[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]



 
                        MONETARY POLICY AND THE
                          STATE OF THE ECONOMY

=======================================================================

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 20, 2006

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 109-110


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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana          PAUL E. KANJORSKI, Pennsylvania
DEBORAH PRYCE, Ohio                  MAXINE WATERS, California
SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             MELVIN L. WATT, North Carolina
ROBERT W. NEY, Ohio                  GARY L. ACKERMAN, New York
SUE W. KELLY, New York, Vice Chair   DARLENE HOOLEY, Oregon
RON PAUL, Texas                      JULIA CARSON, Indiana
PAUL E. GILLMOR, Ohio                BRAD SHERMAN, California
JIM RYUN, Kansas                     GREGORY W. MEEKS, New York
STEVEN C. LaTOURETTE, Ohio           BARBARA LEE, California
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North          MICHAEL E. CAPUANO, Massachusetts
    Carolina                         HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois               RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut       JOSEPH CROWLEY, New York
VITO FOSSELLA, New York              WM. LACY CLAY, Missouri
GARY G. MILLER, California           STEVE ISRAEL, New York
PATRICK J. TIBERI, Ohio              CAROLYN McCARTHY, New York
MARK R. KENNEDY, Minnesota           JOE BACA, California
TOM FEENEY, Florida                  JIM MATHESON, Utah
JEB HENSARLING, Texas                STEPHEN F. LYNCH, Massachusetts
SCOTT GARRETT, New Jersey            BRAD MILLER, North Carolina
GINNY BROWN-WAITE, Florida           DAVID SCOTT, Georgia
J. GRESHAM BARRETT, South Carolina   ARTUR DAVIS, Alabama
KATHERINE HARRIS, Florida            AL GREEN, Texas
RICK RENZI, Arizona                  EMANUEL CLEAVER, Missouri
JIM GERLACH, Pennsylvania            MELISSA L. BEAN, Illinois
STEVAN PEARCE, New Mexico            DEBBIE WASSERMAN SCHULTZ, Florida
RANDY NEUGEBAUER, Texas              GWEN MOORE, Wisconsin,
TOM PRICE, Georgia                    
MICHAEL G. FITZPATRICK,              BERNARD SANDERS, Vermont
    Pennsylvania
GEOFF DAVIS, Kentucky
PATRICK T. McHENRY, North Carolina
JOHN CAMPBELL, California

                 Robert U. Foster, III, Staff Director


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 20, 2006................................................     1
Appendix:
    July 20, 2006................................................    51

                               WITNESSES
                        Thursday, July 20, 2006

Bernanke, Hon. Ben S., Chairman, Board of Governors of the 
  Federal Reserve System.........................................     6

                                APPENDIX

Prepared statements:
    Oxley, Hon. Michael G........................................    52
    Brown-Waite, Hon. Ginny......................................    54
    Waters, Hon. Maxine..........................................    55
    Bernanke, Hon. Ben S.........................................    57

              Additional Material Submitted for the Record

Board of Governors of the Federal Reserve System:
    Monetary Policy Report to the Congress.......................    66
Hon. Michael G. Oxley:
    Chart Depicting Inflation Under Different Federal Reserve 
      Chairmen...................................................    96
Hon. Luis V. Gutierrez:
    June 19, 2006, Open Letter on Immigration to President Bush 
      and all Members of Congress signed by 500 American 
      Economists.................................................    98
    July 10, 2006, Open Letter on Immigration with 33 
      Conservative Signatories as Published in The Wall Street 
      Journal....................................................   104
    May 21, 2006, op-ed piece from the Wall Street Journal 
      entitled, ``Reagan on Immigration''........................   107
Hon. Barney Frank:
    June 27, 2006, Floor Remarks of Hon. Ruben Hinojosa in 
      Deference to Hon. Ben Bernanke.............................   109
    June 13, 2006, Remarks by Chairman Ben S. Bernanke at the 
      Fifth Regional Issues Conference of the Fifteenth 
      Congressional District of Texas, Washington, DC............   111
Hon. Ben S. Bernanke:
    Response to Questions Submitted by Hon. Spencer Bachus.......   118
    Response to Questions Submitted by Hon. J. Gresham Barrett...   123
    Response to Questions Submitted by Hon. Ginny Brown-Waite....   126
    Response to Questions Submitted by Hon. Barney Frank.........   130
    Response to Questions Submitted by Hon. Ruben Hinojosa.......   133
    Response to Questions Submitted by Hon. Deborah Pryce........   137
    Response to Questions Submitted by Hon. Barbara Lee..........   140
    Response to Questions Submitted by Hon. Maxine Waters........   142
    Copies of Speeches in Response to Inquiry of Hon. Maxine 
      Waters.....................................................   145


                        MONETARY POLICY AND THE
                          STATE OF THE ECONOMY

                              ----------                              


                        Thursday, July 20, 2006

             U.S. House of Representatives,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10 a.m., in room 
2128, Rayburn House Office Building, Hon. Michael G. Oxley 
[chairman of the committee] presiding.
    Present: Representatives Oxley, Leach, Baker, Pryce, 
Bachus, Castle, Kelly, Paul, Gillmor, Manzullo, Biggert, Miller 
of California, Kennedy, Hensarling, Garrett, Barrett, Pearce, 
Neugebauer, Price, Fitzpatrick, Davis of Kentucky, McHenry, 
Campbell, Frank, Waters, Maloney, Gutierrez, Lee, Moore of 
Kansas, Capuano, Ford, Hinojosa, Clay, McCarthy, Baca, 
Matheson, Miller of North Carolina, Cleaver, Bean, and Moore of 
Wisconsin.
    The Chairman. The committee will come to order.
    Chairman Bernanke, good morning. In February, this 
committee was proud to be the venue for your first appearance 
before Congress on the conduct of monetary policy. Today marks 
your second appearance, with many more yet to come. In 2001, 
shortly after I assumed the chairmanship of this committee, the 
very first hearing I chaired was to receive the testimony of 
former Chairman Greenspan. We didn't know it at the time, but 
we had a very rough patch of economic road ahead with the 
bursting of the tech bubble; and 9/11 and the resulting 
insurance crisis and the corporate bankruptcies. Back then, we 
had a weak economy that everyone said was strong. Now we have a 
strong economy that some are trying to convince us is weak.
    Some of the credit for the current robust economy goes to 
the Federal Reserve, of course, where you and Chairman 
Greenspan have held inflation to lower levels and lower 
volatility than we have seen in all but 20 years of the life of 
the Federal Reserve. I would like to enter a chart showing that 
into the record.
    The lion's share of the credit goes to President Bush, who 
had the steadiness to guide us through recession and the 
courage to do the right thing in seeking tax cuts to spur 
growth. Now we see that the biggest spurt in tax revenue growth 
in 40 years has trimmed our expected 2006 deficit by a third in 
just 6 months, and is on track to drop the deficit as a 
percentage of GDP to less than half of the similar share in 
most European economies.
    Some of the credit goes to Congress, which made the tax cut 
stick, although we still have some work to do on making tax 
cuts permanent, and on spending discipline.
    But the largest credit of all goes to the American people, 
who with determination, character, and heart, showed what a 
great country this really is. America suffered a recession, a 
massive terror attack, scandals of corporate governance, and a 
destructive hurricane season. Through all of that, we have 
added 5.4 million jobs in the last 3 years; we have had 34 
uninterrupted quarters of growth; we have an unemployed rate 
lower than that of most of the last 40 years; and we also have 
growth at or above the average rate for all 6 postwar decades. 
In June alone, the U.S. economy created 121,000 new jobs, and 
maintained a low 4.6 unemployment rate.
    I would be remiss if I did not point out that the 
unemployment rate is lower than the 6 percent floor that the 
economists used to call full employment. GDP growth for the 
first quarter was 5.6 percent, stronger than expected, and the 
fastest growth in two-and-a-half years. That, Mr. Chairman, is 
something we can all be proud of.
    This is a remarkable country and a remarkable economy that 
constantly renews and reinvents itself--the flexibility that 
Chairman Greenspan talks so much about. The Federal Reserve has 
led monetary policy extremely well, and I am certain that will 
continue to be the case during your tenure.
    Mr. Chairman, America is doing well, and will continue to 
do well. Of course, we will continue to have to work and think 
and innovate, because other countries have smart people and 
good economies as well. However, since the recession and the 
terror attacks, this country's economy has grown a great deal. 
In real terms, U.S. growth alone is half as big as the total 
economy of China.
    So with that, Mr. Chairman, I thank you and all of the many 
people at the Federal Reserve, most of whom we have never met, 
for their insight and experience and dedication. And we look 
forward to your testimony, Chairman Bernanke.
    And with that, I yield back the balance of my time and now 
recognize the ranking member, the gentleman from Massachusetts.
    Mr. Frank. Thank you, Mr. Chairman. It is true that we have 
had growth, but we have had the most unequally distributed 
growth recently in my memory, and the consequences of that are 
severe.
    Let's begin with where we are in America today. The Doha 
Round is foundering, and there is a desperate need to get it 
done for those who want it done because of the perception that 
Congress would not renew the fast track authority to the 
President. There was a reaction to the Dubai Ports matter that 
I believe most in the business community, most of the 
economists and financial people, thought was overdone. The 
President found--to his surprise, I think--resistance to his 
approach on immigration. There are resistances coming to 
efforts to implement productivity.
    What you have is a kind of revolt on the part of the 
average American against globalization, against the adaptation 
of new technology, which was kind of summed up somewhat 
wistfully by Mr. Allan Hubbard, the director of the National 
Economics Council--a week ago he said, ``Obviously it is 
frustrating to us that the American people don't recognize how 
well the economy is doing.'' Or as Chico Marx said, ``Who are 
you going to believe, me or your own pocketbook?''
    The reason the American people don't recognize how well the 
economy is doing, and the reason they are angry and are balking 
at many of the things that I believe you would like to see us 
do, Mr. Bernanke, is that they are not doing well. The economy 
is, but there is a disconnect between the average American and 
the economy.
    First, talking about jobs, it is true we have gotten some 
jobs; my friend, the chairman, said, ``Look, 120,000 jobs.'' 
Only 120,000 jobs used to be a bad thing. What the 
Administration has given us is the evolution of diminishing 
expectations. That chart represents their projections of how 
many jobs will be created each month, beginning in 2003, after 
they said the tax cuts have had an effect and after the 
recession. There has been a constantly declining prediction by 
the Administration of how many jobs we would create. So it is 
true that if you define victory low enough, you can often 
achieve it, except that they haven't. Even as it has declined, 
they have rarely met it.
    The other, of course, is a comparison of job creation on 
the left side in the Clinton years and in the Bush years. Take 
comparable periods, 2 years, starting 2 years into each 
presidency so they are not accused or blamed for what happened 
before. Two years in each presidency; those are the job 
numbers. So 120,000 jobs under the Clinton years would have 
been considered to be a serious problem, but the problem is not 
just job creation. Yes, unemployment is low, although it is low 
in large part because of the drop in labor participation, and 
exactly what causes that, we don't know. What effects that will 
have over long-term economic growth, we don't know. But it is 
also the case that we have low unemployment because we have the 
lowest percentage of people in the workforce.
    But here is the serious problem--real wages. Real wages are 
the red chart; that is, wages corrected for inflation. Now, we 
are told that wages go up with a lag in their recovery, but the 
reverse has happened here. Assuming the recovery begins in 
2003, maybe even earlier, real wage growth is very small in 
2004--2003. It is negative in 2005--2004 and negative in 2005, 
and barely there today. That is, real wages are lagging 
inflation, and I must say, Mr. Bernanke, I was disappointed 
that in your discussion in the monetary report--not your 
statement--pages 16 and following, when you talk about 
compensation, it is nominal. It is not real. And I think that 
talking unadjusted terms about wages unfairly gives people the 
impression that things are better than they are. I wish that 
you would have used real wages.
    And in your statement, part of the problem, frankly, is--
and I will ask you about this on page 3 of your statement--you 
talk about labor costs, but you talk about wages as a cost. 
Your discussion of wages does not address them as the wage 
families support themselves, but as a constraint in the 
economy.
    Let me quickly go to the next chart. Not only have wages 
lagged inflation, they have lagged productivity. They have 
lagged corporate profits. What we have is a--in this chart on 
the left, you have what has happened to the share of national 
income that goes to wages. It has gone from 66 percent to 63 
percent. On the other side, you have what has happened--this is 
from 2002 to 2006, the share that has gone to corporate 
profits. It has nearly doubled from 8.5 percent to 14.4 
percent, so real wages have dropped in the last couple of 
years. Labor's share of the national income has dropped from 66 
percent to 63 percent, and corporate profits have gone way up.
    And then finally, you do have the question of productivity 
on the next chart. Here we have productivity compared to real 
wages, and you look in particular in these last 3 years, 
productivity goes way up, way above historic trend, and real 
wages go down.
    Now, we have--and I will take this 30 seconds, Mr. 
Chairman, thank you. We have concern that wages will be 
inflationary. In fact, exactly the opposite has been the case. 
Where you have a situation where productivity greatly outstrips 
real wages, you clearly have room--and here is what you have: 
productivity greatly outstripping real wages; real wages 
dropping over the last couple of years; and corporate profits 
skyrocketing. To continue to treat possible wage increases as a 
problem for the economy is to perpetuate the growing inequality 
we have. So when people are concerned that there appears to be 
too much anger on the part of the public toward the best 
economic decisions, those are the reasons why.
    Thank you, Mr. Chairman.
    The Chairman. The gentleman's time has expired.
    The Chair now recognizes the gentlelady from Ohio, the 
subcommittee chairwoman.
    Ms. Pryce. Thank you, Mr. Chairman. And thank you, Chairman 
Bernanke, for being with us here today.
    I was pleased to read in your testimony that you believe 
that even though the economy is currently in a transition 
period, that it will continue to expand even under the pressure 
of increased oil prices, consumer spending, and a slowing 
housing market. I would like to talk about that just briefly.
    Studies have shown that housing accounted for more than 
one-third of economic growth during the previous 5 years. The 
robust housing market had enabled homeowners to reduce their 
debt burdens and maintain adequate levels of consumer spending 
by tapping into the equity of their homes. Unfortunately in 
research done by the National Association of Home Builders, 
they show a serious downtrend in housing demand that many 
believe correlates with the rise in interest rates by the 
Federal Reserve.
    As I have said in the past, I am concerned that this house 
price boom has been driven far more by investors than ever 
before, and could lead to a series of mortgage failures, and as 
the Federal Reserve tries to balance rising rates with 
fluctuations in the markets, I don't need to remind you that 
your actions have a trickle-down effect to local communities, 
and losses on housing investments are just one example.
    A study by the Mortgage Bankers Association puts my own 
State of Ohio at the very top of the list of foreclosures, and 
so we are very concerned in the Midwest. Although we would 
sometimes like to think of our economy as one that stands apart 
from the rest of the world's sociopolitical issues, the effect 
of volatility overseas is reaching into our economy more than 
we might realize.
    Just yesterday I held a hearing in my subcommittee on 
currency issues. We had representatives there from the Federal 
Reserve and the Mint discussing with us the rising cost of the 
commodities and materials that make up our coins. We heard 
these commodities are affected by the volatility in the world 
or through rising demand in other markets, and are also 
themselves affecting our inflation here in the United States. 
The more they cost, the more they drive up the cost to make our 
currency, and the more it drives up costs overall.
    In your remarks at the Senate yesterday, you touched upon a 
number of issues concerning citizens, such as rising rates, gas 
prices, and wage earnings. One of the issues that has been 
important to me, and a number of other members on this 
committee, is the ratio of consumer debt to consumer savings in 
America, and the effects that a slowing economy could have on a 
more local level. I agree with your statement yesterday that we 
must be forward-looking in our policy actions, and I would 
appreciate hearing your thoughts on what Congress can do about 
low savings rates, especially coupled with rising consumer 
costs.
    Some of us, Mrs. Kelly, Mrs. Biggert, Mrs. Maloney, and 
myself, have worked to bring this issue to a national focus for 
a number of years, and we mentioned it repeatedly, working with 
the Administration to highlight increasing financial education 
in the United States, but much more needs to be done.
    You also talked about an international savings glut that I 
believe we have here in America, a credit glut. I believe we 
can say it is almost a national epidemic. Consumer spending is 
key to our continued growth, but I believe we also need to send 
a message that consumer savings is just as important, and I 
appreciate hearing from you what the Federal Reserve and the 
rest of us can do to help consumer savings become a priority in 
this Nation. And I want to thank you once again, Mr. Chairman, 
for your appearance. I look forward to your testimony, and I 
yield back. Thank you.
    The Chairman. I thank the gentlelady. Thank you for your 
leadership on this issue.
    The gentlelady from New York, Mrs. Maloney.
    Mrs. Maloney. Thank you, Mr. Chairman.
    And welcome, Chairman Bernanke. All eyes are on you and the 
other members of the Federal Open Market Committee as we reach 
a critical point in monetary policy. While the U.S. economy was 
going through its most protracted jobs slump since the 1930's, 
the Federal Reserve acted appropriately and kept interest rates 
very low. And when the economy began to respond, the Federal 
Reserve told us they were raising interest rates gradually to 
restore them to a level consistent with stable noninflationary 
growth. But that process, 17 increases in short-term interest 
rates, began 2 years ago, and people are naturally wondering 
when is it going to stop.
    Ordinary American families should be wondering the most 
because they are the ones who have been left behind in whatever 
economic recovery we have seen. Regrettably, the gap between 
the haves and the have-nots continues to widen. GDP growth has 
been satisfactory, although not as strong as in the average 
postwar business cycle recovery, and productivity has been very 
strong. But as Ranking Member Frank has pointed out, what have 
ordinary American workers gotten in return for their hard work? 
Paychecks that have not kept up with inflation, much less with 
their increased productivity. And now rising interest rates and 
a slowing economy may choke off the economic recovery before 
most Americans have even had a chance to benefit.
    It is a challenging time for monetary policy because our 
fiscal policy is such a mess. The President's tax cuts were 
poorly designed to produce job-creating stimulus in the short 
run while adding to the budget deficit in the long run. The 
fiscal discipline built up in the 1990's has been squandered. 
Let us remember that President Bush inherited a budget surplus 
of $5.6 trillion over 5 years, but now we are back to a legacy 
of deficits and debt. We have record budget deficits and record 
debt, over $8 trillion, and a record trade deficit, the largest 
in history, $800 billion. Due to the debt, each American owes 
over $28,000. We are borrowing large amounts from the rest of 
the world and have had to raise our national debt limit four 
different times already during this current Administration.
    The fiscal discipline of the 1990's allowed the Federal 
Reserve to pursue a monetary policy that encouraged investment 
and growth. The challenge is greater now because the Federal 
Reserve will have to fight the excesses of fiscal policy which 
have drained our national savings and turned us into a massive 
international debtor.
    Chairman Bernanke, I look forward to your testimony and to 
exploring with you the challenges you face as you try to keep 
the economy growing and inflationary pressures contained so 
that ordinary Americans can begin to see their standard of 
living grow once again. Thank you.
    The Chairman. The gentlelady's time has expired.
    We now turn to the distinguished Chairman of the Federal 
Reserve. Dr. Bernanke, welcome back to the committee, and you 
may proceed.

