challenges. A lot of moms and dads are underemployed. Yes, the Unemployment Rate has gone down, but theres a tremendous amount of anxiety i know in our state about the future of the economy. This is so important. Chair yellen thank you for your time today. Look forward to hearing from you. Thank you. Id like to now introduce our witness, janet l. Yellen, took office as chair of the board of governors of the Federal Reserve system on february 3, 2014 for a fouryear term. Dr. Yellen also serves a chairman of the federal open Market Committee. Prior to her appointment as chair, dr. Yellen served as vice chair of the board of governors taking office in 2010 when she began a 14year term as a member of the board that will expire not until 2024. Dr. Yellen is a professor of university of california at berkeley excuse me, professor of business and professor of economics and has been a faculty member there since 1980. Dr. Yellen took leave from berkeley for five years. She served as member of the board of governors for the Federal Reserve system through february of 1997 and then left the Federal Reserve to become chair of the council of economic advisors through august 1999. She also chaired the Economic Policy committee of the organization for Economic Cooperation and development. She served as president and chief executive officer of the Federal Reserve bank of San Francisco and has a distinguished academic background. Dr. Yellen, we are pleased to have you here this morning. Thank you very much for coming. This is an important time. Youve had a busy week and we appreciate you taking the time to share with us your thoughts on where we are and where were going with this economy and the role of the Federal Reserve. Thank you very much. Chairman coates, Ranking Member maloney and members of the committee, i appreciate the opportunity to testify before you today. In my remarks, i will discuss the current Economic Outlook before turning to Monetary Policy. The u. S. Economy has recovered substantially since the Great Recession. The Unemployment Rate which peaked at 10 in october 2009 declined to 5 in october of this year. At that level, the Unemployment Rate is near the median of federal open Market Committee participants most recent estimates of its longer run normal level. The economy has created about 13 million jobs since the low point for employment in early 2010 and total nonfarm payrolls are now almost 4. 5 million higher than just prior to the recession. Most recently, after a couple of months of relatively modest payroll growth, em employers added an estimated 271,000 jobs in october. This increase brought the average monthly gain since june to about 195,000. Close to the monthly pace of around 210,000 in the first half of the year and still sufficient to be consistent with continued improvement in the labor market. At the same time that the labor market has improved, u. S. Economic output as measured by inflation adjusted Gross Domestic Product or real gdp has increased at a moderate pace on balance during the expansion. Over the first three quarters of this year, real gdp is currently estimated to have advanced at an annual rate of 2. 25 , close to its average pace over the previous five years. Many Economic Forecasters expect growth roughly along those same lines in the fourth quarter. Growth this year has been held down by weak net exports which have subtracted more than half a percentage point on average from the only rate of real gdp growth over the past three quarters. Foreign Economic Growth has slowed damping increases in u. S. Exports and the u. S. Dollar has appreciated substantially since the middle of last year making our exports more expensive and imported goods cheaper. By contrast, total real private domestic final purchases which includes household spending, business fixed investment, and residential investment currently represents about 85 offing a ra gat spending. Its increased at an annual rate of 3 this year, significantly faster than real gdp. Household spending growth has been particularly solid in 2015. With purchases of new Motor Vehicles especially strong. Job growth has bolstered Household Income and Lower Energy Prices have left consumers with more to spend on other goods and services. Increases in home values and stock market prices in recent years along with reductions in debt have pushed up the net worth of households which also supports Consumer Spending. Finally, Interest Rates for borrowers remain low due in part to the fomcs accommodative Monetary Policy. This appears to be especially relevant for consumers considering the purchase of durable goods. Other components of private domestic final purchases including residential and Business Investment have also advanced this year. Gains in real residential investment spending have been faster so far this year than last year although the level of new Residential Construction still remains fairly low. Outside of the drilling and mining sector, where Lower Oil Prices have led to substantial cuts and outlays for new structures, Business Investment spending has posted moderate gains. Turning to inflation, it continues to run below the fomcs longer run objective of 2 . Overall, Consumer Price inflation as measured by the change in the price index for personal consumption expenditures was only. 25 of the 12 months ending in october. However, this number largely reflects the sharp fall in crude Oil Prices Since the summer of 2014. Because food and Energy Prices are volatile, its often helpful to look at inflation excluding those two categories known as core inflation which is typically a better indicator of future overall i know inflation than recent readings of headline inflation. Core inflation which ran at 1. 25 over the 12 months ending in october is also well below our 2 objective partly reflecting the appreciation of the u. S. Dollar which has pushed down the prices of imported goods placing temporary downward pressure on inflation. Even after taking account of this effect however, inflation has been running somewhat below our objective. Let me now turn to where i see the economy is likely headed over the next several years. To summarize, i anticipate continued Economic Growth at a moderate pace that will be sufficient to generate additional increases in employment and a rise in inflation to our 2 objective. Although the Economic Outlook as always is uncertain, i currently see the risk to the outlook for Economic Activity and the labor market as very close to balanced. Regarding u. S. Inflation, i anticipate that the drag due to the large declines in prices for crude oil and imports over the past year and a half will diminish next year. With less downward pressure on inflation from these factors and some upward pressure from a further tightening in u. S. Labor and product markets, i expect inflation to move up to the fomcs 2 objective over the next few years. Of course, Inflation Expectations play an Important Role in the inflation process, and my forecast of a return to our 2 objective over the medium term relies on a judgment that longer term Inflation Expectations remain reasonably well anchored. Let me now turn to the implications of the Economic Outlook for Monetary Policy. In the policy Statement Issued after its october meeting, the fomc reaffirmed its judgment that it would be appropriate to increase the target range for the federal funds rate when we had seen some further improvement in the labor market and were reasonably confident that inflation would move back to the committees 2 objective over the medium term. That initial rate increase would reflect the committees judgment based on a range of indicators that the economy would continue to grow at a pace sufficient to generate further labor market improvement and a return of inflation to 2 even following the reduction in policy accommodation. As ive already noted, i currently judge that u. S. Economic growth is likely to be sufficient over the next year or two to result in further improvement in the labor market. Ongoing gains in the labor market, coupled with my judgment that longterm inflationary expectations remain reasonably well anchored serve to bolster my confidence in a return of inflation to 2 as the disinflationary affects of declines in energy and import prices wane. Committee participants recognize that the future course of the economy is uncertain. And we take account of both the upside and Downside Risks around our projections when judging the appropriate stance of Monetary Policy. In particular, recent Monetary Policy decisions have reflected our recognition that the federal funds rate near zero we can respond more readily to upside surprises to inflation, Economic Growth, and employment than to downside shocks. This asymmetry suggests its appropriate to be more cautious in raising our target for the federal funds rate than would be the case of shortterm nominal Interest Rates were appreciably above zero. Reflecting these concerns, we have maintained our current policy stance, even as the labor market has improved appreciably. However, we must also take into account the welldocumented lags in the effect of Monetary Policy. Were the fomc to delay the start of policy normalization for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting Financial Markets and perhaps even inadvertently push the economy into a recession. Moreover holding the federal funds rate at it current level for too long could also encourage excessive risk taking and undermine Financial Stability. On balance, economic and Financial Information received since our october meeting has been consistent with our expectation of continued improvement in the labor market. And as ive noted, continuing improvement in the labor market helps strengthen our confidence that inflation will move back to our 2 objective over the medium term. That said, between today and the next fomc meeting, we will receive Additional Data that bear on the Economic Outlook. These data include a range of indicators regarding the labor market, inflation, and