Relatively fragile recovery and we want to avoid taking fiscal action that will push the economy back into recession. That was one of the risks that the fiscal cliff posed. The challenge is to achieve long run sustainability without unduly hampering the recovery which we have. The deal that was struck together with the previous work in 2011 that involved some spending cuts made some progress in both of these goals. Sustainability still abil over the decade we have seen improvement in the debt to gdp ratio. Theres more work to be done, but some progress there. And in the short run, the fiscal cliff deal on new years eliminated a good bit of the restrictive components of the fiscal policy that would have had such adverse effects. Not completely, but at least a good start. There was a bit of progress on both of these goals, very importantly. I hasten to say that were not out of the woods, because we are approaching a number of other physical and critical watersheds coming up. Weve got the funding of the government, the socalled sequestered, which is a set of automatic spending cuts that were delayed by two months as part of the fiscal cliff arrangement, and we have the infamous debt ceiling, which will come into play. So we will be seeing a lot of activity in the next few months, debates about people criticize the government, about the size of the deficit, and it a lot of back and forth over these three issues. Without going into all the different ramifications, i want to say one word about the debt ceiling, which is not everybody understands what the debt ceiling is about. The debt ceiling raising the debt ceiling, which congress has to do periodically, gives the government the ability to pay its existing bills. It does not create new deficits. It does not create new spending. So not raising the debt ceiling is sort of like a family which is trying to improve its Credit Ratings and i know how we can save money, we will not pay our credit card bills. Not the most effective way to improve your credit rating. It was a very slow solution to the debt ceiling in august of 2011 that got the u. S. Downgraded last time. So its very important. All these issues are important, but its very, very important that Congress Take necessary action to raise the debt ceiling to avoid a situation where our government does not pay its bills. A number of people have expressed concern about how much of the challenges actually were addressed in the deal. It went part of the way, as you mentioned. But it leaves a number of issues still on the table and traditional negotiations are looming. Would you characterize that as an additional cliff that is facing us . Or do you think it is not as concerning as it was when you raised the term initially . As i said, the fiscal cliff, if allowed to take place, would have probably created a recession this year. A good bit of that has been addressed. Nevertheless, we still have a fairly restrictive set of fiscal policies now. It is estimated that federal fiscal policy will contract from real gdp growth something on the order of 1 to 1. 5 this year, a significant drag on the economy. We have quite a bit to do to address our longterm still beneatsustainability issues. Its going to be a long haul. Its not going to happen overnight, basically because the government budget represents the values and priorities of the public and decisions being made about what to spend on, what do tax and so on, are difficult and contentious issues that will take some time to address. Those issues are not the specific purview of the fed, so why dont we shift gears and talk about some of things the fed is doing and might do. Perhaps a way to introduce that is to say that the fed has been keeping Interest Rates at close to zero since roughly 2008. It has done a pretty deep into its arsenal of very unconventional policies recently in terms of the very massive asset purchases. Recently launched its third round, which tended to bring longterm Interest Rates. Can you tell us how well you think that is working . To go back one step, as you said, we have brought the short term Interest Rates down almost to zer. For years Monetary Policy involved moving overnight Interest Rates up and down and open the rest of the Interest Rates would move in sympathy. Then we hit a situation in 2008 where we had brought the short term rates down as far as it could go, almost to zero. The question is what more could the fed do . There were many people a decade ago, a lot of articles about how the fed would be out of ammunition if it got the short term rate down to zero. But a lot of work by academics and others, researchers at Central Banks, suggested there was more that could be done once you got the short term rate down to zero. What you could do in particular is try to address the longterm Interest Rates, bring those down. Two basic ways to do that. One way is through talks, communication, sometimes open mouth operations is what its called. The idea being that if you tell the public you are going to keep rates low in the long term, that will have the effect of pushing down longterm Interest Rates. Once you are asking about is what we call at the fed the largescale asset purchases otherwise known as qe. The idea there is by buying large quantities of longerterm treasury securities or Mortgage Backed securities, we can drive down Interest Rates on those key securities and that in turn affects spending and investment in the economy. The latest episode so far we think we are getting some effects. Its kind of early. But overall it is clear that through a day three iterations you referred to, we have succeeded in bringing down long term rates pretty significantly and clear evidence of that would be Mortgage Rates. The 30year Mortgage Rate is Something Like 3. 