STATEMENT OF THE HONORABLE BEN S. BERNANKE, CHAIRMAN, BOARD OF 
            GOVERNORS OF THE FEDERAL RESERVE SYSTEM

    Mr. Bernanke. Thank you. Mr. Chairman, and members of the 
committee, I am pleased to be here again to present the Federal 
Reserve's Monetary Policy Report to the Congress.
    Over the period since our February report, the U.S. economy 
has continued to expand. Real gross domestic product is 
estimated to have risen at an annual rate of 5.6 percent in the 
first quarter of 2006. The available indicators suggest that 
economic growth has more recently moderated from that quite 
strong pace, reflecting a gradual cooling of the housing market 
and other factors that I will discuss.
    With respect to the labor market, more than 850,000 jobs 
have been added, on net, to nonfarm payrolls in the first 6 
months of the year, though these gains came at a slower pace in 
the second quarter than in the first. Last month the 
unemployment rate stood at 4.6 percent.
    Inflation has been higher than we anticipated in February, 
partly as a result of further sharp increases in the prices of 
energy and other commodities. During the first 5 months of the 
year, overall inflation, as measured by the price index for 
personal consumption expenditures, averaged 4.3 percent at an 
annual rate. Over the same period, core inflation, that is, 
inflation excluding food and energy prices, averaged 2.6 
percent at an annual rate. To address the risk that inflation 
pressures might remain elevated, the Federal Open Market 
Committee continued to firm the stance of monetary policy, 
raising the Federal funds rate another three-quarters of a 
percentage point to 5\1/4\ percent in the period since our last 
report.
    Let me now review the current economic situation and the 
outlook in a bit more detail, beginning with developments in 
the real economy and then turning to the inflation situation. I 
will conclude with some comments on monetary policy.
    The U.S. economy appears to be in a period of transition. 
For the past 3 years or so, economic growth in the United 
States has been robust. This growth has reflected both the 
ongoing reemployment of underutilized resources as the economy 
recovered from the weakness of earlier in the decade and the 
expansion of the economy's underlying productive potential as 
determined by such factors as productivity trends and growth of 
the labor force.
    Although the rate of resource utilization that the economy 
can sustain cannot be known with any precision, it is clear 
that after several years of above-trend growth, slack in 
resource utilization has been substantially reduced. As a 
consequence, a sustainable noninflationary expansion is likely 
to involve a modest reduction in the growth of economic 
activity from the rapid pace of the past 3 years to a pace more 
consistent with the rate of increase in the Nation's underlying 
productive capacity. It bears emphasizing that because 
productivity growth seems likely to remain strong, the 
productive capacity of our economy should expand over the next 
few years at a rate sufficient to support solid growth in real 
output.
    As I have noted, the anticipated moderation in economic 
growth now seems to be under way, although the recent erratic 
growth pattern complicates this assessment. That moderation 
appears most evident in the household sector. In particular, 
consumer spending, which makes up more than two-thirds of 
aggregate spending, grew rapidly during the first quarter, but 
decelerated during the spring. One likely source of this 
deceleration was higher energy prices, which have adversely 
affected the purchasing power of households and have weighed on 
consumer attitudes.
    Outlays for residential construction, which have been at 
very high levels in recent years, rose further in the first 
quarter. More recently, however, the market for residential 
real estate has been cooling, as can be seen in the slowing of 
new and existing home sales and housing starts. Some of the 
recent softening in housing starts may have resulted from the 
unusually favorable weather during the first quarter of the 
year which pulled forward construction activity, but the 
slowing of the housing market appears to be more broad-based 
than can be explained by that factor alone. Home prices, which 
have climbed at double-digit rates in recent years, still 
appear to be rising for the Nation as a whole, though 
significantly less rapidly than before. These developments in 
the housing market are not particularly surprising as the 
sustained run-up in housing prices, together with some increase 
in mortgage rates, has reduced affordability and thus the 
demand for new homes.
    The slowing of the housing market may restrain other forms 
of household spending as well. With homeowners no longer 
experiencing increases in the equity value of their homes at 
the rapid pace seen in the past few years, and with the recent 
declines in the stock prices, increases in household net worth 
are likely to provide less of a boost to consumer expenditures 
than they have in the recent past. That said, favorable 
fundamentals, including relatively low unemployment and rising 
disposable incomes, should provide support for consumer 
spending. Overall, household expenditures appear likely to 
expand at a moderate pace, providing continued impetus to the 
overall economic expansion.
    Although growth in household spending has slowed, other 
sectors of the economy retain considerable momentum. Business 
investment in new capital goods appears to have risen briskly, 
on net, so far this year. In particular, investment in 
nonresidential structures which had been weak since 2001 seems 
to have picked up appreciably, providing some offset to the 
slower growth in residential construction.
    Spending on equipment and software has also been strong. 
With a few exceptions, business inventories appear to be well 
aligned with sales, which reduces the risk that a build-up of 
unwanted inventories might actually reduce production in the 
future. Business investment seems likely to continue to grow at 
a solid pace, supported by growth in final sales, rising 
backlogs of orders for capital goods, and high rates of 
profitability. To be sure, businesses in certain sectors have 
experienced financial difficulties. In the aggregate, however, 
firms remain in excellent financial condition, and credit 
conditions for businesses are favorable.
    Globally, output growth appears strong. Growth of the 
global economy will help support U.S. economic activity by 
continuing to stimulate demand for our exports of goods and 
services. One downside to the strength of the global economy, 
however, is that it has led to significant increases in the 
demand for crude oil and other primary commodities in the past 
few years. Together with heightened geopolitical uncertainties 
and the limited ability of suppliers to expand capacity in the 
short run, these rising demands have resulted in sharp rises in 
the prices of which these goods are traded internationally, 
which in turn has put upward pressure on costs and prices in 
the United States.
    Overall, the U.S. economy seems poised to grow in coming 
quarters at a pace roughly in line with the expansion of its 
underlying productive capacity. Such an outlook is embodied in 
the projections of members of the Board of Governors and the 
presidents of Federal Reserve Banks that were made around the 
time of the FOMC meeting late last month, based on the 
assumption of appropriate monetary policy. In particular, the 
central tendency of those forecasts is for real GDP to increase 
about 3\1/4\ percent to 3\1/2\ percent in 2006, and 3 percent 
to 3\1/4\ percent in 2007. With output expanding at a pace near 
that of the economy's potential, the civilian unemployment rate 
is expected to finish both 2006 and 2007 between 4\3/4\ percent 
and 5 percent, close to its recent level.
    I turn now to the inflation situation. As I noted, 
inflation has been higher than we expected at the time of our 
last report. Much of the upward pressure on overall inflation 
this year has been due to increases in the prices of energy and 
other commodities, and in particular to the higher prices of 
products derived from crude oil. Gasoline prices have increased 
notably as a result of the rise in petroleum prices as well as 
factors specific to the market for ethanol.
    The pickup in inflation so far this year has also been 
reflected in the prices of a range of goods and services as 
strengthening demand may have given firms more ability to pass 
energy and other costs through to consumers. In addition, 
increases in residential rents as well as in the imputed rent 
on owner-occupied homes have recently contributed to higher 
core inflation.
    The recent rise in inflation is of concern to the FOMC. The 
achievement of price stability is one of the objectives that 
make up the Congress' mandate to the Federal Reserve. Moreover, 
in the long run, price stability is critical to achieving 
maximum employment and moderate long-term interest rates, the 
other parts of the Congressional mandate.
    The outlook for inflation is shaped by a number of factors, 
not the least of which is the course of energy prices. The spot 
price of oil has moved up significantly further in recent 
weeks. Futures quotes imply that market participants expect 
petroleum prices to roughly stabilize in coming quarters. Such 
an outcome would, over time, reduce one source of upward 
pressure on inflation. However, expectations of a leveling out 
of oil prices have been consistently disappointed in recent 
years, and as the experience of the past week suggests, 
possible increases in these and other commodity prices remain a 
risk to the inflation outlook.
    Although the costs of energy and other raw materials are 
important, labor costs are by far the largest component of 
business costs. Anecdotal reports suggest that the labor market 
is tight in some industries and occupations, and that employers 
are having difficulty attracting certain types of skilled 
workers. To date, however, moderate growth in most broad 
measures of nominal labor compensation and the ongoing 
increases in labor productivity have held down the rise in unit 
labor costs, reducing pressure on inflation from the cost side.
    Employee compensation per hour is likely to rise more 
quickly over the next couple of years in response to the 
strength of the labor market. Whether faster increases in 
nominal compensation create additional cost pressures for firms 
depends in part on the extent to which they are offset by 
continuing productivity gains. Profit margins are currently 
relatively wide, and the effect of a possible acceleration in 
compensation in price inflation would also depend on the extent 
to which competitive pressures force firms to reduce margins 
rather than to pass on higher costs.
    The public's inflation expectations are another important 
determinant of inflation. The Federal Reserve must guard 
against the emergence of an inflationary psychology that could 
impart greater persistence than what could otherwise be a 
transitory increase in inflation. After rising earlier this 
year, measures of expectations, based on surveys and on a 
comparison of yields on nominal and inflation-indexed 
government debt, have edged down and remain contained. These 
developments bear watching, however.
    Finally, the extent to which aggregate demand is aligned 
with the economy's underlying productive potential also 
influences inflation. As I noted earlier, FOMC participants 
project the growth in economic activity should moderate to a 
pace close to that of the growth of potential both this year 
and next. Should that moderation occur as anticipated, it 
should help to limit inflation pressures over time.
    The projections of the members of the Board of Governors 
and the presidents of the Federal Reserve Banks, which are 
based on information available at the time of the last FOMC 
meeting, are for a gradual decline in inflation in coming 
quarters. As measured by the price index for personal 
consumption expenditures excluding food and energy, inflation 
is projected to be 2\1/4\ percent to 2\1/2\ percent this year 
and then to edge lower to 2 percent to 2\1/4\ percent next 
year.
    The FOMC projections, which now anticipate slightly lower 
growth in real output and higher core inflation than expected 
in our February report, mirror the somewhat more adverse 
circumstances facing our economy which have resulted from the 
recent steep run-up in energy costs and higher-than-expected 
inflation more generally. But they also reflect our assessment 
that with appropriate monetary policy, and in the absence of 
significant unforeseen developments, the economy should 
continue to expand at a solid and sustainable pace, and core 
inflation should decline from its recent level over the medium 
term.
    Although our baseline forecast is for moderating inflation, 
the committee judges that some inflation risks remain. In 
particular, the high prices of energy and other commodities in 
conjunction with high levels of resource utilization that may 
increase the pricing power of suppliers of goods and services 
have the potential to sustain inflation pressures. More 
generally, if the pattern of elevated readings on inflation is 
more protracted or is more intense than currently expected, 
this higher level of inflation could become embedded in the 
public's expectations and in price-setting behavior. 
Persistently higher inflation would erode the performance of 
the real economy and would be costly to reverse. The Federal 
Reserve must take into account these risks in making its policy 
decisions.
    In our pursuit of maximum employment and price stability, 
monetary policymakers operate in an environment of uncertainty. 
In particular, we have imperfect knowledge about the effects of 
our own policy actions as well as of the many other factors 
that will shape economic developments during the forecast 
period. These uncertainties bear importantly on our policy 
decisions because the full influence of policy actions on the 
economy is felt only after a considerable period of time. The 
lags between policy actions and their effects imply that we 
must be forward-looking, basing our policy choices on the 
longer-term outlook for both inflation and economic growth. In 
formulating that outlook, we must take into account the 
possible future effects of previous policy actions, that is, of 
policy effects still in the pipeline. Finally, as I have noted, 
we must consider not only what appears to be the most likely 
outcome, but also the risks to that outlook and the costs that 
would be incurred should any of those risks be realized.
    At the same time, because economic forecasting is far from 
a precise science, we have no choice but to regard all of our 
forecasts as provisional and subject to revision as the facts 
demand. Thus, policy must be flexible and ready to adjust to 
changes in economic projections. In particular, as the 
committee noted in the statement issued after its June meeting, 
the extent and timing of any additional firming that may be 
needed to address inflation risks will depend on the evolution 
of the outlook for both inflation and economic growth as 
implied by our analysis of the incoming information.
    Thank you. I would be happy to take questions.
    The Chairman. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Bernanke can be found on 
page 57 of the appendix.]
    The Chairman. Again, welcome back to the Financial Services 
Committee.
    Your predecessor was always emphasizing price stability as 
probably the key element to the charge that Congress gave the 
Federal Reserve way back when the Federal Reserve was created. 
And obviously your statement reflected that continuum on that 
issue. I have always been struck by the economic analysis of 
core inflation, minus--or not counting food and energy, and I 
am wondering if you could share that differential with the 
committee.
    I say that because to the average person, when they think 
of inflation, they think of going to the gasoline pump, they 
think of going to the grocery store, probably has more of an 
effect on people's daily lives than any other form of 
inflation, and yet the Federal Reserve talks about core 
inflation minus those two components.
    Could you share how that affects the decisions by the FOMC 
and how that is reflected in the policy?
    Mr. Bernanke. Yes, Mr. Chairman. First of all, you are 
absolutely correct that what matters to the average person is 
overall inflation, including energy prices and food prices, and 
we take that very seriously. Overall inflation is probably also 
what guides inflation expectations as people think about what 
inflation rate is likely to occur in the future, and that is 
another reason to be concerned about overall inflation.
    There are two reasons why we look at core inflation as well 
as overall inflation. The first has to do with forecasting. 
Historically oil prices, energy prices have been rather 
volatile, and if you look even today at the futures markets, 
the futures market predicts energy prices will be relatively 
flat over the next couple of years. If you take that forecast 
as correct, then today's core inflation rate is actually a 
reasonable forecast of tomorrow's total inflation rate if 
energy prices do, in fact, flatten out as the markets seem to 
expect.
    The Chairman. Could I interject there?
    Mr. Bernanke. Certainly.
    The Chairman. Flatten out where; flatten out at $70 a 
barrel, $80 a barrel?
    Mr. Bernanke. Futures suggest they will be a little more 
increased, but roughly speaking, energy oil prices will flatten 
out between $75 and $80 over the next 2 years.
    The Chairman. So there is no expectation at this point--
wouldn't really make any sense that oil prices would slide back 
below $50.
    Mr. Bernanke. Not based on those futures markets quotes. 
There is also a great deal of uncertainty about where energy 
prices are going to go.
    The Chairman. But the betting would be clearly on the 
upside as opposed to the downside.
    Mr. Bernanke. Well, if you look at the options on futures, 
which suggest something about the uncertainty the traders feel 
about oil prices, you see it is quite a wide range. There is a 
possibility in their mind that prices might fall $20 and a 
possibility in their mind that prices might rise $20. So there 
is a lot of uncertainty about what those prices will do. But 
our best guess is just to look at where the futures quotes are, 
and that suggests that energy prices should stay roughly in the 
area where they are today.
    The Chairman. Assuming that is the case, and I think that 
is a fair assumption, at what point does the market mechanism 
provide the incentive for extra exploration, going into shale--
oil shale, all of those things that could be triggered, if 
there is good news that we triggered by the higher prices, the 
incentive to go after tertiary recovery. Is that correct?
    Mr. Bernanke. Mr. Chairman, there are many alternatives to 
oil that are probably profitable at $40 or $50 a barrel. So if 
prices stay at this level over a period of time, you would 
expect to see a number of alternative supplies coming on line. 
The problem on that side, of course, is that many of these 
alternatives take some time to become available, and therefore, 
we don't get immediate relief. Of course, on the demand side as 
well there is also an incentive to conserve, reduced usage of 
oil. That should also provide, I hope, some relief.
    The Chairman. Have you seen any indication that at this 
point that is beginning to take hold?
    Mr. Bernanke. We are seeing a lot of activity in drilling 
and mining, for example. It is very difficult to find petroleum 
workers or drilling rigs because the activity has risen. We are 
seeing activity in Canada and elsewhere on sands and shale. We 
are seeing some reduction in the demand for oil, although 
perhaps less than we would like.
    What we saw in the past when oil prices rose very 
significantly in the 1970's was that the short-term effect was 
relatively small, but over a decade or more, we saw a very 
significant reduction in the amount of oil that the U.S. 
economy uses per dollar of real GDP.