Economic Activity. When my colleagues and i meet, we will assess all the available data and their implications for the Economic Outlook in making our policy decision. As you know, there has been considerable focus on the first increase in the federal funds rate after nearly seven years in which that rate was at its effective lower bound. We have tried to be as clear as possible about the considerations that will affect that decision. Of course, even after the initial increase in the federal funds rate, Monetary Policy will remain accommodative. And it bears emphasizes that what matters for the Economic Outlook are expectations concerning the path of the federal funds rate over time. It is those expectations that affect financial conditions and thereby influence spending and Investment Decisions. In this regard, the committee anticipates that even after employment and inflation are near mandate consistent levels, Economic Conditions may for some time warrant keeping the target federal funds rate below levels the Committee Views as normal in the longer run. So in closing, let me say the economy has come a long way toward the fomcs objectives of maximum employment and price stability. When the committee begins to normalize the stance of policy, doing so will be a testament also to how far our economy has come in recovering from the effects of the financial crisis and the Great Recession. In that sense, it is a day that i expect we are all looking forward to. So thank you. Let me stop there. I would be pleased to take your questions. Chair yellen, thank you very much. It is a day we have long wait the for, and hopefully your positive remarks today will bear that out and set us on the right trend, a positive trend. As we had discussed earlier in private, i want to raise this in public. While our trends are moving toward positive territory, the eus trends seem to be moving into negative territory with negative overnight interest in deposit rates, also additional thoughts about ways to stimulate their economy. They play a major role in the world economy. We see slowdowns in china. We see problems significant problems in brazil and throughout many emerging markets. My question is that clearly is much of the world seems to be on a negative trend. How do you balance those two issues out relative to their impact on each other and how does the fomc take that into consideration in terms of their Decision Making in. Thank you for that question. We have seen relatively weak growth in the Global Economy with different parts of the Global Economy fairing differently. But relatively weak growth. The u. S. Has enjoyed stronger growth in labor market performance. That weak growth shows through to the demand for u. S. Exports, and its one factor that has been depressing u. S. Net exports. In addition, that difference in strength between the Global Economy and the u. S. , and reflected also in different expectations about the path of Monetary Policy as you noted the ecb has added stimulus, has taken additional actions today to provide further stimulus while theres an expectation that the fomc is coming closer to raising rates. That difference in expectations about Monetary Policy reflecting different underlying strength has led over the last year and a half to a substantial appreciation of the dollar. So the combination of weak foreign growth and a strong dollar has both of those things have depressed our export growth and increased imports because imports are cheaper. So that is a drag on the u. S. Economy. But, again, we have to remember that Consumer Spending, Business Investment, residential investment account for 85 of total spending. And domestic spending is on a solid course. Its been growing around 3 . So the combination of solid domestic spending coupled with a drag from abroad that has been operative and will continue to be operative overall on balance, thats led and i think it will continue to lead to growth that is somewhat above trend and on a continuing path of labor labor market improvement. But of course, it highly relevant to our decisions and the strength of the dollar is one factor that puts means that Monetary Policy for the u. S. Is more likely to follow a gradual path. We also have global uncertainty relative to our National Security and the world security. And we seem to be entering a period of time here where violence in one form or another whether its domestic, international, whether its terrorist oriented or connected to other means. What you can lay awake at night thinking of scenarios where coordinated terrorist attacks or just acceleration of the kind of violence were seeing, Mass Shootings and so forth and so on, could have a negative effect and i think would have a negative effect on the economy relative to peoples fear of spending, going out, enjoying sports, entertainment, other types of entertainment, going to malls and shopping, et cetera, et cetera. How does that factor into the feds thinking regarding its impact on the economy . So those risks are ones that we watch very carefully. And i would agree with you that it does have the potential to have a significant economic effect. I would not say that i see a significant effect at this point, although certainly in the aftermath of the financial crisis, weve seen rather cautious behavior on the part of households and firms. And while i think there are many different factors that contribute to that cautious behavior, the crisis itself, the slow growth, we have seen many businesses talk about regulatory uncertainty. I would add geopolitical risk as a further factor that is causing that kind of cautiousness. Thank you. My time is expired. So i can show good example to my colleagues in terms of implementing the fiveminute rule, i will call on our Ranking Member, congresswoman maloney. Thank you so much. Thank you so much, chair yellen. In the speech you gave yesterday at the Economic Club of washington, you said, and i quote, many fomc participants indicated in september that they anticipated in light of their Economic Forecast at the time that it would be appropriate to raise the target range for the federal funds rate by the end of the year, end quote. What are the longer term trends that you give the that would give you the most pause when deciding the timing of liftoff . For example, how will you assess tomorrows swrjobs number in th context of its longterm trends . Well, i think the two things that we focus on most in our evaluation are economic developments that affect the labor market and also those that affect inflation because our congressional mandate calls for us to achieve maximum employment and price stability. And therefore in my testimony, i tried to indicate that i do see there are ups and downs, every series is noisy, we will be looking of course carefully at tomorrows jobs report. What were looking to see is a continued solid trend of job creation that while were close to full employment or maximum employment, at least to my mind, there remains some margins of slack in the labor market, parttime, involuntary employment is remains too high, Labor Force Participation is on a declining trend. But never the less, i think it is to some extent depressed by the fact that the job market hasnt been stronger. So we want to see the economy being on a path where well continue to erode that labor market slack over time. So well be looking very carefully at that. But we cant overwait any particular number. We need to be looking at underlying trends in the data and not overweighting any number. Inflation is also clearly very important. We articulated several years ago that the committee has a 2 inflation objective. Inflation has been running significantly below that for some time. Just as we dont want to see persistent inflation above our objective, we also dont want to see persistent inflation below our 2 objective. So as i discussed, where i think much of it is transitory, but we will be looking at data to see if our expectation that its going to move up over time will be realized and those are key pieces. Chair yellen, two weeks ago, the house passed a legislation that would interfere with the feds operations in numerous ways. You wrote a sharply worded letter to congressional leadership expressing your opposition to the bill. And i request unanimous consent to place that letter in the record. Without objection, we will do that. You said and i quote, that it would quote, severely damage the u. S. Economy were it to become law, end quote. Could you describe why you believe that this legislation would be so damaging to the independence of the fed . Thank you. Just briefly, this legislation would force the fed to set Monetary Policy according to a simple rule, something called the taylor rule or a variant of it that would tie shortterm Interest Rates to only two economic variables, the current level of inflation and the current level of output. And while such rules are useful as reference points in thinking about Monetary Policy, to set the federal funds rate in that way without deeper analysis of whats appropriate for the economy would be extremely damaging. At this point, that rule would call for a federal funds rate well over 2 . And while we might be close to the point at which we should be raising it above zero, i think that if we were to follow that rule, it would be damaging. But maybe more important, i want to say that this is an approach to Monetary Policy that severely threatens the independence of the Federal Reserve in making decisions free of shortterm political pressures in the best long run interests of the economy. It would subject us to regular gao audits of our Monetary Policy Decision Making in a way that congress has decided repeatedly and over many years its wise to insulate the operational decisions of the Federal Reserve from those shortterm political pressures. And i believe that every almost all countries around the world have independent Central Banks. They have recognized it leads to Stronger Economic performance. And i believe this would be a step in interfering