4 now. Incredibly low. That in turn makes housing very affordable. That in turn is helping the housing sector recover, creating construction jobs, raising house prices, increasing activity in that sector, real estate activity, and so on. Broadly speaking, we have found this to be an effective tool. But we will continue to assess how effective, because its possible, that as you move through time and the situation changes, that the impact of these tools could vary,. What we have decisively shown is the shortterm Interest Rate at 0, but zero lower bound problem, does not mean the fed is out of ammunition. There are still things we can do and have done. Other Central Banks around the world have done similar things and have also had some success in creating more monetary policies support for the economy. You mentioned that Mortgage Rates have come down to the initial round. The concern is that the Unemployment Rate remains very high and to further increase activity to try to bring that down, one would hope to see some Additional Movement from the most recent round. Are you suggesting that one would need to be patient . Would you say more about how you would assess whether this most recent round is having the kind of affect you would expect or anticipate . As i said, we will be doing that on a regular basis. We will be looking first at the impact on Financial Markets. We do see some impact there. We will be looking to see whether or not the labor market situation is improving. There has been some modest improvement. When we first began talking about the latest round, the Unemployment Rate was 8. 1 and now it is 7. 8. We would like to see a stronger labor market. A labor market with nearly 8 unemployment with 40 of the unemployed having been out of work six months or more, that is not an acceptable situation. Too many people whose skills and talents are being wasted and have been suffering significant hardships. So were looking to see improvement in the labor market and in the economy more broadly. We will continue to evaluate. I cannot give you specific criteria other than to say we will assess the impact of our actions on Financial Market conditions and to see how those link to developments in labor markets and in the broader economy. As always, you have to make assumptions. You have to ask yourself what would have happened if we had not taken these actions . Again, the evidence seems to be in not only evidence in the u. S. But also the u. K. And elsewhere these types of policies do have some impact on the economy. At this point, having reduced the shortterm Interest Rates close to zero, we are looking for the tools we can get to get better outcomes. So, hopefully, there will be more of an impact going forward, to continue to bring the Unemployment Rate down more quickly. You mentioned you are looking at the kind of tools available. Is there more into a tool kit of the fed that might have the kind of power to have additional affect . First, on the pace of improvement, but is an interesting question. The pace of Economic Growth over the last two years, since the beginning of recovery, has not been as strong as you normally would think would be needed to get really big improvements in the labor market. Nevertheless, we have seen a decline in unemployment from 10 to 7. 8 , which is really significant, and we hope to see ongoing improvement. So its hard to judge how much more but we will see. Certainly we want to keep things going in the right direction. In terms of additional tools, as i mentioned, once you get the shortterm Interest Rates down to zero, there are two principal approaches. Peter securities purchases or communication. Either securities purchases or communication prepares the Interest Rates we pay on x x reserves, as well. The excess reserves. We can look for ways to improve communication and be more effective. But theres no completely new method we have not yet used, as far as i know. We have just had a meeting of the detroit board of the board of directors of the chicago fed, as you know, which provides some information about the conditions more explicitly in this region and the conditions across the country are quite varied. I wonder if you could share how you factor in the differences across different parts of the economy when making decisions that are more aggregate . Thank you, dean collins, first, for joining the Detroit Branch. People probably dont know, unless you have been studying this, but every Federal Reserve bank around the country, but 12 reserve banks and a good number of additional branches, each one has a board of directors drawn from the private sector. It could be academics, it could be businesspeople, it could be community leaders, nonprofits, organizers, and so on. We draw these people in primarily to give their input and their insight. This is a very large and complex economy. There are many different sectors. Its very helpful to us to have people from leaders from different parts of the economy, from different parts of the country providing this input and giving us somebody to bounce ideas off of, to help us make a better decision and understand whats going on. So thats very useful. I attended part of the meeting this morning with the Detroit Branch and i heard from a number of people about the Auto Industry, health care, academics, industry, a variety of things. So that is actually very useful. Now, in terms of the local economy, michigan is still, notwithstanding that it has become much more diversified, it still has a pretty significant reliance on automobile production. Because auto sales dropped so sharply during