    The Chairman. I know you are not the Secretary of Energy, 
you are Chairman of the Federal Reserve, but obviously those 
components play a large part in their decisions. It struck me, 
for example, in the area of natural gas, there were all these 
dire predictions last winter that the price of natural gas 
would go through the roof, partly because of a mild winter and 
so forth. Now we seem to have a surplus of natural gas. Almost 
impossible, I guess, to predict it with any accuracy, which I 
guess makes your job that much more difficult. Is that a fair 
assumption?
    Mr. Bernanke. Yes, sir. That is a piece of good news, the 
natural gas prices have come down from the $12 to $14 level 
that we were seeing earlier. Natural gas is a bit different 
from oil in that natural gas is a regional market. We don't 
ship it internationally to the same extent that we do oil. And 
so we are very sensitive to the domestic supply-and-demand 
conditions, such as the effects of Hurricane Katrina last year 
and the effects of the weather over the winter. So it is a more 
volatile price in that respect.
    The Chairman. Thank you. My time has expired.
    The gentleman from Massachusetts.
    Mr. Frank. Mr. Chairman, I want to get back to the wage 
issue because I really am troubled by an inattention to the 
problems that are there. And I am going to talk now about 
inconsistency in the language in your report, and I don't think 
it was conscious. I think it is more serious than that. It is a 
mindset where people automatically do it.
    As you seem to be acknowledging, when I was talking about 
your discussion in wage increases in the monetary report, it is 
all without saying it is nominal. That is when you talk about 
the wage increases, you were talking about increases that are 
not corrected for inflation. And they look obviously better 
when they are that way, and you don't even say that.
    But I went through the report as we were sitting here, and 
in every other sector where there is a discussion, you are 
talking about real. You are talking about real household 
expenditures. I mean, just--real outlays for goods on page 5. 
Real outlays for consumer services. Housing activity is 
measured by real expenditures. Real outlays for equipment 
software, real business fixed investment, real business 
spending. Real expenditures for nonresidential construction. 
Federal deficit was real. Real expenditures by State and local 
governments.
    Frankly, it is only with wages that you don't get real, and 
that is a serious problem because what this does is allows 
people to--had a debate with a member of this committee in 
which he was told by Treasury how much wages have gone up, but 
I am sure they were using nominal wages. When Secretary Snow 
testified here, he used nominal wages. How can you justify 
talking about real, i.e., corrected for inflation, numbers in 
every other sector where there is a sector discussion but not 
with regard to wages? How do you justify that?
    Mr. Bernanke. Congressman, the nominal wage discussions are 
related to some cost issues, and it is a different topic. I 
agree with you absolutely that real wages are extremely 
important. I would also like to add in case there is any 
confusion that increases in real wages are entirely consistent 
with low inflation. There is no contradiction with those two 
things.
    Mr. Frank. Okay. I appreciate it, but now I will get back 
to the point in your statement where you talked about wages 
purely as a cost rather than as the way most people in America 
support themselves. In the report, you analyze sector by sector 
by sector, and in every sector you talk about real, and in 
labor you talk about nominal. That is a mindset that I think is 
unfortunate.
    But now let me ask you with regard--and let us go to the 
productivity chart, because what you get is--in your statement 
it is, well, frankly, the tone is almost lucky for us that 
wages have stayed down. I mean, that is the context of it, 
because in the context of your statement, given the focus on 
inflation, the fact that wages have lagged both productivity 
and, in fact, inflation for the last year, that seems to be a 
good thing. And we have people writing--and you and I talked 
about this, and you have said that this doesn't reflect you, 
but I think we have to make this public--in the financial pages 
wages are a bad thing, increases in wages are a bad thing. And 
people will write, the Federal Reserve is worried wages may go 
up.
    So let me ask you now, given this chart with regard to real 
wages versus productivity, and given, as you have acknowledged, 
that profits are at an all-time high as a percentage of 
national income, do you believe there is room for wages to go 
up at least--not at least--to the level of productivity 
increases without that having an inflationary impact?
    Mr. Bernanke. Yes, I do. And I do expect nominal wages to 
rise.
    Mr. Frank. You said nominal again.
    Mr. Bernanke. Nominal wages and real wages to rise.
    Mr. Frank. You expect them, but I don't mean to be rude, 
nobody can eat your expectations. We have to eat our own work 
sometimes, but other people can't get much. And you 
acknowledge, I guess, in a question, we were told, well--it is 
the recovery, wages are coming, wage increases are coming. 
Well, the recovery is now leveling off, and wage increases 
ain't been here yet. And this--and by the way, I hear--and here 
is where I think we have a problem. It is not truly a force of 
nature. And, I mean, it goes with this. You acknowledge that 
wages are well below what they could be without there being an 
inflation effect?
    Mr. Bernanke. They could rise without inflation effect.
    Mr. Frank. Good. And they are below inflation--below 
productivity, below inflation. So workers in this great economy 
that we have had, and in many ways it has been a very good one, 
most of them--I am not talking about 20 percent, I am talking 
about 80 percent, the people who get paid by wages, their 
compensation, their wages have dropped. You are talking about 
compensation there, but that includes, you know--let's be 
careful when we talk about overall compensation in this report. 
One of the things we are talking about is when the employer 
pays more for health care, the worker can't bring that money 
home. So real wages have lagged. And here is the fact; it is 
not purely a force of nature.
    When you refuse to raise the minimum wage so inflation 
erodes it, when you have an active policy of breaking labor 
unions, and when you have a tax policy that favors people at 
the high end, you are reinforcing those tendencies. And so what 
we have is a national policy which takes advantage of factors 
that are keeping real wages depressed and keeping productivity 
way ahead of wages so that all the increase--as Alan Greenspan 
said 2 years ago and apparently is still the case, virtually 
all of the increased wealth in this society that comes from 
increased productivity goes to the owners of capital, and 
obviously they should be getting some of it, but not all of it. 
It is not healthy.
    And so you get that situation, you get a public policy that 
reinforces it, and then Mr. Hubbard shouldn't wonder why the 
American people don't give him credit for this wonderful 
economy. They don't give him credit because they are not 
getting any cash.
    Thank you, Mr. Chairman.
    The Chairman. I recognize the gentleman from Illinois.
    Mr. Gutierrez. Thank you very much, Mr. Chairman.
    I intended to ask Mr. Bernanke about the positive effect of 
immigration, but I have a scheduling conflict, so I would like 
to ask unanimous consent to have some items entered into the 
record. The first is an open letter on immigration to President 
Bush and all Members of Congress signed by 500 American 
economists, Mr. Chairman.
    The Chairman. Without objection.
    Mr. Gutierrez. The second is a July 10, 2006, open letter 
on immigration with 33 conservative signatories as published in 
The Wall Street Journal.
    The Chairman. Without objection.
    Mr. Gutierrez. And the third, Mr. Chairman, is an op-ed 
piece from the Wall Street Journal entitled, ``Reagan on 
Immigration.'' The article discusses President Reagan's support 
for legalization and includes Mr. Reagan's account of his visit 
with the President of Mexico to get his ideas on ``how we can 
make the border something other than a locale for a 9-foot 
fence.''
    Thank you, Mr. Chairman.
    The Chairman. Without objection, so ordered.
    The gentlelady from Ohio.
    Ms. Pryce. Thank you, Mr. Chairman, and you, Mr. Chairman, 
for your testimony.
    We have--many of us on this committee have worked very hard 
on legislation to reform the Committee on Foreign Investment in 
the United States, the CFIUS process. Yesterday The Wall Street 
Journal quoted economist Lawrence Kotlikoff's recent study 
which said that foreign investment helps offset the low savings 
rate in the United States and has helped to raise the average 
wage of American workers by increasing productivity.
    The savings rate in America continues to be terribly low, 
as I said in my opening statement. Can you discuss your 
thoughts on if certain pieces of this legislation does become 
law, and it looks like we in the House will be maybe dealing 
with that as early as next week, will it make that harder for 
foreign companies to invest in the United States? Do you 
believe it will be detrimental to our economy, especially the 
savings rate debt--rate/credit debt ratio facing Americans? And 
are you familiar enough with the House and Senate versions of 
the legislation to be able to comment on either one of them?
    Mr. Bernanke. Congresswoman, I would just make, I think, 
the general point that keeping our capital markets open to 
foreign investment is extremely important for the welfare of 
Americans. Capital that comes in allows us to invest more than 
we otherwise could. It provides jobs, it provides new 
technologies that come with foreign investment, at the same 
time that our open markets give us more opportunity to invest 
abroad and to achieve those returns.
    So I think America has one of the most open, free capital 
markets in the world. It is to our benefit to try to maintain 
that. I fully recognize that there are circumstances in which 
national security concerns might come into play. I think we 
need to walk a very fine line to make sure that we are 
restricting ourselves to genuine concerns and that we don't, 
you know, unwarrantedly restrict legitimate capital inflows.
    So I can't really comment on the two bills. I don't think 
it is really even my sphere to do so. But I hope that in 
thinking about this that Congress will weigh the very important 
benefits of capital inflows against the also very important 
concerns about national security.
    Ms. Pryce. Thank you.
    Let me talk a little bit about insurance, and terrorism 
risk insurance specifically. Do you have any thoughts about 
what the financial mechanisms available are to enhance the 
private market capacity to take on terrorism risk when TRIA 
expires? And it seems to be a very difficult problem that isn't 
solving itself in the marketplace quite yet. And is government 
intervention stopping the market from working, or is it just 
inevitable that it is not possible for the market to absorb 
this?
    Mr. Bernanke. Congressman, I am a member of the President's 
Working Group on Financial Markets, as I am sure you know, and 
we are required to submit a report by September 30th to 
Congress evaluating the availability of terrorism risk 
insurance. The staff of the PWG has been exhaustively meeting 
with various groups. We have solicited comments which have been 
arriving, but we have not yet come to the point where the staff 
have summarized and brought the material together and briefed 
the principals of the PWG on this issue. I assure you when that 
time comes, we will look at it very seriously, because I 
understand it is an important issue to many people.
    Ms. Pryce. And lastly, for some time we have been 
discussing the evolving downsizing of the housing market as a 
moderate and orderly cooling process. I think that is how you 
have referred to it. Aren't you concerned about the 
considerable downside risk to the intrasensitive housing sector 
over the balance of the year? Can we hear your comments on 
that?
    Mr. Bernanke. Well, as you indicated, the downcurrent in 
the housing market so far appears to be orderly. The level of 
activity is still relatively high on an historical basis, but 
we recognize the risk you are pointing to. We are watching it 
very carefully.
    I would just note that there are other aspects of the 
economy which are to some extent taking up the slack, so to 
speak, created by a slowing housing market, including 
investment in nonresidential construction and exports, among 
others. So we are looking at the overall economy. We are 
looking at housing. Clearly that is a very important sector we 
are watching very carefully.
    Ms. Pryce. We are very concerned in Ohio, and I appreciate 
your attention.
    Thank you. I yield back.
    The Chairman. The gentlelady from New York, Mrs. Maloney.
    Mrs. Maloney. Thank you.
    Chairman Bernanke, I have been very concerned about the 
growing gap between the haves and the have-nots in the American 
people. The Federal Reserve has recently published some pretty 
disturbing evidence in this regard in the Survey of Consumer 
Finances. That survey is similar to others in showing weak 
growth in median income, but it has unique data on wealth. I 
have seen figures that the top 1 percent of families hold more 
wealth than the bottom 90 percent of families combined. Is that 
true?
    Mr. Bernanke. I believe that is correct.
    Mrs. Maloney. That suggests that for most families wages 
are the main source of income, doesn't it?
    Mr. Bernanke. Yes.
    Mrs. Maloney. And building on the conversation of Mr. 
Frank, the employment costs have not been a source of 
inflationary pressure at any point in the current recovery, and 
so that that may leave room for wages to grow without causing 
the Federal Reserve any worry. Is that a correct statement?
    Mr. Bernanke. As I said to Congressman Frank, I expect 
wages to rise, and I do think that higher real wages are 
completely compatible with low inflation
    Mrs. Maloney. Great. Thanks.
    There are a lot of people who have not benefited from this 
economic recovery so far. And aren't those the people who are 
most vulnerable to the economic downturn if the Federal Reserve 
miscalculates and tightens monetary policy too much?
    Mr. Bernanke. Our concern, Congresswoman, is to achieve a 
sustainable growth path. We don't want to get into a situation 
where we get into a boom and bust. We don't want to get into 
inflation, because inflation also detracts from the buying 
power of workers and the consumers. So we are looking to try 
and achieve a sustainable growth path. We are aware of the 
risks to that, and we are going to do our utmost to achieve 
that.
    Mrs. Maloney. Following up on Congresswoman Pryce's 
comments on raising rates and the impact on mortgages, and I 
want to talk a little bit about the risk of both going too far 
in raising rates as it pertains to housing. First, aren't 
households with adjustable-rate mortgages the ones who feel the 
immediate effects of higher interest rates? What percentage of 
mortgages or home equity loans are immediately affected when 
interest rates go up?
    Mr. Bernanke. Our estimate is that about 20 percent of all 
mortgages outstanding have variable rates, and we expect about 
half of those, or about 10 percent, of the outstandings to 
reprice during 2006. So there will be some effect on variable-
rate mortgages, but it should be a relatively slow process, and 
that would provide some cushion.
    Mrs. Maloney. Many New Yorkers are some of the most 
vulnerable homeowners. They are the people who made purchases 
with very little money down and obtained mortgages in a 
subprime market. Is there a danger of a wave of foreclosures 
and people losing their homes if interest rates keep rising?
    Mr. Bernanke. We have so far seen very little increase in 
delinquencies or problems in the mortgage market, but we will 
watch that very carefully.
    Mrs. Maloney. One of the great benefits of the strong 
economy of the 1990's, when the unemployment rate got down to 4 
percent, more than half a percentage point lower than it is 
now, is that a great deal of people who did not have a firm 
attachment to the labor force got jobs and experience with 
full-time work, and aren't those the people who are most 
vulnerable if an economic expansion is choked off prematurely 
by tightening monetary policy too much?
    Mr. Bernanke. Congresswoman, again, our objective is to 
achieve a noninflationary sustainable expansion. There are 
risks to that in both directions. It is possible to overtighten 
and to have the growth be slower than the potential; it is also 
possible to not sufficiently address inflation problems, and 
inflation rises. Both cut into buying power and create a risk 
that the Federal Reserve would have to raise interest rates 
more later.
    So there are risks. Again, our objective is to try and 
create a noninflationary expansion.
    With respect to mortgage rates, I would just like to add 
that one of the best things the Federal Reserve can do to keep 
mortgages rates low is to keep inflation low. When you look at 
the 1970's and early 1980's, when mortgage rates were in the 18 
percent range, we are not seeing anything like that, of course, 
and it is because inflation is low and expected to stay low.
    Mrs. Maloney. And finally, my time is almost--
    The Chairman. Your time is up.
    Mrs. Maloney. I just want to know, were the markets right 
when they rallied yesterday after your testimony?
    Mr. Bernanke. I don't comment on the market move.
    The Chairman. Nice try, Carolyn.
    The gentleman from Iowa, Mr. Leach.
    Mr. Leach. Thank you, Mr. Chairman.
    I would like to just make a comment first on your opening 
statement, sir. I appreciate very much the clarity of it, the 
transparency of it, as well as the modesty of judgment. It is 
very impressive. In particular, your comments on interest rates 
are as precise as this committee has ever heard, as well as 
your predictions on where you think GDP growth is going.
    I would like to ask about a couple of definitional issues. 
One is a new economic term that has taken on great import and 
one that I gave very positive implications to, and I wonder if 
you would like to suggest whether it is positive or negative, 
and the term is a one-word term called ``pause.'' Do you like 
this idea?
    Mr. Bernanke. Do I like the idea?
    Mr. Leach. Yes, of a pause.
    Mr. Bernanke. Well, as I spoke about in my testimony before 
the Joint Economic Committee, I raised the possibility that at 
some point--and I emphasize at some point--the Federal Reserve 
may want to vary its pattern of policy changes to look to vary 
the pace of tightening to get more information about the state 
of the economy. Neither then nor now am I making any specific 
commitments to future policy actions.
    Mr. Leach. Fair enough. But I just want to lay on the table 
that I think a lot of people in America find this idea of a 
pause in interest rate raising a very attractive idea.
    The second issue I want to raise is employment, because you 
were precise--in December it was a little--not perfectly good 
news because we had about--the last reporting period was 4.6 
unemployment. You are predicting for the next year and a half 
it is going to go between 4\3/4\ percent and 5 percent, which 
means a slightly higher unemployment rate.
    But the definition of unemployment is getting to be more 
interesting, and this contrast between the Household Survey and 
the numbers that is reported through corporations seems to be 
at a greater variance than any time in history, with the 
household employment rates going up substantially higher than 
the traditional measurements.
    So I would like to ask you, when you referred to the 4\3/4\ 
percent to 5 percent, what unemployment rate are you referring 
to? And does this relate to the household statistics or the 
traditional definitions? And might one reported rate be 
actually less optimistic than the situation, or vice versa?