with the independence of the Federal Reserve in conducting Monetary Policy. Thank you. My time is expired. Congresswoman, maloney. We thank you. We understand youve had a series of votes in the house. Uhhuh. Senator kobacek. Thank you for being here chair yellen. My first question actually is about income inequality. Weve done studies on this when i was the Ranking Member of this committee. And i know youve written extensively on trends. What do you see as the impact and what do you think could be done to reverse the trend . So i do think there is a very disturbing trend toward rising income inequality in this country. Economists have looked carefully at many different factors that might be responsible for it. And these are factors that are not recent. Theyve been in operation at least since the early or mid80s, two that stand out are first the technological change has been biassed in the direction of increasing the demand for Skilled Labor and diminishing the demand for less Skilled Labor. And particularly people who engage in rather routine jobs that can be computerized. So technical change. And globalization also appears to have played a role in reducing the number of jobs in especially in middle income jobs that can be outsourced or automated away. So i think those are key factors. There are others also that people have studied. So let me just make clear that these trends are not ones that the Federal Reserve can address. The best contribution we can make is to try to achieve our goals and particularly maximum employment job market where people who want to work can find jobs using their skills. But there are many things that congress could consider. Clearly, the return to education, the gap between high and lowskilled people is very high. And so policies that enable individuals to get appropriate education and training. I think those are important. There are many things i think that congress could do that would make a positive so youre saying this is on it is on you. Were trying to do the best we can. Thank you. I agree. Shifting here. We have a you and i have talked about this, a lot of Community Banks in our states and we know were losing a number of them, consolidation. Doddfrank which i strongly supported has protected many consumers. For some of the smaller banks, its been hard for them to do all the paperwork with this increasing regulatory complex y complexity. Any ideas on what we should be doing there . Im sure you agree we need strong competition in the banking market and we dont want the smaller players to just be eaten up. So i think that small Community Banks really are suffering from regulatory overload. And i think it behooves us to focus carefully on what we can do to try to diminish those burdens. Let me say that we recognize how high the burdens are on Community Banks and for our own part, we are heavily focused on trying to tailor our regulations so that its appropriate and were looking carefully for ways that we can make life better for Community Banks, especially those that are wellmanaged and have have adequate capital. Can we raise the threshold under our Small Bank Holding Company policy so that now banks under 1 billion arent subject the Holding Companies arent subject to our Capital Requirements. Were trying to do more of our supervisory work off site and to target our exams toward risk areas. Were engaged with the other agencies in the socalled gripper process in which were Holding Hearings and trying to identify things that we can do to reduce Regulatory Burden. Well be reporting to congress and im sure there will be a number of things that come out of that review that will be enable us to take steps that will be helpful. But i do recognize there are significant burdens and i think it behooves us to address them. Im going to put two other questions on the record. One is an issue getting a lot of attention. Thats the 50 billion asset threshold, your views on if that can be modified. Maybe someone else will ask it. The second issue is just im a strong supporter of the infrastructure bill that were about to vote on today. I would imagine you might have concerns on how some of this was paid for, wasnt actually a senateside proposal. I wish we had more time. Maybe one of my colleagues can ask that question. I will in any case put it on the record. Appreciate that. Im going to exercise a little bit of discretion here and allow you to answer that second question because i know thats great, mr. Chairman. On our minds here, just for those who yeah. Understand the issue here. We are about to pass a highway bill which is longneeded. But part of the pay for is coming comes from your bank at the fed. And the word is that theres plenty of profit sloshing around there that its eventually going to come back to the treasury anyway. So why dont we take some of it now as an early withdrawal. Do you want to respond so that . Yes, i appreciate the opportunity to do so. So the highway bill as i understand it will take a large share of our operating surplus which is part of the Federal Reserves capital to pay for this bill and not allow us to build it up. This concerns me. I think financing federal fiscal spending by tapping the resources of the Federal Reserve sets bad precedent and impinges on the independence of the central bank. It weakens fiscal discipline. I would point out, that repurposing the Federal Reserves capital surplus doesnt actually create any new money for the federal government. If you dont mind my quoting what cbo wrote in scorn this bill they said as follows, its important to note that the transfer of surplus funds from the Federal Reserve to the treasury has no import for the fiscal status of the federal government. Although federal government accounting does not recognize additions to the Federal Reserve surplus accounts as revenues, such additions have the same effects as if they had instead been paid to the treasury and counted as revenues. A transfer of those funds would have no affect on national savings, Economic Growth or income. By taking our surplus, our holdings of u. S. Treasury securities declines. And the the interest we would earn on those securities would be money that would be transferred every year for many years to come back to the federal coffers. By taking this surplus now, youre diminishing the stream of revenues into the federal budget over many years. Now, a central bank differs from a commercial bank in the role of capital is somewhat different. But almost all Central Banks do hold some capital in operating surplus. And holding such a surplus or capital is something that i believe enhances the credibility and confidence in the central bank. And so on those grounds as well, our policy, we dont have a lot of capital, we have long had capital in surplus that i think creates confidence in our ability to manage Monetary Policy. Thank you. I think it was important to get an answer to that question. So relevant right now. Thank you. And there is the narrative that this is easy money. I think youve given us a pretty good response to that question. We appreciate it. Thank you very much. Senator cassidy. Thanks for being here. I share so going off of the concern about income inequality, you have written about the problem of those we have also looked at that, and just for context to the further conversation perna, will you hold up the poster, please. We noted that this effect is not on all, but if these are the five quintiles of workers, post recession, most have returned in terms of the average number hours per week, except the bottom quintile is still lagging way behind. No dispute there, im sure. Of i think its your data, so im guessing youll agree with it. And my concern is, is that the cbo did a study pointing out the margin al text rate of the Affordable Care act, essentially puts it upon the employer, providing employment. If someone is working full time, obviously you have to pay more to give insurance, and most profoundly among the lowest quintile of workers. Would you agree with all that . Well, so i think the data that you presented is interesting. I am not aware we have tried to monitor ourselves, but and others have looked at the impact of the Affordable Care act. Im not aware that it has had a very large effect on the phenomenon were talking about it. Its of course worth monitoring Going Forward. It is important to note that the degree of involuntary part time employment has declined quite a lot but not in the lowest quintile, is that a fair statement . That data which is from the bureau of labor statistics shows that it persists in the lowest quintile. It does persist, but its diminished. Relatively speaking, but still far greater than this point in previous recovers. Yes, i think it is disproportionately high. Let me ask, and im sorry to interrupt, but hes holding me to five minutes im looking at something from 2013 that suggest that rising cost Health Benefits may make employers medium size and larger employers provide Health Benefits, et cetera. Intuitively, if the cost of Health Benefits is added to the wages paid as total compensation, the marginal effect of increasing the cost for Health Benefits for the lower quintile is going to be greater than the marginal effect for the upper quintiles. So im just curious that as much as you have looked at this, thats not something you have noted. Ill move on if you just say i havent. But we would appreciate any further thoughts you have regarding that. Im not aware of any estimates of the size of it. Most significant size employers have covered and continue to cover their workers, so while theres been a lot of anecdotal discussion of this, ive not seen a study that shows that its large. Let me return to something you said earlier that you you imply that the dollar will weaken over the coming year. Because you said that both the price of oil you imply will begin to rise. Im sorry, i didnt mean to make a forecast about i dont believe i did. I didnt make a forecast in terms of Inflationary Pressure you said you thought the downward effect upon