the great recession, the Unemployment Rate here rose 15 or Something Like that compared to a 10 national peak. It has now come back quite a bit as the Auto Industry has improved. And so, were seeing some strengthening, although conditions here are still not aware we would like them to be. The Housing Market also has come back some in michigan. Like many other industrial parts of the country, like pittsburgh steel plants and other places, michigan also is diversifying and is bringing in hightech, various kinds of services, health care, education, and so on. Places like the university of michigan, ann arbor, are a tremendous resource for entrepreneurs, people trying to develop new hightech businesses. So it is a good sign to see that america still has a powerful industrial base, but it is diversifying into a wide range of new types of industries. So it is a large and complex economy. I dont know if you want to talk about the broader economy or not, but we can come back to it if you like. We have been seeing some improvement in the labor market. It is still not where we would like it to be. Growth has been moderate. There are some positive signs to look at. One of the key positives that are already made reference to its housing. As you know, house prices in the u. S. Fell 30 and the amount of construction fell extraordinarily over this recession. Now for the first time really since 2007 or 2006 we are starting to see increases in production, rising house prices will affect household wealth. So thats one positive factor that will help us have a better year in 2013 and in 2014, i hope. If a few other things that are positive, one is that state and local governments, which have been in very contraction in remote because the loss of tax revenue during recession and laying off people, having postponed spending, they are in much better shape now than they were in a few years ago, including michigan. As a result, they will not be the drag on the economy they have been the last few years. The Energy Industry in the u. S. Is looking much stronger. Consumers are more optimistic. University of michigan publishes the index of consumer sentiment, which is one of the very best guides to how consumers are feeling. As long as the fiscal policy and thing is too messed up, consumers seem to be little bit more upbeat. So there are some positives. But i want to be clear that, while we have made some progress, it is still quite a ways to go before we are where we would be satisfied. Well, let me shift gears a little. Certainly, as you know, there are some very vocal critics of fed policy. I wonder what you might say to those who argued that the policy that has maintained Interest Rates at such low levels has taken some of the pressure off of congress to try to address these fiscal challenges and that the massive asset purchases have created extremely high risks for future inflation. The critics are on both sides. Give the other guys a chance. [laughter] i will get there. Youll get their later . Ill give them a chance. Let me first say that as we think about the costs and risks of any policy, we should also think about what we are trying to accomplish. I made reference already, but the Federal Reserve has a dual mandate from the congress to achieve or at least try to achieve price stability. And stability. Price stability means low inflation. We have basically taken that to mean to inflation. Inflation has been very low. Its been below 2 and appears to be on track to stay below that. So our price stability record is very good. Unemployment, as we have already discussed, is still quite high. It has been coming down, but very slowly. The cost of that is enormous in terms of lost resources, our chi harship, talents and skills being wasted. Our effort to try to create more strength in the economy to try to put more people back to work, that is an extraordinarily important thing for us to be doing. If i think it motivates an end justifies what has been an aggressive Monetary Policy. So that is what we are doing and that is why we are doing it. Are there down sides or potential costs and risks . There are some. You mentioned inflation. We have, obviously, used a very expansionary Monetary Policy. We have increased the monetary base, which is the amount of reserves that banks hold with the fed. Some people to think that will be inflationary. Personally, i dont see much evidence of that. Inflation has been quite low, as i mentioned. Inflation expectations remain quite wellanchored. Forecasters dont see any inflation coming up. In particular, we have, i believe, all the tools we need to undo our Monetary Policy stimulus and to take that away before inflation becomes a problem. So i dont believe significant inflation will be a result of any of this. That being said, price stability is one part of our dollar mandate. And we will be paying very close attention to make sure inflation stays wellcontained, as it is today. The second issue worth mentioning its Financial Stability. This is a difficult issue. The concern is, has been raised that by keeping Interest Rates very low, that the Federal Reserve induces people to take greater risks in their Financial Investments and that in turn could lead to instability later on. Again, a difficult question. I probably could take the rest of the hour talking about it, so i dont think i will. But i will say we are, first of all, very engaged in monitoring the economy, the Financial System. The fed has increased enormously the amount of resources we put into monitoring financial conditions and try to understand whats happening in different sectors of the Financial Markets. We have also been part of the very extended effort to stre