    Mr. Bernanke. Congressman, let me just note that when these 
forecasts were made at the last FOMC meeting, I believe the 
unemployment rate was 4.7 percent at that point. We are not 
that precise in our forecasting. I think the thrust of our 
forecast is that the unemployment should stay at about the same 
region as it is today.
    The unemployment rate is calculated from the Current 
Population Survey, which is a survey of 60,000 households; that 
is the one that we are referring to. The discrepancies that 
have arisen in the past are between the job creation numbers 
from that survey and the job creation numbers from the payroll 
survey, which we are perhaps more familiar with. Those two 
surveys have come closer together in recent years, and in the 
last few months we have seen some divergence again, but they 
have been somewhat more aligned than they were a few years ago.
    Mr. Leach. Fine. I appreciate that and have no further 
questions.
    The Chairman. The Chair recognizes the gentleman from 
Massachusetts, Mr. Capuano.
    Mr. Capuano. Thank you, Mr. Chairman.
    Mr. Chairman, I am interested in hedge funds and their 
impact on the economy. As I understand it, it is $1.2 trillion 
and growing, mostly held by--within 200 hedge funds. Obviously 
there is a lot more than that, but about 200 hold most of that 
money.
    Hedge funds are no longer restricted to the wealthy, so-
called sophisticated investor; they are open to the small 
investors. They are attracting larger and larger investments 
from pension funds, both public and private.
    The growth in hedge funds has resulted in lower returns, on 
average, which in turn has led to some investment strategies 
that might be a little bit more risky than they had been in the 
past.
    Recently the SEC, as you know very well--the SEC was 
knocked out in court from their attempt to not regulate, but to 
simply gather data and to make sure that that data was accurate 
and had the integrity so it could be relied on. It was not an 
attempt to regulate, yet the SEC was told they couldn't even 
gather this data.
    I am just curious. Do you think the SEC should be gathering 
this data, or do you think that there is no need to do so?
    Mr. Bernanke. I think the SEC has an important role in 
making sure that the information that the hedge funds provide 
to their investors is accurate, and I would support their 
actions to do that.
    I think, broadly speaking, that the best way to make sure 
the hedge funds are not taking excessive risk or excessive 
leverage is through market discipline, and there are two 
primary mechanisms. First, the SEC and the Federal Reserve 
supervise the large banks and investment banks which are the 
primary counterparties of the hedge funds. And ever since the 
PWG's report after the LTCM crisis a few years ago, we have 
made very strong efforts to ensure that those banks and 
investment banks are very carefully monitoring the risks of the 
hedge funds that they work with, and are stress testing and are 
requiring sufficient margin and the like.
    In addition, I think that the investors in hedge funds, 
which for the most part should be large and sophisticated 
investors, are also a source of market discipline. And I would 
support the SEC's investor protection activities to make sure 
that they get the information they need to make those 
judgments.
    Mr. Capuano. So you would have no objection to this 
Congress passing a bill that clarified that the SEC's actions 
are within the law, or actually making it clear that the law 
allows them to have done only what they did. I am not 
suggesting--I would say it is not regulation, but simply 
gathering information.
    Mr. Bernanke. Well, the Board doesn't really have a 
position in that specific element. I think there is a trade-
off. There are some benefits to the information, but we need to 
be a bit careful to make sure that the public is not misled 
into thinking that there is a full-fledged regulatory regime 
here which would then lead them to be less careful in their 
dealings with the hedge fund.
    Mr. Capuano. I think that is a very fair statement.
    I am glad to hear that, because some of the quotes that I 
read from you got me a little concerned. And I guess--jumping 
off of that into the next point, at some point regulation--I am 
not convinced it is necessary yet, but I guess I am leaning 
that way at some point. I have a quote here from you--actually, 
let me back up. The president of Bear Stearns is--well, he is 
not quoted, but it is reported that he considers hedge funds 
risky and have become a focus of concern because of their rapid 
growth and concentration in the industry. And it is reported 
that he has suggested that this could trigger a financial 
crisis. And obviously Bear Stearns, I don't think anybody would 
consider them radical left wing, over-regulating types of 
supporters.
    Here I have a quote from you--and again, maybe misquoted, 
``Direct regulation may be justified when market discipline is 
ineffective at constraining excessive leverage in risk 
taking.''
    Well, I guess the question I have is does this suggest that 
we shouldn't even consider regulation until after there is a 
crisis of some sort, until after we find out that the market 
forces may not work, until after pension funds are looking to 
cover my mother's pension, or--I understand your hesitancy, and 
I am not suggesting we should rush into it at all, but I also 
think that there might be a balance at some point as hedge 
funds grow, that we might want to consider the possibility of 
reviewing some regulation. Again, I am not suggesting we jump 
into it headlong, but I think there is something between no 
regulation and waiting until after a crisis. And I want to see 
if I can clarify at least that quote that is attributed to you.
    Mr. Bernanke. First let me say that hedge funds provide 
some very important positive benefits. They add a lot of 
liquidity to markets, they add a lot of efficiency to the 
markets. We don't want to do anything that would inhibit those 
very positive--
    Mr. Capuano. And I agree with that.
    Mr. Bernanke. That quote, I think, was a general statement, 
not referring to hedge funds. The thrust of my speech on hedge 
funds at Sea Island, Georgia, was to affirm the general 
principle that the President's Working Group put forward after 
LTCM, which is that the best way to achieve good oversight of 
hedge funds is through market discipline, through the 
counterparties, through the investors.
    There are also other ways to try to make sure that hedge 
funds work better. I would just point to the work that the 
Federal Reserve Bank of New York has done to try to improve 
deferring settlement of credit default swaps, for example. And 
there are international groups like the Committee for Payments 
and Settlement Systems, which is sponsored by the BIS, which is 
also looking at this issue quite broadly. But at this point I 
think that the market discipline has shown its capability of 
keeping hedge funds well disciplined.
    The Chairman. The gentleman's time has expired.
    Mr. Capuano. Thank you very much, Mr. Chairman. Thank you 
for those opening remarks.
    The Chairman. The gentleman from Louisiana.
    Mr. Baker. I thank the chairman.
    Just to follow up a little bit on Mr. Capuano's remarks, 
there was, in 1999, H.R. 2924, which would have required hedge 
funds above a certain size to disclose information to the 
Federal Reserve for the intended purpose of identifying 
potential systemic risk events, and I will forward that over 
for comment and advisory. I, in retrospect, look at the product 
and feel that it needs to be made more clear that no 
proprietary disclosure be made to ensure that it is only a 
blind view as to who is sitting at what table and--beyond what 
the counterparty risk disclosure may give to you now.
    I wanted to move quickly to the subject of GSE reform. I 
read with great interest your response to Senate questions on 
the matter of portfolio limitations wherein I believe you 
characterized your view to be that no hard dollar amount nor 
some arbitrary percentage reduction be made applicable, but 
rather that some relationship between portfolio scale and 
mission compliance pursuant to charter requirement be made 
effective.
    In given conversations I have had with Secretary Paulson 
and Director Lockhart on the matter, I, for whatever it is 
worth, share that view--would like to request that you work 
with the Director and the Secretary to compound some sort of 
language that you think would be helpful in breaking the last 
remaining element I believe that is blocking the adoption of 
significant and, I think, very badly needed GSE reform.
    There is another issue that I wanted to get on the record 
that I think is very important. I am concerned not so much 
about the domestic economic condition and our ability to 
maintain a reasonable rate of growth, except for the enhanced 
global competitive market we now face. I believe there are 
conditions brought on by our own regulatory constraints that 
may be inhibiting international capital flows which would 
generate the job opportunities and, hence, the increased wages 
which some have expressed concern about.
    The result is that some regulators have suggested actions 
that might be helpful. Recently the Chair of FASB has indicated 
that a move toward a more principles-based accounting 
methodology might be a way to help industries' current cost of 
compliance. Chairman Cox has indicated his strong support for 
the deployment of XBRL to help us move away from the enormous 
paper-based reporting methodologies that we now have to deal 
with.
    Many in the market have expressed some concerns about some 
of the compliance cost with the Sarbanes-Oxley Act. My last 
general question is to help us going forward and maintain our 
U.S. competitive edge, are there certain regulatory areas that 
you could recommend to the Congress to review where, without 
diminishing transparency, appropriate disclosure, gauging 
systemic risk potential--are there things that are now on the 
books that, in light of our current technological 
sophistication, are no longer warranted and might be worthwhile 
to set aside?
    Mr. Bernanke. Congressman, first, it is important to 
recognize that these regulations have a positive purpose, that 
Sarbanes-Oxley has addressed some important issues like 
corporate governance and disclosures, internal controls and the 
like. I think it is important that we think hard, particularly 
at the implementation phase, about aligning the costs and the 
benefits of individual actions.
    As you may know, my former colleague Mark Olsen has just 
left the Federal Reserve to become the head of the Public 
Company Accounting Oversight Board. I have a lot of confidence 
in Mr. Olsen and in Chairman Cox. I am sure they are reviewing 
all these issues very carefully. And I think that for the 
implementation phase, the regulation phase, I think that they 
will look for areas where cost can be reduced without 
compromising the overall, in part--
    Mr. Baker. Let me jump in before my yellow turns red.
    I met Mr. Olsen yesterday, and had a great conversation 
about these general parameters. The last piece of this, I 
believe, is that the most insidious force in market function 
were CEO's and CFO's trying to beat the street every 90 days 
with manipulation of the rules to exceed market expectation.
    Do you support, as I do, and I believe others have 
expressed, including the Chamber, encouraging companies to move 
away from the 90-day reporting, and would that in a way deter 
investors' abilities to make proper judgments about economic 
condition of corporations?
    Mr. Bernanke. I thought about that issue, Congressman. I 
think that good corporate governance, though, should establish 
a longer-term strategic approach rather than meeting short-term 
earnings goals.
    The Chairman. The gentleman's time has expired.
    Mr. Frank. Mr. Chairman, I have a unanimous consent request 
on behalf of our colleague, the gentleman from Texas, Mr. 
Hinojosa, who was called away by the little matter of 
redistricting, which is, as you know, a constant theme of 
Texas. So he has a unanimous consent request.
    And he wanted me particularly to express his thanks to the 
Chairman of the Federal Reserve for addressing the regional 
issues conference, and particularly on the issue of financial 
literacy. So these remarks are from Mr. Hinojosa, in which he 
expresses his gratitude to Chairman Bernanke for his support 
for the issue of financial literacy and for his work on that. 
That is for the record.
    The Chairman. Without objection.
    The gentleman from Missouri, Mr. Clay.
    Mr. Clay. Thank you, Mr. Chairman.
    Mr. Chairman, we have many pension funds that have lost 
hundreds of millions of dollars. We have many citizens who have 
seen their investments lost whether because of corporate 
scandals, investment fraud, poor management decisions, or 
having to cash out and replace lost wages, yet we still hear 
how great investment returns are.
    Who are these investment returns actually going to? How 
much of the investment returns is going to individuals not in 
the top 1\1/2\ percent of income earners?
    Mr. Bernanke. Congressman, you are referring, I think, in 
part to defined benefit pensions or defined contribution 
pensions. With regard to defined benefit pensions, we have had 
some problems, obviously, with companies not able to meet their 
promises. I think it is very important that Congress pass 
reform that requires companies to meet their promises, provides 
transparency so their workers can see what the state of the 
pension fund is, and protects taxpayers as well. So I think 
that is a very important area.
    With respect to defined contribution plans, many workers 
are now moving toward defined contribution. I think they are 
receiving market returns on average, but one thing I would 
point out is that what we have learned is that people will not 
voluntarily join the defined contribution plan unless they are 
put in there by default. And one of the things that we 
encourage employers to do is have an opt-out option so that 
people don't take an action that they automatically enroll, 
because one of the important things we need to do is help 
middle-income and low-income families build wealth, and a 
401(k) at work is one important mechanism for building wealth.
    Mr. Clay. And you are comfortable with the performance of 
the defined contributions?
    Mr. Bernanke. For 401(k)'s. I am not aware of any 
information that they have received lower returns than other 
investments. As Congresswoman Maloney pointed out earlier, 
there is inequality of wealth in the country, and people in the 
lowest levels of wealth have, you know, much smaller wealth 
relative to their income than those in the upper echelons.
    Mr. Clay. Thank you for that response.
    We know that job creation in the Bush Administration does 
not nearly approach the average job growth monthly rate of the 
previous Administration. The Clinton Administration outpaced 
the Bush years by nearly 100,000 jobs a month. And we have seen 
the effects of this in my State, Missouri, with the loss of 
jobs. We additionally see that existing wages have not kept 
pace with inflation. Wages adjusted for the effects of 
inflation have not risen at all over the past 3 years. We have 
had an extended period of solid GDP growth, but this has not 
brought any real benefits to workers in general.
    What is the direction of the Federal Reserve in addressing 
this problem?
    Mr. Bernanke. Well, we have no objection. You know, as I 
said, higher real wages are entirely consistent with low 
inflation.
    With respect to jobs, there is an issue, I think, that is 
worth putting on the table which relates to some research that 
has been done by Federal Reserve economists. They have found 
evidence that for demographic reasons the labor force 
participation rate, the share of the adult population that is 
working or looking for work, will be declining over time, 
reflecting such factors of the leveling off of female 
participation, more young people going back to school, and then 
particularly the aging population. Older people are less likely 
to be in the labor force than younger people.
    Because the labor force participation seems to have a 
downward trend to it, it probably takes fewer jobs each month 
to keep the unemployment rate at a constant level. So the job 
numbers, I think, going forward are going to be smaller, but 
not necessarily in a way that is going to raise unemployment, 
because the number of people looking for work is probably going 
to be growing more slowly in years to come than it was in the 
past.
    With respect to wages, there are alternative measures of 
wages that give somewhat different answers, but I agree that 
average hourly earnings for production workers, as measured by 
the Payroll Survey, have not shown real gains. And one of the 
key problems there I think it is important to note is, in fact, 
the increase in energy prices, so what people get at the pay 
stub they lose at the gas pump. That is an issue and a reason 
for worrying a bit about inflation.
    The Chairman. The gentleman's time has expired.
    The gentleman from Alabama, Mr. Bachus.
    Mr. Bachus. Thank you.
    Chairman Bernanke, I notice that you were confronted with a 
chart by Mr. Frank, and, in fact, yesterday you were questioned 
in the Senate about job compensation. Now, I don't know where 
he got his chart, there are Democratic charts and there are 
Republican charts, and then there is actually a chart--and I 
would like to turn it towards you here a minute if I could. 
There is a chart--did they hand you a copy of the chart?
    Mr. Bernanke. No, sir, but I can--
    Mr. Bachus. I had asked them to do that, and I apologize.
    This is the Treasury Department chart on compensation 
growth, and it is entitled--and this is from the career people 
at the Treasury Department, this isn't from the DNC or the RNC 
or a dueling Member of Congress, and it is titled, 
``Compensation Growth Is Better than Comparable Point in 
Previous Cycle.'' It talks about real hourly compensation. And 
as I said, this is a national survey, National Compensation 
Survey--I am having Members on both sides take a look at it, 
and I would like unanimous consent to pass it out.
    The Chairman. Without objection.
    Mr. Bachus. It shows that in the past year real hourly 
compensation has gone up 7.4 percent. Now, Mrs. Maloney and Mr. 
Frank keep talking about real, real, real. Well, if you will 
notice--and if you will turn that chart towards the chairman--
actually, I am sorry, you have one in front of you, I think. It 
talks about real compensation per hour is worker pay plus 
benefits adjusted for inflation and the number of hours worked. 
And what it shows is that in this job cycle, as opposed to the 
previous recovery, that workers are 7.4 percent better off in 
compensation. I just wanted to give you those talking points--
in case you are asked about real numbers again.
    Mr. Frank. Would the gentleman yield for 1 minute?
    Mr. Bachus. And also, I would like to say that we have 
created 5\1/2\ million jobs, and job growth is stronger than it 
was under the last recovery.
    But let me ask you this. You have been asked for 2 days--
you have heard Members of Congress, you have heard the media 
talking about the anemic economy and the slow economy and the 
slowing economy. And I think The Wall Street Journal said it 
best. They called it the ``Dangerfield economy, it is the 
economy that gets no respect.''
    Bottom line: What is your view about the economy? Is it as 
strong as some claim? Is it as weak as others claim? Just talk 
to us about the economy.
    Mr. Bernanke. I think the U.S. economy is a very strong 
economy; it is very resilient. It has passed through a number 
of very severe shocks going back to the stock market decline in 
2000; 9/11; corporate scandals; and Hurricane Katrina. All 
these things have hit us, and yet the economy continues to grow 
at a rate that is faster than most other industrial countries, 
so in that respect it is very positive.
    Mr. Bachus. Do you know why there is such fear-mongering 
presently about the economy and about representations--and if 