inflation will be eased, because of the kind of return to the norm, both if i might, when the dollar appreciates while its moving up, that tends to push import prices down, which cuts inflation. But if the dollar simply stabilizes at a new higher level, then inflation is no longer held down. So simply stabilizing the value of the dollar, stabilizing at a new higher level let me ask it will diminish that effect. Will that also imply, still intuitively seems manufacturing will be impacted. Yes, that is true. I think that the strong dollar has been one of the factors, along with the cut in drilling activity, yes. If the eu is planning eecb is planning to stimulate and we are sending signals that were going to raise Interest Rates, it seems were creating a dynamic where the dollar will continue to strengthen. The dollar has strengthened a lot over the last yearandahalf. Do you anticipate that plateauing or continuing . Because if it continues, you mention how the downward pressure on inflation is eases once stabilized. But if they are stimulating and we are raising rates, its suggests that we might continue to rise. Well, i believe much of that expectation is already built into the market and into Exchange Rates. So i think that that explains importantly why the dollar has risen as much as it has. I wouldnt forecast i wouldnt forecast where the dollar is heading. Thank you. I yield back. Just a comment off a side of it but related to that. I notice this morning that the euro actually rose, based on the decisions made by the ecb, which surprised me. But perhaps the thinking was that they were taking the right path to get the economy to a better position. I dont know if you want to just remark on that, but i just thought that was i fully expected the dollar to strengthen this morning against the euro and based on what the ecb did. Watching a little bit of this mornings events, my understanding is that the market expected some actions that were not forthcoming. Thats always been the problem with the market, isnt it . We can never predict what its going to do. Senator. Thank you, chairman. And chair yellen, welcome again. I want to kind of return to this line of questioning that senator klobuchar and chairman coats had touched on with infrastructure in particular. And i want to thank you for very diplomatically describing why its a bad idea to pay for things in this way. I might be less diplomatic in my characterization of those types of pay force. But i think its very important that we in our effort to pay for things as important as infrastructure have honest payments. One of the changes that was made along the way had to do with the exemption of Community Banks from that sort of structure. And at this point, fed member banks with assets less than 10 billion will be exempted from the changes in the fedshared Dividend Rate included in the Highway Trust Fund bill. Community banks in new mexico and across the country depend on the fed share dividend for its solid return on capital investment. And ive been very voccel al about how misguided it is to ask Small Community institutions to finance our nations infrastructure. Do you have any thoughts on what the impact could have been, especially given your previous comments today on the Regulatory Burden on those institutions, had that change not been made to the pay for . So, i mean, obviously there would have been a burden on those institutions. Something that worried me is that it might affect the incentives of many of those institutions to be members of the Federal Reserve. To be members of the fed system. And i thought that was something that before one makes a change of that significance, its wise to think through more fully. Do you think it would have any impact on their ability to on the Decision Making in terms of lending to Small Businesses that are on the margin of their Business Plan . Thats thats difficult for me to say. I mean, clearly, there is a tax in that. But i i dont know how its significant that would be to lending decisions. So shifting gears a little bit, by just going back to Interest Rates, by potentially raising Interest Rates, the fed would endorse the idea that our economy is on a stable path towards full recovery. And im interested in how this potential action may signal improving conditions for job creation in states like my own, especially given the fact that new mexico and a number of other states have not experienced the same economic recovery as the country as a whole has. Do you have thoughts on that . Well, there certainly or differences across states and localities in terms of how much the recovery has aided employment in those states. My expectation Going Forward is that the labor market and the economy will continue the labor market will continue to improve. And eventually i think all states will see improvements as that occurs. But, of course, you know, the exact industrial structure of a state can matter. But there probably have been improvements, substantial improvements. And i think the labor market will continue to improve over time. So returning to an issue that a number of my colleagues have raised. Just generally, when youre looking at a situation where the fomc is looking at increasing Interest Rates, but the actions of other Central Banks around the world are in a countervailing direction, how do you overall factor in the actions of those other Central Banks into the the broad picture, and how does that impact your Decision Making as to whether or not its the right time to move forward . So we are trying to assess the overall u. S. Economic outlook, and we need to factor in all the different elements that determine that. Our success in selling goods to the rest of the world and the strength of our imports, thats an important determinant of the outlook. And when we have divergent monetary policies globally, it often means that there will be Exchange Rate movements that accompany that. We have seen that over the last yearandahalf, and as ive said, the combination of the weak growth abroad, plus the movement in the dollar has been a factor that has been depressing net exports. And thats been a subtraction from growth. And i think it will continue to be, Going Forward. So thats a negative. And, of course, its something that makes us much more cautious in terms of raising rates. But still, 85 of spending on u. S. Goods and Services Comes from consumers, investment spending, housing. And for very good fundamental reasons, theres greater strength there. So when we put it all together, were still seeing an overall picture of splilt above trend growth, ongoing improvements in the labor market. You know, obviously there are risks there. There are risks that come from the Global Environment that we have monitored carefully, and recognize. But overall, i would say that the total, while where this foreign weakness overall were on a solid course. Thank you. Senator peters. Thank you, mr. Chairman, and thank you chair yellen for your testimony here today and the wonderful work that you do. Thank you. I want to pick up on some of the comments you made on income and equality and i realize the fed doesnt have the ability to alter that, but certainly you have to respond to that in terms of your policy making and the effectiveness on your policy may be really regarding some structural changes that may be occurring in the result of the fact the result of the majority has been stagnant. And it seems to be a disconnect from some of the policy or the theory i remember learning years ago in economics that normally when you have increases in productivity, that productist ivity translates into higher wage levels. We have not seen that in recent years. We have seen productivity has gone up significantly more than wage levels. And if youre looking at formulating Monetary Policy, youre looking at aggregate demand and how you get that demand is income in the economy and wages. You mention that consumers are 80plus percent of it. So the more money consumers have, the stronger the economy is. And yet if it is not growing from wages, then it has to grow from them taking on debt. And yet if we look at the fact that wages have been stagnant, were seeing consumers are starting to deleverage which is a different trend from what we saw before. You dont have those engines of growth. In your testimony there is a 3 increase in Consumer Spending. But i believe that is down from previous years as well where we saw 3. 5 or more in Consumer Spending per year which led to higher gdp growth. Were seeing this longterm many year trend of lower wages, deleveraging of debt and the fact that most of all of the economic gains are only going to the very top of the income ladder. And the folks at the very top dont spend as much consumer wise as folks in the middle class. There may be more resources in terms of other uses of that cash. But how do you see this longterm trend of income equality. How is that going to impact the fed to be as effective as it may have been in past years using these tools when those things were in balance a lot more than what were seeing right now . Thats a great question. And you introduced a lot of different elements into it. Clearly the trends in income and having our disposal income for households are one of the most important factors determining Consumer Spending. And the fact that wages have been pretty stagnant for a number of years, i guess compensation has been growing in the 2 or 2. 5 range. That, you know that is something we have had to take account of in forecasting what the strength of the overall u. S. Economy has been and its integral to our forecasts. But i guess i would i would say that job growth has been solid for a number of years. So disposal income, in spite of the fact that wage growth has remained in that 2, 2. 