you pick up the newspaper, every day you can read an article 
about how bad the economy is, and this economy is stronger than 
it has been in previous cycles, it is very strong.
    Mr. Bernanke. I would say the most favorable aspect of the 
economy is that productivity growth has picked up. We saw it 
pick up from the 1970's and 1980's. In the mid-1990's we saw it 
pick up, and in the last 5 years or so we have seen an 
additional pick-up, and that is a very positive feature of our 
economy, and one that compares well with other industrial 
countries.
    Mr. Bachus. And the fact that you are having to fight 
inflation is--part of that factor is a strong economy; is it 
not? If the economy was weak and unemployment was high, we 
wouldn't be having inflationary problems, would we?
    Mr. Bernanke. Congressman, I think there are a number of 
factors affecting inflation, but probably one of the most 
important is the fact that energy and commodity prices have 
gone up so much. And that affects, to some extent, the strength 
of the global economy, which has been very strong for the 3 or 
4 years, and the increased demand for energy coming from China 
and other places has driven up those prices, and that has been 
a contributing factor to our inflation issue.
    The Chairman. The gentleman's time has expired.
    The gentlelady from New York, Mrs. McCarthy.
    Mr. Frank. Will the gentlelady yield?
    Mrs. McCarthy. Certainly.
    Mr. Frank. What the gentleman from Alabama completely 
misunderstands is the distinction between wages and 
compensation. When he and I were debating this on television, 
we were talking about wages, and he kept saying that wages were 
going up. I now understand the source of his error. It was that 
he has confused wages and compensation.
    Real hourly compensation--as you will see if you read the 
Monetary Policy Report on page 18--includes employer 
contributions to health care costs, and, in fact, according to 
the Monetary Report, the cost of health insurance, which 
accounts for one-fourth of overall benefit costs.
    So, yes, it is true that compensation has gone up if you 
count the amount of health care increases. What I was talking 
about was wages, the take-home pay, and that is very different 
than compensation. And, yes, as health care costs have 
accelerated, more has been paid out for the same health care, 
but for the worker taking home wages, that hasn't meant 
anything. So that is the fundamental difference.
    There was also, as the report said, a burst in compensation 
in 2004 as companies made up for pension deficits, so they put 
money into the pensions that they were supposed to have had in 
there, and that also increased. You are talking about 
compensation, which includes pensions and health care, and I 
don't think, for the average worker, knowing that the boss is 
now paying more for the same health care he or she used to get 
when the wages in real terms have gone down is of great 
comfort.
    The other thing is I am just struck by the timing of the 
comparison. You compare two quarters here, two periods, but you 
leave out the Clinton years. You talk about the Bush years, the 
second Bush years, and then you compare that to 1990 to 1995. 
So what is left out here is 1995 to 2000, the main thrust of 
the Clinton years, when apparently things were better, which is 
why they were left out.
    But the fundamental flaw in the gentleman's reasoning is to 
equate compensation with wages, and it is wages that are 
eroding, and that is a real problem--
    Mr. Bachus. Point of personal privilege--
    Mr. Frank. There is no point of personal privilege for my 
remarks.
    The Chairman. The gentlelady is recognized.
    Mrs. McCarthy. Thank you, Mr. Chairman.
    I would like to bring this back down to a little 
perspective. I happen to think that the average person is 
having a hard time, and I will just--I know how much money I 
take out of my ATM. I go to the ATM once a month, and that is 
my budget, and I have always done it since I have been here, 
and I have done fine with it. I am a little thrifty, but I have 
to tell you, I have to go to my ATM machine now twice a month, 
mainly because the cost of my gasoline has gone up. In the New 
York area we have probably gone up a little bit higher; we are 
probably comparable to New York. But it is also when I go food 
shopping.
    Now, I am a single woman. I go food shopping on Saturday 
morning, and I basically pick up my regular things, with a 
little bit more fruit. Fruit. The prices of fruit have gone up. 
This is what the daily life of someone is going through. So I 
have seen my costs go up.
    Certainly we in Congress, we get a COLA every year, so our 
pay increase has gone up 2 point something. But I have to tell 
you, my fuel costs--and I have gas at my home, and even though 
it was a mild winter, I ended up paying almost $1,800 more this 
past winter because of the surcharge. So you take that out of 
my yearly schedule, and you wonder why the middle-income 
families are having a hard time. They are; this is not a myth. 
If I am feeling a squeeze, and I probably make more money than 
a lot of my middle-income families, then certainly they are 
feeling the squeeze, because my medications have gone up, 
certainly dramatically, in the last 6 months. So there is pain 
out there for my middle-income families, and it is real pain.
    So with that, though, I actually wanted to talk to you 
about--we are now in the hurricane season. We suffered a 
terrible loss financially here in the Treasury with Katrina. We 
are predicting more storms this year. And there are many of us 
who are basically looking at a reinsurance program.
    And I guess, Mr. Chairman, my question to you is has the 
Federal Reserve looked at the potential impact of another major 
natural catastrophe on the U.S. economy? Can the Treasury 
afford another 50- or $100 billion response to any kind of 
natural disaster? Could a natural disaster reinsurance program 
protect the economy? And risk management insurance is better 
than debt. And I guess the final part of the question is, given 
the limited resources, is the cost of limited insurance better 
than the cost of unlimited debt?
    Mr. Bernanke. Well, of course, as you know, the hurricanes 
last year did enormous damage and created a very heavy fiscal 
burden. There is no question about that. I am glad to see that 
there has been some attention to trying to reform the Flood 
Insurance Program, put that on a more sound actuarial basis. 
You can buy insurance, but, of course, insurance will be 
expensive as well. There is really no free lunch in this case 
in order to protect against these risks.
    So my summary is that this is a risk, and if it happens 
again, it will be a very heavy cost one way or the other to the 
Treasury. The only silver lining that I can point to is that 
the U.S. economy as a whole is very resilient, very strong, and 
we have been through a number of natural disasters, including 
hurricanes, earthquakes that we had, of course, the terrorist 
events, and the overall economy has proven to be rather 
resilient and has been able to continue to grow despite these 
terrible shocks. But I don't see any way to avoid the costs, 
except to try to make provision in terms of, for example, in 
the Gulf, providing stronger protections against those 
potential catastrophes.
    The Chairman. The gentlelady's time has expired.
    Mrs. McCarthy. Thank you, Mr. Chairman.
    The Chairman. The people indicate there are 10 minutes left 
in this vote. There is a series of three votes on the Floor. It 
would be the expectation of the Chair to recognize the 
gentleman from Delaware for questions and the gentleman from 
North Carolina, and then we will recess and return after those 
votes.
    The gentleman from Delaware.
    Mr. Castle. Thank you, Mr. Chairman.
    Chairman Bernanke, let me just agree with Mr. Baker on the 
GSE's and leave that at that. Let me also agree with the 
gentleman from Iowa, Mr. Leach, on the clarity of your comments 
and on your statements. I spent many a day up here listening to 
Chairman Greenspan, trying to figure out what he had written 
and never quite understanding it, trying to figure out what he 
had said, but never understanding it, but having great 
admiration for him because the economy always did well under 
him. And I understand you with clarity, and I hope this does as 
well--I don't know if clarity is good or not.
    But I would like to have some reassurance here, because I 
listened to and read your comments as you were reading them 
with respect to the area of inflation, and when it is all said 
and done, that is what people really look at. And you can't 
comment on what seems to drive the stock market, what you are 
going to do with interest rates, or whatever. And I am not 
saying I see it differently, I just want to be reassured--and 
you may even say it in the same words, or perhaps in different 
words--but with energy prices and other commodity prices, even 
by your statement, we are probably not through with increases. 
And it is highly unpredictable, as you have indicated and as we 
all know.
    But it is beyond just oil prices; I mean, there are a whole 
lot of commodity prices that are up tremendously, and it is a 
trickle-down effect. For example, in Delaware we entered into 
some cockamamie agreement whereby we didn't increase electric 
rates for 7 years or something, and now all of a sudden there 
is about a 50 percent jump at one time. But that is maybe 
atypical, but those kinds of things are happening out there. So 
all commodity prices concern me.
    Labor costs, I think, are definitely--I mean, we see it 
here--there is definitely going to be a push as far as labor 
costs are concerned, which I think is going to be a major issue 
before it is all said and done.
    I am going to ask you a question later if I have time on 
housing, because I am not sure where that is going with respect 
to this. Plus this sort of public expectation in terms of 
inflation is there as well. I am taking most of this, at least 
I am summarizing, from what is written here. So I am not saying 
anything is wrong, I just, based on what we see and know and 
sort of the uncertainty--and I realize economics is an 
uncertain practice, as you also said in your testimony. What 
reassurance can you give us that these projections of inflation 
being somewhat more in control than they have been in recent 
months, which has been of--well, maybe not the last couple of 
months, but before that was pretty significantly higher than 
anticipated, I think, by anybody, what reassurance can you give 
us that these projections are correct, that the inflation rate 
will hopefully stay where it is now or even decline slightly?
    Mr. Bernanke. Well, Congressman, as you point out, there is 
uncertainty. We have a baseline forecast which assumes that 
energy prices don't do another big increase, that expectations 
remain contained, as they appear to be currently. We have 
talked about the cost side of labor costs, which seem not at 
this point to be a problem from a cost perspective.
    So from all that perspective, again, we have the baseline 
forecast that the inflation will gradually decline over the 
next couple of years. At the same time, we talk about risks, 
and we think there are some risks. The risk that I talk about 
in my testimony is that, given the tightening of markets, 
product markets in particular, that some firms may be better 
able to pass through those energy and commodity prices that you 
mention, and that that might become possibly embedded in the 
expectations of the public. So we do see some upside risks, and 
we have to take that into account as we make policy.
    Mr. Castle. Thank you. It just seems to me there is a 
little more uncertainty than usual. But let me change subjects 
because time is going to flee here.
    I want to talk about--when you talk about the housing 
market, not just now, but in general, I always get a little 
confused about what we are specifically talking about. Is it 
the economic--I know you were talking about the housing market 
as a whole, and you are going to say all of these components, 
but is it the new basic housing market, that is, the home 
builders and the banks and the others, who would profit from 
that, or is it the resale?
    I mean, a lot of people in this room have houses, and they 
are worried about the resale of their houses going down, which 
may only benefit a limited number of brokers and a few other 
people, but not the housing market per se.
    When we talk about housing, you have indicated a couple of 
times not housing per se, but other construction, which could 
be anything, I mean, offices, shopping malls, whatever it may 
be. My question to you is when you say the housing market 
having strengthened in recovery of the economy and slowing 
down, are you talking about all of these items, or are you 
talking about more specifically the new housing market? Can you 
break out the housing market a little more?
    Mr. Bernanke. Yes. What contributes to GDP is new 
construction of homes; that has been slowing. Construction of 
multifamily homes and apartments has been stable. 
Nonresidential construction has been actually strengthening.
    As far as existing homes are concerned, that is relevant in 
two ways; one, commissions that realtors get from buying and 
selling does enter the GDP; but secondly, and more importantly, 
if home prices flatten out, it affects the equity that 
homeowners have, and it may affect their spending pattern, and 
that is a subsidiary effect that could come from a slowing 
housing market.
    The Chairman. The gentleman's time has expired.
    The gentleman from North Carolina.
    Mr. Miller of North Carolina. Thank you.
    Chairman Bernanke, I am very pleased to see a Dillon 
County, South Carolina, boy doing well. You probably remember 
that there are a lot of Millers from Dillon County. My 
grandfather was one of them, moved early in the last century to 
North Carolina. Actually, my grandmother was also a Miller. The 
gene pool in Dillon County at the beginning of the last century 
was not Olympic sized, and if I seem a little quirky, it may be 
the result of recessive traits. But I am pleased to see you 
doing well.
    I do have questions based upon your discussion with Mr. 
Bachus and with Mr. Frank. Chairman Greenspan always 
distinguished in his testimony between supervisory wages and 
nonsupervisory wages, and said supervisory wages, which is only 
about 20 percent of employees, were going up much more rapidly 
than nonsupervisory wages. Is that consistent with your own 
observations in the time you have been--
    Mr. Bernanke. That appears to be true. The number that 
Congressman Frank is referring to is average hourly earnings, 
is for production workers, that is, nonsupervisory workers, and 
that hasn't grown very quickly in part because of, again, the 
high energy prices, which have taken away purchasing power.
    Mr. Miller of North Carolina. And for those 80 percent of 
the workforce who are nonsupervisory, in fact, they have not 
been keeping up with inflation, have they? Or only just barely 
at best.
    Mr. Bernanke. It is about even, yes.
    Mr. Miller of North Carolina. Chairman Greenspan, on many 
occasions before this committee, although undoubtedly a devoted 
believer, a devout believer, in capitalism, was very concerned 
about rising income inequality and the effect that it had on 
democracy. And I understand you addressed that the last time 
you were here. You said in July of last year that there is a 
really serious problem here, as I have mentioned many times 
before this committee, in the consequent concentration of 
income that is rising. In response to questions that I asked 
about supervisory and nonsupervisory wages, he said, we are 
giving a bivariate income distribution. And as I have said many 
times in the past, for a democratic society this is not 
helpful, to say the least. And as I have indicated on numerous 
occasions, I believe this is an education problem.
    Chairman Bernanke, do you also think that the rising income 
inequality, the rising concentration of wealth is a problem for 
our society and a problem for our democracy?
    Mr. Bernanke. The short answer is yes. I would like to 
point out that the increase in inequality is a very long-term 
trend. We have been seeing this for about 25 years. I believe 
it is linked to education and skills in our technologically 
oriented society. But Chairman Greenspan's point that if the 
people in the bottom end are not sharing in the benefits of 
open markets and flexible capitalism, that they are going to 
react against it politically, I think that is a potential risk, 
and I agree with that assessment.
    Mr. Miller of North Carolina. Well, 80 percent is not just 
the bottom end. Actually the vast majority of workers are not 
sharing in whatever economic prosperity may be coming from 
production increases. Eighty percent is not just the bottom 
end. That is the vast majority of Americans.
    Mr. Bernanke. Well, I do want to point out that it has been 
very difficult in the past when we have had periods of energy 
price increases as large as we have seen, for example, the 
1970's is another example, it is very hard for wages to keep up 
with that because it is such a big part of family budgets.
    Mr. Miller of North Carolina. Chairman Greenspan did 
identify, as you just did, education--and, of course, in part 
of what I read you mention education--he specifically spoke of 
community colleges. Community colleges is something that I have 
pushed in the time that I have been here. I know how important 
they are to my State. Eleven- or twelve million Americans are 
in community colleges every year; it is where they go to learn 
job skills to get new jobs and better jobs.
    In the time that I have been here, I have seen funding, 
Federal support for community colleges, decrease, not increase, 
or for some programs not keep up with inflation. The real 
support has diminished. And the taxes, the tax cuts going to 
people who receive inherited wealth. Chairman Bernanke, can you 
identify a single policy of this Congress or of the Bush 
Administration that appears directed at closing income 
inequality or the concentration of wealth?
    Mr. Bernanke. Well, I could point to the expansion of the 
child care credit and the earned income tax credit, if you are 
looking for a single example.
    I want to agree with you about the community colleges. I 
think one of the great strengths of our system is that we have 
a very flexible educational training system; we have community 
colleges, vocational schools, technical schools, online 
learning. We don't have to wait for a whole new generation for 
people to acquire these skills. I think people can be retrained 
and can learn even as adults, and lifelong learning is a very 
important goal.
    The Chairman. The gentleman's time is expired.
    The Chair would indicate we will go in recess, and the 
committee will stand in recess until 12:15 p.m..
    [Recess]
    The Chairman. The committee will reconvene. And the next 
person in line is our good friend from Texas, Mr. Paul.
    Mr. Paul. Thank you, Mr. Chairman.
    Good afternoon, Chairman Bernanke.
    I have a question dealing with the Working Group on 
Financial Markets. I want to learn more about that group and 
actually what authority they have and what they do. Could you 
tell me, as a member of that group, how often they meet and how 
often they take action, and have they done something recently? 
And are there reports sent out by this particular group?
    Mr. Bernanke. Yes, Congressman. The President's Working 
Group was convened by the President, I believe, after the 1987 
stock market crash. It meets irregularly; I would guess about 4 
or 5 times a year, but I am not exactly sure. And its primary 
function is advisory, to prepare reports. I mentioned earlier 
that we have been asked to prepare a report on the terrorism 
risk insurance. So that is what we generally do.
    Mr. Paul. In the media, you will find articles that will 
claim that it is a lot more than an advisory group you know, if 
there is a stock market crash, that you literally have a lot of 
authority, you know, to impose restrictions on the market. And 
we are talking about many trillions of dollars slushing around 
in all the financial markets, and this involves Treasury and, 
of course, the Federal Reserve, as well as the SEC and the 
CFTC. So there is a lot of potential there.
    And the reason this came to my attention was just recently 
there was an article that actually made a charge that out of 
this group came actions to interfere with the price of General 
Motors stock. Have you read that, or do you know anything about 
that?
    Mr. Bernanke. No, sir, I don't.
    Mr. Paul. Because they were charging that there was a 
problem with General Motors, and then there was a spike in GM's 
stock price.
    But back to the issue of meeting. You tell me it meets 
irregularly, but are there minutes kept, or are there reports 
made on this group?
    Mr. Bernanke. I believe there are records kept by the 
staff. There are staff mostly from Treasury, but also from the 
other agencies.
    Mr. Paul. And they would be available to us in the 
committee?
    Mr. Bernanke. I don't know. I am sorry, I don't know.
    Mr. Paul. The other question I have deals with a comment 
made by one of the members of the Federal Reserve Board just 
recently. He made a statement which was a rather common 
statement made. He expressed a relief that the economy was 
weakening, mainly--inferring that this would help contain 
inflation. And I hear these comments a lot of times, the 
economy is too strong, and therefore we need a weaker economy. 
If this assumption is correct--would you agree that this 
assumption--that a weaker economy is helpful when you are 
worried about inflation?
    Mr. Bernanke. Congressman, as I talked about in my 
testimony, we need to go to a sustainable pace. We need to have 
a pace which matches the underlying productive capacity; that 
will probably be a bit less robust than the last few years, 
because over the last few years we were also reemploying 
underutilized resources, and going forward we don't have that 
slack to put to work.
    Mr. Paul. But if you accept the principle, as it seemed to 
be in this quote, that if you are worried about inflation, you 
slow up the economy, and then inflation is brought down, it is 
lessened, it infers that inflation is caused by economic 
growth, and I don't happen to accept that, because most people 
accept the fact that inflation is really a monetary phenomenon. 
And it also introduces the notion that growth is bad, and yet I 
see growth as good. Whether it is 3 or 4 or 5 or 6, if you 
don't have monetary inflation, we don't need to worry, because 
if you have good growth in the marketplace rather than 
artificial growth, that it is this growth that causes your 
productivity to increase. You have an increase in productivity, 
and it does help bring prices down, but it doesn't deal with 
inflation.
    And I think what I am talking about here could relate to 
the concerns of the gentleman from Massachusetts about real 
wages. There is a lot of concern about real wages versus 
nominal wages, but I think it is characteristic of an economy 
that is based on a fiat currency that is just losing its value 
that it is inevitable that the real labor goes down. As a 
matter of fact, Keynes advocated it. He realized that in a 
slump, that real wages had to go down, and he believed that you 
could get real wages down by inflation, that the nominal wage 
doesn't come on and keep the nominal wage up, have the real 
wage come down and sort of deceive the working man. But it 
really doesn't work because ultimately the working man knows he 
is losing, and he demands cost-of-living increases.
    So could you help me out in trying to understand why we 
should ever attack economic growth. Why can't we just say 
economic growth is good and it helps to lower prices because it 
increases productivity?
    Mr. Bernanke. Congressman, I agree with you. Growth doesn't 
cause inflation; what causes inflation is monetary conditions 
or financial conditions that stimulate spending which grows 
more quickly than the underlying capacity of the economy to 
produce. Anything that increases the economy to produce, be it 
greater productivity, greater workforce, or other factors that 
are productive, is only positive. It reduces inflation.
    Mr. Paul. Do you see our deficits that we produce--and that 
you have no control on--as a burden to the Federal Reserve in 
managing monetary affairs and maintaining interest rates as 
well as maybe even living with a lower increase in the money 
supply?
    Mr. Bernanke. Well, in our short-term monetary 
policymaking, we are able to adjust for the conditions of 
fiscal policy, however they may be. I think fiscal issues are 
more important in the long-term sense because of the long-term 
obligations we have, for example, for entitlements. We have not 
found the fiscal situation to be a major impediment to our 
short-term management of monetary policy.
    Mr. Paul. I guess we can--
    The Chairman. The gentleman's time has expired.
    The gentleman from Kansas, Mr. Moore.
    Mr. Moore of Kansas. Thank you, Mr. Chairman. Thanks for 
your testimony this morning.
    I am concerned that we have a serious fiscal problem in our 
country today. Last year our Federal budget deficit was $319 
billion, and last week the Administration released its updated 
Fiscal Year 2006 budget deficit estimate of $296 billion. Isn't 
it true that the Fiscal Year 2006 deficit is closer to $477 
billion when Social Security is excluded?
    Mr. Bernanke. I don't know the exact number, but it is true 
that without the Social Security surplus, the deficit would be 
larger.
    Mr. Moore of Kansas. And it looks like a smaller number 
when you take it out, correct?
    Mr. Bernanke. That has been the consolidated budgeting cost 
for some time now.
    Mr. Moore of Kansas. Should that be changed?
    Mr. Bernanke. I think it should be recognized that our 
budget deficit--and again, this is a practice of some 
standing--reflects current revenues and current spending, it 
doesn't reflect the unfunded obligations that are arising for 
future entitlement?
    Mr. Moore of Kansas. So that can be very misleading then, 
can't it?
    Mr. Bernanke. It can be misleading in the long-run sense. 
And as I have said a number of times, and my predecessor said, 
I think our greatest long-run challenge will be to find ways to 
meet the promises that we have made to an aging population.
    Mr. Moore of Kansas. Last week David Walker, the 
Comptroller General of the United States, and head of the GAO, 
delivered a speech in Dallas, Texas, and he said that, ``The 
United States is now the world's largest debtor nation. In the 
last 5 years alone, our Nation's total liabilities and unfunded 
commitments have gone up from about $20 trillion to over $46 
trillion.'' Is he correct?
    Mr. Bernanke. Those are numbers which I think are 
consistent with the actuaries for Social Security and Medicare.
    Mr. Moore of Kansas. Are we the world's largest debtor 
right now as a Nation?
    Mr. Bernanke. If you are referring to external debt. I 
don't think it is true in terms of share of GDP, it would be in 
terms of actual dollars.
    Mr. Moore of Kansas. I am talking about actual dollars.
    Mr. Bernanke. I believe that is true.
    Mr. Moore of Kansas. Mr. Walker pointed out that our 
country today has several serious budget deficits. The first is 
our budget deficit, the second is our savings deficit, and the 
third is our balance of payments deficit. Is he correct on 
these three?
    Mr. Bernanke. Those are all issues I think we need to 
address, yes.
    Mr. Moore of Kansas. All right. We do, in fact, have a 
budget deficit, which we have already discussed, and have had 
for several years, correct?
    Mr. Bernanke. Yes.
    Mr. Moore of Kansas. Okay. And I believe--you didn't say it 
in exactly these words, but isn't it a fact that we are, in 
effect, mortgaging the future of our children and grandchildren 
right now by the way we are conducting our fiscal policy now?
    Mr. Bernanke. Again, I think the real issue is the long-
term entitlement situation, and that is the one we are going to 
have to address better sooner than later.
    Mr. Moore of Kansas. Are we, in effect, charging new 
spending and tax cuts on a national charge card and passing the 
bill on to our kids for payment and our grandkids for payment?
    Mr. Bernanke. It would be better if we could be saving more 
and planning for these entitlement costs that are going to be 
coming down the pike very soon.
    Mr. Moore of Kansas. Would it be better if we were living 
within a budget?
    Mr. Bernanke. If we were to live within our budget, we 
would have a higher national saving rate and be better prepared 
for the long-term fiscal obligations that we have incurred.
    Mr. Moore of Kansas. So is the answer yes?
    Mr. Bernanke. Yes.
    Mr. Moore of Kansas. Thank you.
    The Chairman. The gentleman's time has expired.
    The gentleman from Ohio, Mr. Gillmor.
    Mr. Gillmor. Thank you, Mr. Chairman.
    Mr. Chairman, I would like to get your views on ILC's, 
industrial loan companies. There has been a tremendous 
explosion in recent years of commercial firms buying ILC's in 
order to get into banking. Congressman Frank and I sponsored an 
amendment to prohibit those ILC's from branching nationwide, 
which passed the House, but hasn't passed the Senate. We now 
have a bill which would eliminate some future purchases of 
ILC's and also provide for the FDIC to regulate the holding 
companies.
    I guess my question to you is what is your view on this 
situation of commercial firms buying ILC's, and attempting to 
get into banking? And how should we deal with that; and in 
particular, in terms of regulation of the holding companies?
    Mr. Bernanke. Well, Congressman, the Federal Reserve has 
testified on this issue. We have broadly two concerns from a 
public policy point of view. The first is the mixing of banking 
and commerce, which occurs when ILC banks are acquired by 
commercial firms. The Congress, through Gramm-Leach-Bliley, has 
indicated that it wants to keep banking and commerce separate, 
and I think this is inconsistent with that general approach.
    The second concern we have is that the FDIC is only given 
authority to supervise the ILC banks themselves, but not to do 
consolidated supervision of the parents. And we feel that safe 
and sound regulation and supervision requires consolidated 
supervision that takes into account the financial condition of 
the parent as well as the ILC itself.
    Mr. Gillmor. Let me ask you, should we maintain--is it 
important for the health of the financial system to maintain 
that split between commerce and banking?
    Mr. Bernanke. It is a long-debated question among 
economists. My personal opinion is that it is a good idea to 
try to keep some separation between banking and commerce.
    Mr. Gillmor. Very good.
    I want to ask you, in terms of mortgages, explosion of 
different kind of mortgage instruments, or, you know, no money 
down, a lot of adjustable rates, and those are promoted very 
heavily, and we now have millions of Americans with them. Those 
are basically low-interest-rate products, and now we are 
beginning to see interest rates go up.
    Do you have concerns to the financial system and the 
ability to repay as interest rates go up and these are reset?
    Mr. Bernanke. There might be some risks in some of those 
situations. The Federal Reserve and the other banking agencies 
have issued proposed guidance for comment about nontraditional 
mortgages and how they should be managed.
    About nontraditional mortgages and how they should be 
managed, and among other things, we are asking banks to 
underwrite not just the initial payment, but to underwrite the 
ability of the borrower to pay even as interest rates rise, as 
we go to a maximum payment, and we are also asking banks and 
other lenders to make sure that the consumer understands fully 
the implications of these sometimes complicated mortgages. So 
we are trying to address it from a guidance perspective.
    Mr. Gillmor. Let me--because I presume I am about out of 
time. Let me just go back and tie down one thing. In terms of 
holding companies of ILC's, would I be misstating it if I said 
it is your opinion that they ought to be regulated if they are 
a commercial firm? I guess two questions, one, should a 
commercial firm be able to buy them at all? And I am guessing 
the answer is, no. But secondly, if you do have a firm owning 
an ILC, should the holding company be regulated by the 
financial regulatory authorities?
    Mr. Bernanke. The purchase of a bank by a commercial firm 
violates the separation of banking and commerce, and so I 
wouldn't advise allowing that, but if you do allow it, then it 
would be better to have consolidated supervision, which 
includes an overview of the financial condition of the parent, 
that is, the commercial firm as well as of the ILC subsidiary.
    Mr. Gillmor. Thank you very much, Mr. Chairman. I yield 
back.
    The Chairman. Ms. Waters.
    Ms. Waters. Thank you very much, Mr. Chairman. And I would 
like to thank Chairman Bernanke for being here this morning and 
for staying so long. These hearings just seem to go on and on 
and on. But I would like to ask you, how do you factor poverty 
into your work, into your calculations, into your predictions 
and what you do? How do you consider poverty? And how do you 
consider the implications of your decisions relative to 
poverty?
    Mr. Bernanke. Well, the evidence suggests that when the 
labor market is strong, poverty tends to fall. And so from the 
Federal Reserve's perspective, our mandate from Congress is 
price stability and maximum sustainable employment. So from our 
perspective, of course, ours is not a comprehensive approach to 
poverty. There are many other issues related to poverty but 
from our own perspective, if we keep a strong economy, we feel 
we are doing our bit to help reduce poverty.
    Ms. Waters. Have you ever written anything about poverty? 
Have you ever written a paper, or presented any analysis, or 
have you done anything to indicate the relationship of poverty 
to the Federal Reserve's decisionmaking process on interest 
rates and monetary policy?
    Mr. Bernanke. I have spoken on issues of community 
development, on issues of financial asset building by low- and 
moderate-income families. In some of my speeches and 
activities, I have been very much interested in economic 
redevelopment and issues related to low-income communities.
    Ms. Waters. Do you have anything in writing?
    Mr. Bernanke. Yes, ma'am. They are all on the Federal 
Reserve Web site, and we would be happy to send them to you.
    Ms. Waters. Thank you. And I will ask my staff to check 
them out.
    The other thing I would like to ask about is employment 
opportunities at the Federal Reserve. What about minorities? 
What about African-Americans? Do you have any minorities in 
high-level positions at all?
    Mr. Bernanke. We have addressed this issue. And we have 
worked to increase the number of women and the number of 
minorities in the Federal Reserve system. I would be happy to 
provide you with numbers.
    Ms. Waters. Do you have any African-Americans that you know 
about in any high-level managerial positions?
    Mr. Bernanke. Until a month or two ago, the Vice Chairman 
of the Federal Reserve was an African-American, and he just 
left recently to retire from that position. A number of our 
highest-level economists and policy advisors are African-
American or other minorities.
    Ms. Waters. Do you have--can you talk about the percentages 
of African-American women, Latinos, and Asians employed at the 
Federal Reserve? Do you have an assessment in writing anywhere? 
Where can I find that?
    Mr. Bernanke. Vice Chairman Ferguson, I believe, testified 
on this matter at one point, and we can update that information 
and send it to you. We have an officer who is in charge of 
diversity and these types of issues, and I am sure she could 
provide you with the latest information.
    Ms. Waters. Would you please submit that for the record? 
You can submit it either to the chairman, or to my office. I 
would like to take a look at it.
    Mr. Bernanke. We will do that.
    Ms. Waters. To see how well you are doing with diversity at 
the Federal Reserve.
    Now, finally, let me just ask you about the deficit. As you 
know, it was just a few years ago that everyone was so 
concerned about the deficit. President Clinton did a fabulous 
job of eliminating that deficit. Now we continue to have a 
deficit, and all that I hear is, oh, it is 2 percent less than 
it could have been; deficits are not so bad, particularly when 
we see some reductions, and we think that it is going in--are 
you concerned about the deficit?
    Mr. Bernanke. Congresswoman, as I have indicated, I think 
the real fiscal problems are long-term issues. We have some 
very substantial obligations for Social Security, for Medicare, 
and for other entitlement programs. They are largely at this 
point unfunded. And I think that we need to be moving towards a 
fiscal situation where we will be able to make those payments, 
we will be able to meet those obligations. I think that is the 
real long-term fiscal issue right here.
    Ms. Waters. I have never heard any alarm or any real 
concern written about or discussed by you about the deficit. I 
appreciate the answer that you just gave me, but I guess my 
question is, are you concerned about the size of this deficit?
    Mr. Bernanke. I don't think you can discuss it in 
isolation. I think it is part of the--
    Ms. Waters. I just want to know how you feel. I really 
don't need an intellectual answer. Are you concerned at all 
about the deficit?
    Mr. Bernanke. I am only concerned in the context of the 
fact that we need more national saving in the country. We need 
to work down the current account deficit over a period of time, 
and we need to prepare ourselves for our long-term transfer 
obligations. And for all those reasons, I think the fiscal 
situation ought to be improved. I don't--
    Ms. Waters. Does that spell, ``I am concerned?''
    The Chairman. The gentleman's time has expired.
    The gentleman from Illinois, Mr. Manzullo.
    Mr. Manzullo. Thank you very much.
    Dr. Ferguson visited my Congressional district a couple of 
years ago. I would extend the same to you. We have one of the 
most highly concentrated areas in the country in manufacturing. 
I would like to show you some of the exciting things going on. 
I will give that to you in writing obviously.
    My understanding is that the core inflation which does not 
take into consideration food and energy is at 2.6 percent. If 
you add energy, it is at 4.3 percent. And my question is, do 
you believe raising interest rates decreases consumption of 
gasoline for vehicles and oil feedstocks for manufacturing?
    Mr. Bernanke. Well, I will answer your question indirectly. 
One of the reasons we pay attention to the core inflation rate, 
which excludes energy, is we don't have a lot of control, 
obviously, over the price of energy, and so one of our concerns 
is that higher energy commodity raw materials costs don't get 
passed through into other goods and services. If we can sort of 
stop it at the first round, that will lead us to a more stable 
inflation situation when energy prices level off.
    Mr. Manzullo. But on the other hand, if inflation were at 
2.6 percent, you might be raising interest rates. Is that 
correct? That is a trick question.
    Mr. Bernanke. It is a trick question. As I said in my 
testimony, our expectation is that core inflation will be 
moderating over the next 2 years for a variety of reasons. 
However, we do see some risks, and one of the risks would be 
that because product markets are tight, that there would be 
ability of firms to pass through energy and commodity prices 
into other goods.
    Mr. Manzullo. Well, it is unfortunately, in manufacturing, 
you can't do it, I mean, because of imports. And in the farming 
sector, you can't do it either. I have a lot of agriculture in 
my district, and so I think that the consumers and the farmers 
and the manufacturers are being hit with an additional tax 
which is the increase of inflation, and we can't do anything 
about it. And as I understand it, the reason you raise interest 