5 range, theres been a lot of job growth thats added to disposable income. So the raving rate moved up after the financial crisis, and it remains in positive territory and has been pretty stable. So the Consumer Spending were seeing isnt largely being supported by taking on additional debt. It is being supported by income that households are earning. As the economy progresses, as the labor market strengthens further, i would expect to see some upward pressure on wage growth. Recently in issues of compensation and average hourly earnings, i think we have seen some welcome hints. Its hinted of evidence. We dont know if it will last. But at least recent data does suggest some upward movement in wage increases. But over the last couple of years, the spending we have seen has been supported by income growth. So inequality definitely plays a role here, and, of course, we need to see sufficient wherewithal for households to spend in a way that generates forecast of continuing growth. All right. Thank you. Senator casey . Mr. Chairman, thank you. Madam chair, were grateful for your testimony today, your presence and your public service. Ill have just one question, ill submit a second for the record. Because of the limitations on time that we have today, and we have in the senate, as well. I wanted to say first that i was heartened by some of the numbers in the i guess the first page of your testimony that we we all have heard, i guess here or there but we dont emphasize enough. The statement you made that the economy has created about 13 million jobs since the low point for employment in early 2010, thats good news. Good news on the Unemployment Rate itself, which as you note, peaked at 10 in october 2009, declined at 5 this october. So literally cut in that. Thats good news and even as we emphasize as we highlight some of the challenges with Labor Force Participation rate or folks not not folks really discourage from seeking employment. Get the question i had is more longterm and steps we should be taking and steps that you might recommend for longterm competitiveness. One of the policy steps that i hope we could take and we had a step in the right direction on Early Learning a couple months ago when we voted in connection with an Education Bill on an amendment that was my amendment, which was the first time in a decade, really, where the senate was on record voting on a substantial Early Learning commitment for the country. Just to summarize it, if every state signed up, and it would be optional, if every state participated, we could have provided Early Learning to children at 2 of the Poverty Level and lower. So a substantial in new investment. We didnt win, we didnt prevail on that vote, but it was to have a clarifying sense of where people stood. But i guess just my basic question is that. What would you hope it would do on taking steps on longterm investments in a more competitive work force. So let me say i think that one of the most disappointing aspects of u. S. Economic performance is that the pace of growth and the pace of productivity growth have been very depressed. They have fallen very substantially from what we saw in precrisis times. Now the good side of it is, it hasnt taken very much growth to see a substantial improvement in the labor market. The bad way to read that complex of facts, namely not a lot of growth, quite a lot of jobs is that produ that productist growth has been very slow. And ultimately, long term living standards, how well our children will do and whether or not theyll have better lives than we have, really do depend on productivity growth and thinking then, i would say that congress should put considerable tension into thinking about how policies that could serve to speed the productivity growth in the economy and education is one of the things that would head my list. The fact that we have seen such a large gap between the wages of more educated and less educated workers, that is a signal that there is a high return to investment and education. And making it more available. I know there are studies with many studies with respect to Early Childhood education that have particularly pointed to the importance of that in creating skills and better performance. But at all levels at all levels, education is important. In addition to that, i would say its well documented that support for basic research and development is an Important Foundation for Economic Growth. And i would say policies to make entrepreneurship easier and to encourage it. All of those are the kinds of things that are important to long range trends in Economic Growth. Thank you very much. Thank you, mr. Chairman. Im told the house of representatives is ready to take up its voting and members may be coming back. With that gives us more time here. Not to we know you have a cutoff time, and well make sure we hit that. But if youre willing to stay a bit to see if members come back. Yes. I know senator cassidy would like to speaking of coming back. Yes. Congressman delaney, thank you. Youre up. Okay. Good timing indeed. Thank you, chair yellen, for the quality of your testimony, but more important for your comparable leadership in the Federal Reserve during this obviously particularly important time. I wanted to focus on your view as to the effect higher Interest Rates or lets say it differently. The First Step Towards raising Interest Rates will have on borrowing. Because the conventional wisdom is always that lower Interest Rates encourages more borrowing. Because credit costs are cheaper. But we have had Interest Rates at such unusually low levels for such a sustained period of time that thats obviously been a bit of an anomaly in terms of Historical Rate patterns. And i wondered if that has kind of psychologically changed peoples perspective on borrowing. And if a return to a view that things are more normal, which is what i think many people would interpret an increase in rates would certainly signal that. At the levels were at now, modest increase in rates will have largely an incon convention effect. You talked about how Corporate Investment is kind of moderate. New Home Construction is still below standard or blow where you would like it to be. So you know, you worry that those a lot of those Decision Makers have viewed the zero Interest Rates as kind of a free option. Well, you know, i dont have to do anything because theyre so low and seem to be low for a long period of time. I guess my question is, as you look at a day when rates do go up, and that day is clear. Exactly when, none of us know yet of course. But do you think that will encourage more credit formation, more borrowing, by i personally think will be good for the economy. Because of some of these that people will start looking at rates differently. So a few things id like to say. When the fed takes its initial step in raising the target for the federal funds rate, its important to understand that that doesnt mean that there is some predetermined no path to historically normal rates. So the notion that it should be something that will be gradual. I mean, in general, higher levels of Interest Rates, i think, do tend to make borrowing more expensive and discourage it. But it will occur in the context of a stronger economy with higher income where people are doing better. Its not the only thing that affects Investment Decisions or borrowing or spending decisions. So i would not expect to see borrowing go down or lending go down when we raised rates modestly. Do you think it might encourage more borrowing . Well, one does often hear, especially anecdotal evidence that i hear, along the lines that youre suggesting, that there are people who do feel i have a free option. Yeah. Rates will stay low for a long time. And if they see rates going up, there may be people who are on the fence, who may decide nows the hour to act. So so that wouldnt surprise you as an outcome from this decision. It wouldnt surprise me as an outcome, but it would not be thats a temporary effect. Sure. And youre not making a decision borrowing from the future. So i dont want to encourage the idea that i believe that higher rates in and of themselves would permanently tend to boost borrowing and spending. Right. One other quick question. If i can. Governor switching gears, Governor Carney gave a speech two months ago where he talked about one of the longterm risks being Climate Change being a repricing of assets and potentially the reinsurance industry around risk related to weather. Do you share some of those concerns . I know you dont have much time. I thought it was an extremely interesting speech. I cannot say that im aware of work that we have done looking at that. But i think its something that is worth certainly worth considering. Do you think youll be doing some work in that area . I will its something we can get back to you on, and have a look on. Great. Thank you, chair. Thank you. Senator cruz. Thank you, mr. Chairman. Chair yellen, welcome. In the summer of 2008, responding to rising Consumer Prices, the Federal Reserve told markets that it was shifting to a tighter Monetary Policy. This in turn set off a scramble for cash, which caused the dollar to soar, asset prices to collapse, and cpi to fall below zero. Which set the stage for the financial crisis. In his recent memoir, former fed chairman ben bernanke said the decision not to ease Monetary Policy was, quote, in retrospect certainly a mistake. Do you agree with chairman bernanke that the fed should have eased in september of 2008 or earlier . Youre talking about 2008 or 2007 . 