rates is to decrease consumption and cool off the economy. And 
so I think that raising interest rates, because of the increase 
in energy, not only is bad economics but it fuels the 
inflation. For example, most people charge--I think it is 60 
percent of the people charge gasoline on their charge cards. 
And the interest rate on many credit cards is determined by the 
Federal Reserve. So whenever you increase your interest rate, 
you increase the interest rate that they are paying on the 
gasoline that they are charging. So you are actually fueling 
the problem and making it worse. Now that is not a trick 
question.
    Mr. Bernanke. The increase in energy prices is clearly 
making the economy worse off, both in terms of real activity 
and in terms of inflation. There is no question about it.
    Mr. Manzullo. Right.
    Mr. Bernanke. And we have very little control over energy 
prices themselves. Our objective is to make sure that it 
doesn't get into a wage-price spiral where energy prices spill 
over into other--
    Mr. Manzullo. So, therefore, the answer to your question--
my question would be, by raising interest rates, you believe 
that that will decrease the consumption of energy?
    Mr. Bernanke. No. We expect it is going to reduce the 
ability of firms to pass through those costs to the final 
consumer prices.
    Mr. Manzullo. Why, by making it more difficult for them to 
borrow money for the production lines?
    Mr. Bernanke. By making product markets less tight.
    Mr. Manzullo. Such as--
    Mr. Bernanke. Well, again, as I mentioned before, if 
financial conditions are such that aggregate demand is greater 
than the underlying productive capacity of the economy--
    Mr. Manzullo. Right.
    Mr. Bernanke. Then you are going to have a lot of power of 
firms to pass through their cost because high demand means that 
they will have the power to raise their prices. What we want to 
make sure is that those high energy prices--
    Mr. Manzullo. But what that does is that makes our foreign 
competitors more competitive, those that have--for example, in 
Europe and Asia where natural gas is half what it costs here in 
this country, where natural gas is 80 percent of the feedstock 
of plastics. I just think--that is why I wanted you to come to 
my district to examine the impact on manufacturing because 
there is--every time you increase that interest rate, you not 
only tighten up the ability for these manufacturers to borrow 
money for the production line, but you make it more difficult 
for them to export, and that is going to hurt the economy as a 
whole.
    The Chairman. The gentleman's time has expired.
    The gentleman from California, Mr. Baca.
    Mr. Baca. Thank you very much, Mr. Chairman, and Ranking 
Member Frank, for having this hearing.
    And thank you, Mr. Bernanke, for being here as well. First, 
I want to start on the housing crisis. As the housing crisis 
market slows, areas like California, the Inland Empire where I 
have quite a few people moving in from L.A., Orange County, 
into the area, have been heavily dependent on real-estate-
related employment will suffer the most. If prices start to 
drop in San Bernardino County, and homes stay on the market for 
5 months instead of the 5 days, it hurts more than just the 
sellers. It also leads to less work for people, and I state 
less work for people who build new homes and those who help 
sell, finance, or insure them. Thousands of people's jobs are 
at stake, including home construction, real estate agents, 
mortgage brokers, inspectors, and more. Question number one is 
what industries of the economy have enough strength to pick up 
the slack as the housing market continues to cool? And question 
number two is what will the cooling housing market mean for job 
growth and unemployment numbers?
    Mr. Bernanke. Well, as I indicated in my testimony, there 
are other sectors that are going to pick up some of that slack, 
and they include nonresidential construction, which is quite 
strong, business investment, and exports. And also multifamily 
housing has remained at about the same level as recent years. 
So I think there are other components of the economy that are 
picking up some of that slack.
    Mr. Baca. But at the same time, though, because of the 
outsourcing that we have done, and we have done quite a lot of 
outsourcing, that also hurts in that endeavor, too, as well 
when we look not only at our national deficit, but we continue 
to do most of the outsourcing. When most of the jobs are done 
outside, then all we have is distribution centers, and then it 
becomes a profit for individuals yet jobs are being lost here 
in the United States, and it is very difficult to pick up. 
Isn't that so?
    Mr. Bernanke. The labor market has strengthened 
considerably in the last couple of years. We always want it to 
be better, but it has been improving. In terms of outsourcing, 
we don't want people to lose jobs. And when people are 
displaced by--
    Mr. Baca. We are losing jobs when we do outsourcing. We 
have lost quite a few jobs here in the United States.
    Mr. Bernanke. When that happens, I think it is important 
for us to help people retrain and find new work.
    Mr. Baca. The labor market, too, as well because the 
minimum wages are low, and they are not up as well, and so it 
becomes very difficult. And we have not kept up with inflation, 
and that makes it very difficult, even for the original 
question that I asked on housing, is that correct?
    Mr. Bernanke. I don't understand the connection.
    Mr. Baca. Well, the connection is, with a lot of the 
outsourcing, we have lost a lot of jobs in the area. And as we 
have done that, we have not kept up with inflation in terms of 
even at labor jobs that are even done here because a lot of the 
labor jobs are at minimum wage, and we have not even increased 
the minimum wage to keep up with the inflation and the cost of 
living. Therefore, it impacts us. Is that correct or not?
    Mr. Bernanke. We have a large surplus in trade and 
services. A lot of people outsource to us--financial services, 
accounting services, educational services, and tourism. So it 
is a two-way street, and our labor markets benefit from 
transplants from foreign direct investment. I think keeping our 
economy open to the world is good for our labor market and good 
for our economy.
    Mr. Baca. The next question that often runs along the same 
lines, and the question was just asked about gas pricing in my 
area or in the State of California, basically the cost of gas, 
prices have almost escalated to about $4 a gallon, which 
becomes very difficult for a lot of us, so it has jumped 
considerably. If the trend of raising gas prices coupled with 
the stagnated wages continues, how will the impact be felt in 
our communities across the Nation because it becomes very 
difficult even with the minimum wage right now that they are 
earning just to fill a tank of gas. It costs anywhere between 
$50, $60, and $70, which means that one day's work pays for a 
gas tank that only takes them to 2 days work. So it becomes 
very difficult in terms of--to keep up with their mortgage 
payments, putting food on the table, and paying their medical 
expenses. Could you reply how it affects us across the Nation?
    Mr. Bernanke. I agree absolutely. We have seen about a 
tripling of energy prices over the last few years. That has 
raised gasoline prices, raised heating oil and other kinds of 
energy prices, and it has reduced our growth and been a burden 
on consumers and firms, and it has been inflationary for us so 
it has obviously been a problem for our economy.
    Mr. Baca. Okay. Well, the spending of gas prices growing 
faster than spending for other basic items such as healthcare, 
housing and college, what impact will this have on long-term 
economic growth? And do you believe that there should be a 
greater sense of urgency for Congress and this Administration 
to do something to stop the rising gas prices?
    The Chairman. The gentleman's time has expired.
    The chairman may respond.
    Mr. Bernanke. The higher prices have reduced our growth. We 
have estimates that GDP has been reduced between \1/2\ percent 
and 1 percent from growth in the last few years, but I think it 
is important going forward that we look to other sources of 
energy and trying to diversify our portfolio of energy sources 
and trying to increase our conservation, and doing all that, we 
will, I think, ultimately overcome this problem.
    Mr. Baca. If I had another question, I would have asked it 
on higher education, and the cost that has been there, too, as 
well, and its impact, it has not only on minorities and others 
getting into an education institution, but I didn't have time 
to do that. But I thought I would throw that in.
    The Chairman. The gentleman's time has expired.
    The gentleman from New Mexico, Mr. Pearce.
    Mr. Pearce. Thank you, Mr. Chairman.
    And thank you, Mr. Chairman. If we are talking about the 
price of gasoline and the price of crude oil being a component 
of that, isn't crude oil simply a function of supply and 
demand? If we increased the supply, then the price would fall?
    Mr. Bernanke. Yes, Congressman. There is a global market.
    Mr. Pearce. Really affect the price of gasoline if we were 
to drill in ANWR in the outer continental shelf, if we were 
able to get those things through legislative bodies in this 
town, might affect the price of gasoline in some way.
    Mr. Bernanke. Yes.
    Mr. Pearce. Okay. Just making sure my facts were right. And 
I am also--as far as labor I would tell you that, in my home 
county, we do gas work. Those are basically labor jobs with no 
high school education required. And a kind of a minimum salary 
right now in the oil field is about $30,000. If you have some 
experience, it is up around $50,000. And if you are actually 
one of the lead forepersons, it is up around $100,000. So I 
don't really find anybody even at the Burger King, the entry-
level price is $8.50. And I don't always see that the minimum 
wage is what is pulling us into financial difficulty as a 
country. You had made an observation earlier about the price of 
natural gas not accelerating, and I would point out that 
nationwide we have got about 1,400 or 1,500 drilling rigs and 
over 1,000 of those are drilling for natural gas, only about 
300 or 400 drilling for oil, which tells us why the price of 
oil continues to go up. And so, again, we find that the supply 
and demand actually can be affected right now in today's 
current situation. So I continue to be a little bit surprised 
by our land management agencies that restrict access to the 
service of them. They restrict access. So if you ever have a 
chance to comment on that, I won't ask you to do it at this 
point, but we are choosing policies which absolutely give us a 
higher price of gasoline and then cause inflationary pressures. 
I think my question is, what price do you--you have adequately 
stated that labor is a little bit harder driver in inflationary 
pressures. But what price of crude oil would you be very 
concerned that we have inflationary pressures, significant 
inflationary pressures from energy?
    Mr. Bernanke. Well, I don't have a specific price in mind. 
The futures markets right now have oil prices rising a bit over 
the next few months and then stabilizing. If that were to 
happen, then that source of upward pressure on the inflation 
rate, and also the adverse effect on growth, would be removed 
over time. Obviously, any significant $10 or $15 increase from 
where we are now would have significant consequences.
    Mr. Pearce. And again, it kind of lets us know that we 
probably should be doing some things on our energy policies, 
because of the descriptions in the Middle East, a $10 or $15 
increase would be fairly easy to achieve, fairly within reach. 
The problem in the Middle East then brings us up to a different 
point, and that is even the availability of crude oil at any 
price. And could you see a scenario that might play out where 
the lack of energy, the lack of ability to move products around 
could drive us toward deflation rather than inflation? Would 
that be a potential scenario if the price--let's say that there 
is no price at which the Middle East would ship oil to the rest 
of the world.
    Mr. Bernanke. Well, it is a global market, and there are 
many different sources. I expect that oil would be available 
but potentially at a very high price, and I would think the 
primary effects of that would be inflationary because of the 
impact on costs and impact on the consumer prices at the pump 
and so on. And also it would be a hit to growth if oil prices 
were to rise very, very significantly.
    Mr. Pearce. I don't know that it is correct, but I have 
heard estimates that Saudi Arabia has about 60 percent of the 
world's oil and that is probably 15-year-old data. But even if 
it is 40 percent, I can see where--that it would not be 
available at any price if you add Iran and Saudi Arabia 
together, and I worry about the other end. If we faced 
deflation, what would be your view of responses that we should 
take?
    Mr. Bernanke. Well, deflation is not an immediate issue 
here in the United States. The Japanese have faced deflation 
for the last few years, and they used some nonstandard monetary 
policies, including what is called quantitative easing and a 
zero interest rate policy, and that seems to be helping. And 
their economy is currently growing, and they have recently left 
that unusual policy and returned to a more normal poll monetary 
policy regime.
    The Chairman. The gentleman's time has expired.
    The gentlelady from Wisconsin, Ms. Moore. If the gentlelady 
would yield, the Chair would like to accommodate the rest of 
the members here, Mr. Chairman, if that is okay with you. And 
then we will be finished. We will try to keep the questions as 
brief as possible. Thank you.
    Mr. Frank. Let me join you in thanking the chairman for 
coming. The members really appreciate it.
    The Chairman. The gentlelady from Wisconsin.
    Ms. Moore of Wisconsin. Well, thank you so much, Mr. 
Chairman. Thank you, Mr. Chairman. You can feel relief because, 
whenever they call on me, it is absolutely the end of the line. 
I am a new member, and so it is very important to me, sir--and 
you are a new chairman. It is very important for me to try to 
understand what the monetary philosophy is, and so as I look 
through your testimony here, you really say that the U.S. 
economy appears to be in a period of transition that has been 
growing, and it is robust. And when I compare your optimism 
about our economy with what is happening to individuals, I see 
it is a negative savings rate, certainly I am guilty of that. 
You point out that some of the weakness in our economy prior to 
the last few years was seen in the lack of productivity of 
employees, but yet people are working harder, and they are 
earning less. I have heard numbers of my colleagues have 
probably complained about no increase in the minimum wage and 
the flattening of wages and so forth. They have less purchasing 
power. So they can't really buy things. You have admitted in 
your testimony that we are adding jobs at a much lower pace. 
And of course, we all know that the unemployment rate does not 
reflect the numbers of people who are eligible to be in the 
workforce that have just given up.
    In my own hometown of Milwaukee, Wisconsin, we have a 52 
percent unemployment rate among African-American men. But yet, 
on the other hand, in the last 5 years, we have seen corporate 
profits increase by 69 percent. We have seen executive 
compensation, which might account for some, you know, some 
increase in wages, we have seen the increase in corporate wages 
such that a corporate executive, on January 2nd, by lunchtime, 
has earned as much as a minimum wage worker will all year.
    In your testimony, you said you touted business investments 
and exports. So am I to glean from all this that you really see 
a shift--that the shift in the economy has been to increase the 
capital, improvement of corporations and individuals and 
investors, and that basically we should just concede the 
strength of our economy by having people with good jobs and 
purchasing power and able to go out and buy goods and services, 
that our strength--that your perspective of the strength of our 
economy is in favor of capital; couple that with the cuts in 
programs that hurt families and all of the tax cuts that this 
Administration has put forward, should I conclude that 
strengthening our strong economy is because we prefer the 
accumulation of capital as opposed to our labor assets?
    Mr. Bernanke. Congresswoman, I am taking an overall 
perspective on the economy. I think that accumulation of 
capital helps workers. It provides jobs and raises 
productivity. I think exports provide jobs, give more 
opportunity. But I have also agreed with the comments made 
earlier that there is widening inequality in this country. It 
has been going on for about 25 years. I agree it is a concern. 
And nothing in my testimony contradicts that.
    Ms. Moore of Wisconsin. Okay. I do have a few more minutes. 
Well, I am glad to hear that because, Mr. Chairman, there are 
people in jail right now for painting a rosy picture about the 
value and assets of their companies and painting the rosy 
picture to their investors and consumers. So I would hope that 
the Federal Reserve would adhere to the discipline that I think 
that they are used to, you know, in terms of looking at the 
economy from both perspectives. Our concern, many of our 
concerns is that, you know, a few rich investors--I mean, they 
can only eat one hamburger, two hamburgers if they are really 
greedy, and it would be so much better to provide enough money 
in the economy so that thousands, yet millions of people could 
have a hamburger, could go out and enjoy an evening at the 
movies. It is not clear that these investors are really 
investing in American products. Can you comment on that before 
my time expires? Are they making investments here at home? 
Because the job growth is slowing. You have admitted that. Or 
are they making investments abroad?
    Mr. Bernanke. Well, we have a global capital market. We 
have domestic investors investing both here and abroad, and we 
have foreign investors investing here as well. I think the 
process of investment, creating more capital is really one of 
the basic means by which we increase productivity, increase job 
opportunities.
    The Chairman. The gentlelady's time has expired. The 
gentleman from New Jersey, Mr. Garrett.
    Mr. Garrett. Thank you, Mr. Chairman.
    And thank you, Mr. Chairman, as well. And one of the first 
comments at the very beginning of the day from the other side 
of the aisle, that all the credit can be given to you for the 
rise in the stock market yesterday based on your testimony--I 
think we are about halfway through the trading day. I have not 
seen whether or not there has been an inflection one way or the 
other based on testimony today. But there was an article in, I 
think, The Washington Post about a month ago where economists 
from some investment firm made some sort of comments saying 
that, well, the chairman is selected by the President, 
confirmed by the Senate; his real bosses are really in Wall 
Street. I just wonder how you take that sort of comment or 
criticism.
    And then following that, though, a more serious note, and 
that is the point of the discussion that we have had so far on 
wages here. You touched part of this with regard to the 
unemployment rate. My question is two-part. One, what are the 
impediments, if any, that are holding down a significant or any 
real increase in wages? As I say, you touched upon the aspect 
of the unemployment rate being basically at historic lows for 
the period of time. On the other side of it, what are the 
impediments on the other side, or what could be pressures that 
we could use to, if we wanted to, to see a raise of wages? Is 
there something Congress has done in the past or is there 
something Congress should be doing in the future in this area? 
We know that, just a couple of years ago, in light of the 
economic doldrums that we were in, this Congress passed an 
economic growth package and--all the markets were going down; 
we passed the economic growth package, and you had the charts, 