2008. I mean, i think the fed responded pretty promptly in easing Monetary Policy to the pressures that were emerging. And i mean, i dont i dont disagree about with his analysis of a particular decision. But i i certainly wouldnt say that that decision is what caused the financial crisis. And by december of 2008, the federal funds rate had been lower to zero. So when you say you dont disagree, does that mean you agree with chairman bernanke that it was a mistake . So i cant recall the exact passage that youre referring to. So before i say if i would agree, i would like to have a chance to review exactly what he said. Well, i would be very interested if you would have the opportunity to review the passage, and let the committee know whether you agree with his assessment. Okay. I want to shift to a different fed chairman, which is paul volcker. Who said in a stage before the Bretton Woods Committee Last year, quote, by now i think we can agree that the absence of an official rulesbased cooperatively managed Monetary System has not been a Great Success. In fact, International Financial crises seem at least as frequent and more destructive in impeding economic stability and growth. Chairman volcker went on to say, the United States in particular had in the 1970s an unhappy decade of inflation ending in stagflati stagflation. The major latin america debt crisis followed in the 1980s. There was a serious new mexican crisis and the big and damaging asian crisis. Less than a decade later, it was capped by the financial crisis of the 2007 through 2009 period, and the Great Recession. Not a pretty picture. Now you have said, quote, it would be a grave mistake for the fed to commit to conduct Monetary Policy according to a mathematical rule. Do you agree with chairman volckers characterization that, quote, the absence of an official rulesbased cooperatively managed Monetary System has not been a Great Success and not been a pretty picture . Well, you have pointed to a large number of very damaging financial crises, and in that sense, i do believe it was very important for us to take steps to have a stronger Financial System, and one thats less crisisprone. I dont think that former chairman volcker was proposing a rulebased Monetary Policy in the sense of following a simple mechanical rule. And i guess i would argue that many countries do have in essence a rulebased Monetary Policy in the sense that most countries have inflation targeting regimes. And transparent monetary policies where the Central Banks are independent and spell out and are accountable to achieve an inflation objective. And the Federal Reserve has very much strengthened its transparency as to what our goals are, what our strategy is for trying to achieve those goals. And provided the public with very detailed forecasts of what policies we think are appropriate to achieve the goals of the congress is assigned to us, including a 2 inflation objective. And over the last 20 years, inflation has been highly stable around 2 . So in that sense, even though we may not follow the rule or some simple mathematical formula, i believe we do have a rulesbased Monetary Policy in the United States, or at least a systemic policy in the United States, and many other countries, most other countries do as well. And one final question. In 2008, the fed began paying interest on reserves. In the seven years since then, do you know how much in interest the fed has paid to banks under that policy . Its been set at 25 basis points, and i dont have the exact numbers. At my fingertips. But i want to say, it is a critically important tool of Monetary Policy. Its a tool that almost all, most certainly advanced countries, Central Banks have and rely on as a key tool of Monetary Policy. So what has the impact been of paying billions of dollars to those banks in the last seven years. Its helped us to set Interest Rates at levels that we thought were appropriate for Economic Growth and price stability in this country. Thank you. Senator . Madam chair, i getting to again. A lot of turmoil in china. There was an earlier discussion about how obviously feign markets are part of how we, a judge, are growth. China may be devaluing their currency. It seems they have weakened their currency. I could go on on things you know better than i. What do you see as the stability of the Chinese Market and how does that impact us . So china has grown, obviously, very rapidly for a very long period of time. And in recent years, has been on a general slowing trend for reasons that are entirely understandable. Namely slower labor force growth, a reduction in the pace of investment growth. A desire that they have, which is in their own interest and one that we share, that their economy rebalanced from such heavy dependence on trade as a source of growth to domestic consumption. And as they have moved toward the technological frontier, further progress in adopting technological can i interrupt for a second . Changes tend to slow. Are they truly attempting to increase domestic consumption . I always had a sense the way they encourage savings, and use those savings to among other things prop up their stock market, their rhetoric says they are increasing domestic consumption. But their policies do not seem to reflect that rhetoric. My impression is they are trying to rebalance their economy. Consumer spending is a smaller share, a far smaller their of their economy than Consumer Spending is of ours. And it has been growing rapidly. There are challenges that they have faced in trying to boost it. But i believe that that is, a course theyre on that is in their own best interest. And we would agree. Okay. The change in subjects. By the way, so you feel the turmoil were currently seeing, the threat they might devalue their currency, just to be specific, you dont feel like that threatens our economy, nor that and let me ask a secondary question. Are they attempting to, if you will, game it by increasing their exports by devaluing their currency, et cetera, et cetera. Well, there was disruption last summer in Financial Markets when they made a decision to devalue the remnant by a couple of percent. I think to put that in context, remember that the u. S. Dollar has been rising, has been appreciating significantly over the last yearandahalf. And the chinese currency has been linked to the u. S. Dollar, and so during that period, the chinese currency had been strengthening rather substantially relative to many of its trade partners. And they made a modest adjustment of their Exchange Rate, but in a way that was arguably not wellcommunicated and proved disruptive. And then they saw very Large Capital outflows. I think they recognize that stability of their Exchange Rate is probably in their best interest. But ultimately, would like to move to a more marketbased and flexible system of Exchange Rate determination. I wish you were their central banker. Im not sure but that said, i hope youre right. Secondly in january of this year, the economy actually slowed, growth became negative. At the time it was attributed to the slow down in the Energy Market because oil prices had fallen so produced a lot of jobs. And by the way, jobs for less skilled workers which we have spoken of here today. Now it seems as if that fell or production rose a little bit for auto variety of reasons. And now it appears that Oil Production is decreasing once more and the rig counts are falling. My state is impacted by this. Any comments upon how this shedding of jobs and the exploration and production component of the Energy Industry is going to impact our economy . Well, we have seen a huge decline in oil prices. For reasons pertaining to both huge increases in supply and perhaps some slowing in demand. It has had an enormous impact on drilling activity, on jobs in that sector. And that has been one of the things that has been holding back growth. So even though we have gotten some benefit for Consumer Spending in terms of employment, now Going Forward, as those jobs are further shed, what impact do you feel that has upon our growth . Im struck that your forecast is that the economy is going to continue to grow at this kind of 2. 5 rate. Not under reagan and clinton, but this. 5 . But if were shedding all these jobs in the industry, which provides such a tremendous number of jobs for less skilled workers, it seems as if that endangers even this 2. 5 growth we have. Well, remember that we have been creating roughly 200,000 jobs a month for the entire year. No, i was told once that it actually takes about 270,000 jobs a month to both bring back into employment those who are currently unemployed, to take care of those but who would prefer to work. Because their Labor Participation market is so low. For newer workers entering the market, to employ them, as well as to maintain full employment for those currently. Im struck that something i read speaks of those 20 to 25yearold workers being underemployed. Higher rate of unemployment among those. So all of this is to say 210,000 a month, is that adequate to to both increase job participation, but also to account those who are newly entering. So to simply provide jobs for those who are newly entering the labor force probably requires under 100,000 jobs per month. And theres a downward trend in the labor force, due to its aging. If Labor Force Participation is stable, that helps to absorb people who are discouraged and have dropped out. But that still requires quite a bit less than the 200,000 or so jobs we have had. In terms of increasing back up to full employment excuse me, full our labor Market Participation is the lowest since jimmy carter. So when the president speaks about how great the Unemployment Rate is, i think our Labor Participation is as low as jimmy carter. So i guess my question is, how do we increase our Labor Participation, as well as take care of those entering now. Because we dont seem to be accomplishing that with even a 210,000 per month labor growth. Well, we are on a path oh of declings cling Labor Force Participation due to the aging work force of the population. So i dont think that we should expect to see Labor Force Participation move up a great deal over time. If it were simply stable over time, rather than on that declining trend, i think we would be absorbing people who are perhaps discouraged, and in a stronger job market would move back. But 200,000 jobs a month is enough to make progress on those dimensions. I yield back. Thank you. Thank you, senator. We have had the return now of two of our key members. Of the committee. And so we have a little bit of time. We have a hard 12 00 stop so we have time for both of you to ask questions. Thank you, chairman. Thank you, chair yellen. Sorry about the vote. So in your comments, when i was here earlier, you mentioned