you would see all the charts were going up in the other 
direction in a positive direction because of that. We passed 
tax cuts in this Congress which basically shifted the tax 
burden. There was a progressive tax cut, basically shifted the 
tax burdens so those who were making at the higher end of the 
income range are now paying a bigger, a larger percentage, a 
larger portion of the pie of the entire tax burden than they 
did before. So is there anything that we have done in the past 
that has been a negative impact, if you will, if that is the 
correct term, as far as the wage growth or lack of wage growth? 
And conversely, is there something we haven't done because we 
have heard from several members already with regard to the 
minimum wage, and we haven't moved on that in maybe over a half 
dozen years but maybe just comment what impact that would have 
anyway just considering the size of the population that is 
currently at the minimum wage and whether that would have any 
significant impact overall on wage growth?
    Mr. Bernanke. Well, on the slowing, the fact that real 
wages have not grown as quickly as we would like, there are a 
number of factors. Again, energy prices are very important. 
They have raised the cost of living. Congressman Frank talked 
about the difference between compensation and wages. Some parts 
of benefits are in fact useful to workers, but some of it 
reflects higher costs, for example, the medical insurance and 
the like, and they may not perceive that as being an increase 
in their standard of living, and then there is the fact that 
real wages have lagged to some extent behind productivity. I 
believe that will improve, but it hasn't entirely done so yet. 
I think the best thing that can be done to increase real wages 
and reduce inequality, and it has been said before, but I 
remain convinced, is upgrading skills and training. If we look 
at the labor market today, we see people with skills, 
generally--of course, there are always exceptions, but 
generally--not having difficulty finding jobs, and those with 
the lower levels of skills are the ones who are having the most 
difficulty finding good jobs. On the minimum wage, I think the 
statistic is about 2.5 percent of the labor force is actually 
at the minimum wage.
    Whether a raise in minimum wage would assist is a 
controversial issue. Clearly, those who kept their jobs and had 
a higher wage would be better off. The question is whether or 
not some people would lose their jobs because of a higher wage. 
I have in the past, and I think it makes sense, suggested that 
perhaps a more targeted way to help lower-income people would 
be through the earned income tax credit, which doesn't have 
these negative employment effects and provides direct 
assistance to people who are low-income working families.
    Mr. Garrett. Switching subjects now quickly over to the 
GSE's, you made a comment on that earlier, you made some 
comments yesterday in your testimony in that regard, looking 
for a compromised solution, a middle ground, so to speak, on 
the portfolio limitations, and you are suggesting that may be 
one that goes up if the market is down--or if the economy is 
down, giving the rate a flexibility for them to come in and 
conversely restricting at other times, if I am understanding 
your testimony. Is the history, though, of GSE's, of Fannie Mae 
and Freddie Mac, have we seen them be able to do that in the 
past and do so appropriately? Because some critics say, in past 
crises, instead of what we ask them to do, what we expected 
them to do, actually what they did instead was basically take 
the cream of the crop and just basically take their own 
advantage as opposed to helping the economy. So would this be 
something to just benefit the GSE's if we did that compromise?
    The Chairman. The gentleman's time has expired. The 
chairman may respond.
    Mr. Bernanke. Our research at the Federal Reserve has not 
found a significant impact of interventions by the GSE's in 
terms of assisting the housing market during difficult times.
    Mr. Garrett. Thank you.
    The Chairman. The gentlelady from California, Ms. Lee.
    Ms. Lee. Thank you, Mr. Chairman. Good to see you again Mr. 
Chairman.
    I don't want to have to get back on my soap box on this, 
but I guess I will because I have been trying to get, since 
Chairman Greenspan, some real answers to this issue so that we 
can move forward. So in the past, and I think I have talked to 
you a little bit about this the last time you were here, I have 
sought to work with Chairman Greenspan to address the obvious 
racial and ethnic disparities in small business lending and 
home mortgage lending as well as I have talked with the CEO of 
our local Federal Reserve, Janet Yellen. Now, unfortunately, 
the response that I have received in each case has been totally 
inadequate. And this has been going on for several years. Mr. 
Greenspan suggested that the cost to business would prohibit 
stronger data collection, discounting the positive effects to 
the economy of increasing minority homeownership and small 
business lending. And Ms. Yellen also indicated that it would 
be way beyond the capacity of the Federal Reserve to undertake 
a community survey of minority homeownership and suggested that 
we wait until the 2010 Census.
    I think the Federal Reserve must do more to ensure 
accountability to these unfair lending practices and to 
meaningfully address the tremendous gap, and it is tremendous 
in minority homeownership. Toward that end, I am interested in 
looking at ways to link the Community Reinvestment Act ratings 
with lending practices, and I have written you a letter--you 
probably haven't seen it yet--on July 12th, summarizing all 
this. CRA, of course as you know, was written to address how 
banking institutions meet the credit needs of their low- and 
moderate-income neighborhoods and ensure that banks invested in 
and strengthened the communities in which they were doing 
business. And part of this goal also was to reach out to 
traditionally underserved communities and provide them with 
access to capital if they needed it so that they could grow 
with their community bank. But disappointingly, according to 
much of the data that we have received, and I am sure you know 
this data, most banks provide on average--now this is on 
average--about a 1 to 2 percent conventional loan rating to 
their--in terms of home loans to African-Americans and to 
Latinos and yet the CRA ratings are ``A's'', and 
``outstandings'', and what have you. And so what I am trying to 
figure out is, understanding the CRA doesn't currently focus on 
lending to minorities, don't you think that it makes sense to 
strengthen the statute to do so or at least to increase the 
amount of data, just increase the amount of data that is 
collected based on race and ethnicity because I believe--and I 
wanted to get your sense of this--that the potential economic 
benefits would definitely outweigh the minimal costs posed to 
businesses for collecting such information. And again, I hope 
to hear from you in writing because I did write this up again 
on July 12th.
    And just the second question is--or well, yes, it is a 
question. I wanted to get your sense of the Wachovia regulatory 
approval of its acquisition of World Savings. That is located 
in my district, and we, since I have been in Congress, haven't 
been through this type of acquisition, and I wanted to hear 
what the underlying factors are in the Federal Reserve's 
decision and what your timetable is for the approval.
    Mr. Bernanke. I can answer the first three at least. The 
Federal Reserve has recently expanded the data collection under 
HMDA, the Home Mortgage Disclosure Act, which collects data on 
every single home mortgage loan essentially made in the country 
including pricing, including denial rates, and including 
ethnicity. So we have a great deal of data on that issue, and 
we are using it as an initial screen to check for fair lending 
violations. With respect to CRA, it is absolutely correct that 
if the purpose of CRA is to get banks and other institutions to 
reach out to underserved communities, and they get credit for 
doing that when they do, and if they violate the fair lending 
laws, that's a debit in their CRA rating.
    Ms. Lee. But that is not so at this point.
    Mr. Bernanke. I believe it is. But we will get back to you 
on your letter and give you exact information about that. You 
are correct that the CRA talks about underserved communities 
and lower- to middle-income communities. It doesn't 
specifically talk about race and ethnicity, and that is in the 
statute, and that would be, of course, up to Congress if they 
wanted to make that change.
    Ms. Lee. But if we wanted to make the change, could we get 
your support for that?
    Mr. Bernanke. I would have to discuss it with other board 
members and the like, but I would certainly think about whether 
it makes sense in this context. Again, there are other ways to 
address the issue, through fair lending, for example, but I 
would certainly be willing to consider that issue.
    The Chairman. The gentlelady's time has expired.
    The gentleman from Texas, Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman.
    And, Mr. Chairman, the good news is I think I am the second 
to the last. In listening to some of the questions and some of 
the comments on the other side of the aisle, it would lead us 
to believe that we were on the verge of a great depression. I 
think what I have observed in our economy is that we have more 
Americans working now than ever. We have created--we, the 
economy, capitalists have created over 5 million new jobs in 
the last several years. We have a lower unemployment rate than 
we had in the 1970's, 1980's, and 1990's. Homeownership is at 
an all-time national record. Household wealth is at an all-time 
national record. Inflation adjusted after tax income is up. And 
then I know that you do not have a perfectly clear crystal 
ball, and I understand that economic forecasting is an 
imprecise science, but if I heard your testimony right, barring 
unforeseen circumstances, I think you said employee 
compensation is likely to rise over the next couple of years. 
You predict a gradual decline in inflation in coming quarters 
and that the economy should continue to expand at a solid and 
sustainable pace. Given where we have been, given where--given 
the facts that are available to the extent that you can 
forecast, my precise question is, what is your opinion of this 
economy relative to U.S. history? And what is your opinion of 
this economy relative to the Western industrialized world, say 
the EU and Japan?
    Mr. Bernanke. It is a very strong economy. Two very 
impressive aspects of it are, first, the very high productivity 
gains. We didn't see that in the 1970's and 1980's. We are now 
seeing productivity gains which are the envy of the 
industrialized world. The other thing about our economy which 
is impressive is its resilience. We have been through a number 
of very severe shocks in the last 5 or 6 years, and the economy 
has managed to continue to grow. It is certainly not a perfect 
economy, but there are some very strong elements, and I think 
those are two that I would point to.
    Mr. Hensarling. Much of the questioning has had to do with 
near-term economic and monetary policy. Let me turn our 
attention long term. I have a great concern over the spending 
patterns of the Federal Government, and I am sure you have 
probably poured over some of the similar reports that I have 
poured over and GAO and OMB and CBO that essentially lead me to 
conclusion, and I think others, and I am paraphrasing from a 
recent GAO report, that within one generation, America is 
facing a rather nasty fork in the road. One fork is going to 
lead to a Federal Government consisting of almost nothing but 
Medicare, Social Security, and Medicaid. The other fork in the 
road is going to lead to doubling taxes in real terms for the 
American people in one generation from roughly $22,000 for a 
family of four to $44,000. Assuming you have seen similar data 
and concluded to be accurate, there has been a lot of talk here 
of the economic implications of certain policies on low-income 
people. If we do not change the growth rates in the big three 
entitlement programs and we double taxes on the American 
people, what does the American economy look like in the next 
generation? And precisely what is its impact on low-income 
people?
    Mr. Bernanke. Well, your numbers are correct. We currently 
spend about 8 percent of GDP on those three programs, and 
according to the actuaries, by 2045, we will be spending about 
16 percent. Since the Federal revenue collection is about 18 
percent historically, that would be essentially the entire 
government. And this is the point I have been addressing that 
we need really to make up our minds about how we want to 
proceed. I do think if the taxes were to be raised to the level 
that you are describing, I think it would be a drag on growth 
and a drag on the efficiency of the economy. So Congress needs 
to think about what size government it wants and what the 
appropriate tax rate is that is associated with that 
government.
    Mr. Hensarling. There have been a couple of questions on 
GSE's, and forgive me if I am applying some old ground. But 
your predecessor had a rather high anxiety level about the 
GSE's holding their own debt in their portfolios. I know there 
has been a couple of questions about it, but if I decide to 
toss and turn tonight, how much time should I spend worrying 
about portfolio limitations on the GSE? To what extent on the 
anxiety barometer, how much time should we worry about the 
systemic risk that that poses?
    Mr. Bernanke. Well, I think there is a risk there. And 
indeed the recent report from OFHEO about some of the 
inadequacies of the GSEs' internal controls and their 
accounting makes us wonder about their ability to manage these 
very large and complex portfolios. I am not saying there is 
anything immediately about to happen, but I do think that these 
portfolios do present a systemic risk and that it would be in 
our interest to try to address that issue.
    The Chairman. The gentleman's time has expired.
    The gentleman from California, Mr. Miller, to wrap up.
    Mr. Miller of California. Thank you.
    Welcome. I always enjoyed Mr. Greenspan when he was here, 
and I come from the building industry, about 35 years involved 
in that. I enjoyed your testimony. I listened to it from my 
office. I actually had to write some of this down because I 
wanted to make sure I get everything correct and get a response 
on what you had been saying. You said in the hearing today that 
one of the best things to keep mortgage rates low is to keep 
inflation under control. And that in and of itself sounds 
reasonable, but you say in your testimony that increase in 
residential rents as well as in the imputed rent on owner-
occupied homes has recently contributed to higher core 
inflation. You have also indicated in testimony that there has 
been a gradual cooling in the housing market, and I think that 
might be an understatement, but that is a statement. But I 
believe this cooling in the housing market is due to interest 
rate hikes. Every time you raise interest rates, you reduce the 
number of qualified buyers on the market. Kept out of the 
housing market due to a lack of affordability, these 
individuals turn to the rental market. This contributes to the 
increase in rents which you say is an indicator of inflation. 
In a way, it is kind of a circular reasoning. Affordability 
decreases when interest rates rise; rents rise due to lack of 
affordability in the housing market. This increase in rents 
leads you to determine the higher core inflation, so you 
increase rates. Some have said that the Federal Reserve has 
been relying too heavily on owner-equivalent rents to 
nationalize the interest rate hikes. The owner component of the 
core inflation is an imputation made by government 
statisticians to determine inflation. In essence, a weakening 
of home buying is increasing the demand for rental units, and 
the firming of rents translates into sizable increases in 
homeowner equivalent rents.
    You are saying there is a problem in rents rising, but 
aren't you really creating the problem in rents rising by 
increasing rates?
    Mr. Bernanke. Congressman, we are aware of the issues 
associated with this imputed rent. On the one hand, I am a 
little bit reluctant to look at an inflation indicator that 
takes out energy, food, and shelter. At that point, we are 
looking at a very narrow measure of inflation, but the point 
you make has some validity. It is one reason why we tend to 
focus more on the core PCE deflator--rather than PCI. And I 
would say also that, as I mentioned in the testimony, that the 
pickup in core inflation is much broader based than this 
imputed rent component.
    Mr. Miller of California. Significant factor in your 
determination; am I not correct?
    Mr. Bernanke. What is significant is that this increase in 
core inflation seems to be a broadbased phenomenon, and so we 
don't think it is a statistical illusion.
    Mr. Miller of California. But when interest rates go up, 
any person who owns an apartment complex looks at demand, and 
what they are paying for cost of funds. And when you have a 
market that is being impacted because affordability has 
decreased, every time you raise it a quarter percent, ``X'' 
amount of people are driven out of the marketplace. Not only 
are people building homes impacted, the people who own homes 
are impacted. In California, it seems, after the recession we 
experienced in the 1990's as you recall, after 1989, some 
people in California had to wait until 2000 to have their home 
be worth what it was in 1989. So California is rather trying to 
catch up on the stagnant 11 years we experienced there, and you 
have had a robust housing market that has, in my opinion, based 
on people I know in industry, has solely been impacted recently 
because of the rise in interest rates. People are being forced 
out of the market. And as that happens, not only are they 
impacted trying to sell their home, the cost of land has 
remained consistent. The cost of government process remains 
consistent, but this equation you are using on rents is just 
making the situation worse than it otherwise would have to be. 
And not only just rising rents, but you have discussed other 
factors that you think have contributed to this cooling in the 
market. What might those be?
    Mr. Bernanke. Well, the main factor is that housing prices 
have risen at double-digit rates for about 5 years. I think 
that quantitatively is the main reason that people have been 
getting priced out in some markets. And, you know, that 
obviously can't go on forever because affordability begins to 
bite and--
    Mr. Miller of California. Well, when supply and demand 
equal each other, that is true, but right now, the demand is 
huge. Rates being reasonable, they are having trouble producing 
enough product out there to meet that demand. But every time 
you raise these rates, more people are forced out of the 
marketplace that otherwise--you know, if you go back a year, 
year and a half, people who qualified to buy a home today can't 
even dream of it because the interest rate hike. And I am not 
trying to be argumentive, but you trying to stop inflation is 
absolutely devastating to the housing market and devastating to 
individuals who own homes who want to sell to relocate. They 
are unable to do that.
    The Chairman. The gentleman's time has expired. This 
concludes the hearing.
    Mr. Chairman, this will be our last hearing together. As I 
leave the Congress, I just want you to know how much we have 
appreciated your excellent testimony two times before the 
committee and look forward to--my successor, I am sure, looks 
forward to your continued cooperation and appearances on a 
regular basis before the Financial Services Committee. Again, 
thank you for your service.
    Mr. Bernanke. Thank you, Mr. Chairman.
    [Whereupon, at 1:24 p.m., the committee was adjourned.]


                            A P P E N D I X



                             July 20, 2006


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