moderate growth within the economy. But yet earlier this week, economists at citigroup predicted that not only a tightening of the u. S. Labor market will force the fed to increase short term market or Interest Rates more rapidly than was anticipated. They said it would result in a inverted yield curve, which typically precedes a recession and actually, they they said the economists said they would assign a 65 likelihood of a recession in the United States in 2016. Now 65 seems high to me. But im not an economist and not the fed chair. But zero risk may be too low, as well. So what would you assign a risk level of a recession next year . So i dont have a number for you. But a decision on the part of the fomc to increase rates would only occur in the context where the committee believe that we were going to enjoy at least somewhat above trend growth, so we would see an improvement in the labor market. And, of course, theres always uncertainty that pertains to the Economic Outlook. There are always shocks that occur. The risks the risks are on both sides. Theyre to faster growth and also slower growth. I cant i cant put a number on the risk of a recession. But i absolutely wouldnt see it as anything approaching 65 . Okay. So assuming that you either do something or dont do something with respect to Interest Rates, i think everybody would probably agree that regardless of what you do, historically speaking, interest may Interest Rates would still remain at a historically lower level. What tools would you have . What tools would the fed have, if indeed the economists at sti were right and the u. S. Did go into a recession . What would you have to mitigate the effects of such a problem . So we have all of the tools that we previously used to try to combat a recession. First of all, if we had raised rates, we would have the possibility of lowering rates. Important to markets in setting or determining longerterm yields is expectations about the future path of policy. For a number of years, when we had after rates had hit zero, we discussed the reasons that we thought it would be appropriate to keep rates at low levels. As it turned out, seven years almost now at zero rates, we discussed why we thought we would be keeping rates at low levels for a long time. And as the market absorbed the notion that they will stay low for a long time, longerterm yields came down. Of course, we had had asset purchases. We undertook substantial asset purchases in order to stimulate the economy. I think those purchases were successful, as well. In conjunction with that Forward Guidance in bringing down longerterm rates and those tools are still available. Last question. And real quick, i met with a group of ohio bankers yesterday. And in december, they brought up to me the bazel committee on banking supervision as planning to finalize new rules for the amount of capital. The banks are required to hold against their trading book assets. We understand the current premium proposal could have a negative impact on the liquidity in significantly increased borrowing costs for americans and american businesses. They told me the regulatory changes proposed by the committee would increase mortgage and auto loans by 1. 5 and home loans by as much as 6. 3 . Im a former realtor so that number popped out to me as a huge, huge problem. So there are real concerns in the Lending Community in ohio that the Basel Committees rules would maborrowing more expensiv and hinder growth in ohio and as well as across the country. Does the fed support the Basel Committee finalizing the proposal before these concerns are addressed and will you be conducting your own cost benefit analysis of what impact the rules would have in our country . I believe the fed is taking part in those discussions, along with other regulators. But i am not aware there is any thought, Capital Requirements on those positions did go up previously. Im not aware there is any thought of changing those requirements in the manner that would have the kind of impact that youre discussing. But we can try to get back to you on this. Thank you, chairman. My time has expired. Councilman swaggert. Thank you, chairman coats. Madam chair, how are you . First, because i promised my team, we wanted to extend a thank you for your staff for tolerating our technical written questions and some of the responses. Thank you. Its appreciated. Because some of them are lengthy in nature. Thank you. Can i take a slightly different direction . And im blessed to sit on Financial Services so we get to cross each others paths quite obvious. Often. As mr. Ty berry was discussing, some of the indexes and economist who are saying look there is storm clouds in the horizon. Our team we have been collecting information about worldwide debt and does that cause any fragility to us in north america and, you know when im seeing numbers in the last nine years, what developing countries, 57 trillion new debt, double their gdp growth. Worldwide debt is, what, 300 of gdp. How do you from a policy stand point, as youre looking at an environment of possibly future Interest Rate adjustments and the effects that will have on u. S. Currency. At the same time with lets face it, a developing country debt i wont call it crisis, but debt stress on the horizon. A. , how does that affect your Decision Making. But b. , does that provide us any fragility to our Economic Growth, our even potential recession threats . Well, its certainly something we take account of as we try to evaluate the Global Environment and the likely impact it could have on the United States. And its something we look at as well as part of our Financial Monitoring to try to determine whether there are risks that could impact Financial Stability in the United States. But will the fed engage in certainly Bilateral Agreements or swap agreements with some of the well call them developing countries or reserve banks to actually help wall off a cascade effect and those of us who remember the tequila crisis and the others. What inoculations, what indemnification does the fed engage from a policy set . The fed has swap agreements with a very small number of advanced countries Central Banks where we think its important to make sure that banks doing dollarbased business have access to adequate liquidi liquidity. We have no swap arrangements with emerging market countries, and the only reason that we engage in those swap market arrangements is to essentially protect Financial Stability in the United States. So there is no i dont know the word you use, indemnification. Yeah, i was trying to find a way or inoculation. We could pick a few of them. These are risks we consider in looking at u. S. Financial markets. When you talk about debts, i think what we whats been discussed over the last year or so is the fact that private companies in it many emerging markets have taken on dollar denominated debt. Yes. I think my sense is that the Banking Systems and the financial sectors of those emerging markets have been much more carefully regulated in recent years and are less vulnerable. They have themselves less dollar denominated and shortterm debts. But the Companies Corporations in these countries do have taken on a large quantity of debt. Do you see cascade risks in developing companies from both sovereign debt loads and private debt loads in those countries that would affect our economy . I it is a risk that we monitor. I would not at this point say that its very serious risk to the u. S. Financial system. Okay. And this is not meant to be sort of a oneoff another oneoff question. But we were looking at some data about a month ago. And well call it dollar euro contracts. And the movement away from their being settled in new york, and some of that i did not know was because of a regulatory or cost situation. They were not being settled under our Regulatory Environment. Does that movement of dollar denominated contracts being settled overseas have any threat or difficulty to the Federal Reserves ability to both see data but also influence regulatory and Even Movement of those resources . So im not aware that there is such a trend. But i will try to look at that and get back to you. Okay. Thats one of those technical written questions we have submitted. Mr. Chairman, i yield back. Thank you. Thank you. I just want to inform members here, the chair has a need to leave at noon. And we want to honor that. Ive just talked to the vice chair and she agrees. Which means maybe what we can do, i want to give everybody a chance to get a question in. But could we limit it to one question and maybe keep it to two to three minutes so that everybody has an opportunity to do that before we run out of time . Dr. Adams, youre the next on the line here. Thank you, mr. Speaker. Mr. Chair and thank you Ranking Member maloney for hosting the hearing and chair yellen, thank you for being here. Based on the commentary ive heard from some of my colleagues and the media claiming that the Federal Reserve overreaches in its ability to adjust Interest Rates, it may not be clear that one of the most important factors impacting how the Federal Reserve will set this space is based on whats called the equilibrium real Interest Rate which has been consistently low or even below zero. Given that the equilibrium rate is low, close to zero. What has not been receiving enough attention is how fiscal policy should play an increasing role in stimulating demand and providing an uptick to the economy. Since the Federal Reserve has limited tools on how it can impact economic recovery through Monetary Policy, including adjusting Interest Rates and implementing quantitative easing or forward guidancguidance, can speak to the impact that fiscal policy, particularly questions trags and the lack of support and certainty for certain tax expenditur expenditures, even financial tools has had on the rate of overfor our economy . Let me say generally there is evidence that the socalled equilibrium rate this is a real rate of interest or inflation adjusted rate of interest, fell sharply after the financial crisis and remains quite depressed. And it is a factor that leads us to believe that even when we start raising rates that those rate increases will be gradual. Now, in general, when this rate comes down, it means that rates are likely to be lower than the historical norm. And to the extent that we are operating in a low, even if positive Interest Rate environment, if the economy is hit by negative shots, well, we do have tools that we can use. Our most sure and certain instrument of policy is the fed funds rate. So when the average level of the fed funds rate is low, we have less room to respond to negative shocks. So it would be helpful to be an environment and give us more scope to be stimulating the economy and responding to adverse shocks if the average level of Interest Rates were somewhat higher. And i dont want to give you advice on fiscal policy thats up to you. But a more stimulative fiscal policy is something that would in a sense enable the fed on average to have somewhat higher level of rates and then to have more scope to respond to negative shocks. Thank you very much. Mr. Chair, im going to yield back. Congressman. Thank you, mr. Chairman. And madam chair, thanks so much. The recent fomc projections have a rate of 4. 9 , close to what we always taught was maximum unemployment. But the broad market, who have given up looking for work or employed part time for economic reasons and the u6 to 9. 9 in october. During the last economic expansion from 2001 to 2007. This is maybe still considerable slack in the labor market. So how important is the u 6 and other labor tools . And basically, given the considerable slack suggested, this could be the right time to raise rates. So i would agree with you that u6 remains elevated relative to its historic norms. It is higher than i would have expected, based on our based onl experience, given where the standard or u3 Unemployment Rate is. Its one of the things that leads me to believe that even though were close to that 4. 9 median, there does remain a margin of slack in the labor market. An important part of u6 that makes it that high is involuntary parttime employment. While thats come down substantially, its hard to tell for sure, because there is a trend over time toward more parttime employment in the u. S. Economy. But i believe that it remains higher than it ought to be in a socalled full employment economy. In addition, as you noted, there are also discouraged and marginally attached workers. Again, thats come down too. I do see margins of slack, and i do think theyre reflected in that discrepancy in u6. Thank you, madam chair. Thank you, chair yellen. Im going to follow up on what the vice chairman mentioned. Its more along the cumulative impact that i have concerns with from the regulatory perspective, that the financial sectors had to deal with. Im thinking the recent adoption of capital surcharges and the total loss of capacity, tlac proposal. Can you describe a little bit what all of these changes mean on a cumulative basis, and in particular, this cost benefit analysis, has it been discussed to do a more comprehensive analysis of what the accumulation of all these regulations have on the industry in particular and on the economy. This regulatory rule book has been in a constant state of revision essentially for the last six years. Can you see any benefit of pausing the process just to assess that cumulative impact on regulations, what its having on the economy . So i do think the regulation is having an important impact on the economy. And my assessment would be the most important impact its had is to make the Banking System and the Financial System more broadly far safer and sounder and less crisisprone than it was prior to the financial crisis. You described two regulations, the socalled tlac or Long Term Debt requirement we proposed recently. And i believe you also mentioned capital surcharges. Its important to understand that those regulations only applied to the eight largest systemically important banks. In our regulations, we are trying to make sure that Community Banks that are not systemic are not responsible for the financial crisis, are not going to be hit with all of those regulations. But i do think its critically important that the very largest and most systemic organizations need to be safer and sounder. They need to have more capital. They need to have more liquidity. And Congress Told us that they need, in the event that they encounter difficulties or insolvency, we need to be able to resolve those institutions. We dont want the taxpayer bailing out those institutions again. And the surcharges, higher capital standards, means theyre much less likely to fail. It gives an advantage to medium and smaller size institutions, to the extent it burdens them in competing away their business, and thats safer. And if they didnt need to be resolved, that loss absorbency that comes from having Long Term Debt at the Holding Company is going to be something that is very important, that would enable their resolution, either under title ii or the bankruptcy code. Yes, there are some coasts associated with these regulations, and certainly on parts of it weve done significant costbenefit analysis. But really, there is a huge benefit. And i mean, according to one estimate, the cost to the United States of the financial crisis probably amounted to 16 trillion, ive seen one estimate that puts it at 16 trillion. So having a safer and sounder Financial System by having more capital and liquidity and resolvability is really, i think, clearly a net benefit. Thank you, mr. Chairman. Thank you. Congressman . Thank you. I hope this question hasnt been asked before. Your two publicly stated mandates are price stability and full employment. And insofar as when you answer my question on full employment, i want you to remember, we have a lot of safety net programs and a lot of people feel that were not going to achieve any better than whatever were at, 4. 9 right now, because the safety nets are so generous, people are either not looking or working parttime. At least right now, price stability and full employment are supposedly where you want them to be. Given that were at price stability, full employment, and the Banking System is recovered, can you explain to all the savers, i used to represent older people, you save money, you live off the Interest Rate. Could you explain to our savers and our Elderly Population why you continue to maintain a zero Interest Rate, given that it appears were at full employment, given it appears our banks are stable, and given it appears we have no inflation . Well, so i would say that inflation is running, i think were pretty close to maximum employment, inflation is running below our 2 objective, and we certainly want to see that changed. Our economy is, in the sense that youve described, doing well. That is the reason that it is a live option for us at our december meeting to discuss, as we indicated, whether or not its appropriate to raise rates. But we do have to ask the question, what is the socalled neutral rate at which the economy would continue to operate near full employment and approach price stability. And a good deal of research, and i discussed some of this in a speech i gave just yesterday, suggests that the neutral rate of interest is very much lower than its been historically. In real or inflationadjusted terms, perhaps close to zero at present. So the level of Interest Rates that would support a continuation of these desirable trends is probably low. Of course, when we were recovering from the Great Recession with high unemployment, to stimulate all the job creation we had, we had to keep Interest Rates at very low levels, zero. We are contemplating raising them. But we have said that we expect that process to be gradual. And we want to make sure that, having achieved this progress in the labor market, we maintain it and dont put it in danger. You mean, my whole lifetime, when older people put money in the bank, and they were getting 3, 4, 5 , we didnt know it, but during that whole time we were putting an unnecessary drag on the economy . We had a different economy then. And many things are different domestically and globally than they were then. The rates of return that savers are able to get depend on the strength of investment demand, the strength of demand for borrowing the funds that savers are trying to provide. And we live in an economy globally as well as domestically were in some sense there is a great deal of savings relative to the demand for those funds. And thats a market force that shapes the reality that the Federal Reserve operates in, and conditions our ability to set rates that will be consistent with the attainment of congresss objectives theyve asked us to achieve. So people are saving more money so we cant give them as much Interest Rates, theyre saving more than they used to . If there were a huge demand for those funds, Interest Rates would be bid up to the levels that were more accustomed to having experienced historically. But the demand for those funds is simply not Strong Enough to generate a level of Interest Rates thats more historically normal. Thank you, congressman. Congressman hanna has graciously waived his time. I want to say, chair, that i think this has been a very constructive and timely hearing. We deeply appreciate your willingness to be with us. We have a common goal. Those of us on both ends of constitution avenue, the congress of the United States, along with the executive branch, but also the Federal Reserve. I think that common goal is to enact and implement sound policies that achieve a dynamic economy, that provides meaningful employment, not only for our generation but meaningful employment for future generations. And the more we can Work Together and the more we can share how we get to those common goals, and pass that on to future generations, that clearly is a goal that has to be pursued with a lot of passion and a lot of intellect. And you provide both. So we thank you