[Joint House and Senate Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 113-339
THE ECONOMIC OUTLOOK
=======================================================================
HEARING
before the
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
MAY 7, 2014
__________
Printed for the use of the Joint Economic Committee
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JOINT ECONOMIC COMMITTEE
[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]
HOUSE OF REPRESENTATIVES SENATE
Kevin Brady, Texas, Chairman Amy Klobuchar, Minnesota, Vice
John Campbell, California Chair
Sean P. Duffy, Wisconsin Robert P. Casey, Jr., Pennsylvania
Justin Amash, Michigan Bernard Sanders, Vermont
Erik Paulsen, Minnesota Christopher Murphy, Connecticut
Richard L. Hanna, New York Martin Heinrich, New Mexico
Carolyn B. Maloney, New York Mark L. Pryor, Arkansas
Loretta Sanchez, California Dan Coats, Indiana
Elijah E. Cummings, Maryland Mike Lee, Utah
John Delaney, Maryland Roger F. Wicker, Mississippi
Pat Toomey, Pennsylvania
Robert P. O'Quinn, Executive Director
Niles Godes, Democratic Staff Director
C O N T E N T S
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Opening Statements of Members
Hon. Kevin Brady, Chairman, a U.S. Representative from Texas..... 1
Hon. Amy Klobuchar, Vice Chair, a U.S. Senator from Minnesota.... 3
Witnesses
Hon. Janet L. Yellen, Chair, Board of Governors of the Federal
Reserve System, Washington, DC................................. 6
Submissions for the Record
Prepared statement of Hon. Kevin Brady........................... 32
Figure 1 titled ``Recovery's Growth Gap Remains Large''...... 34
Figure 2 titled ``5.7 Million! More Private Sector Jobs with
an Average Recovery''...................................... 35
Figure 3 titled ``Missing $1,072/mo.''....................... 36
Chart titled ``Unemployment Rate Decline''................... 37
Chart titled ``American Families Suffer While Wall Street
Roars''.................................................... 38
Prepared statement of Hon. Janet L. Yellen....................... 39
Article titled ``Study: U.S. is an oligarchy, not a democracy''
submitted by Senator Bernard Sanders........................... 42
Charts submitted by Vice Chair Klobuchar:........................
``50 Months of Private-Sector Job Growth''................... 45
``Employment Rate Reaches Five-and-a-Half Year Low''......... 46
Response from Hon. Janet L. Yellen to Questions for the Record
submitted by:
Chairman Brady............................................... 47
Vice Chair Amy Klobuchar..................................... 58
Representative Duffy......................................... 59
THE ECONOMIC OUTLOOK
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WEDNESDAY, MAY 7, 2014
Congress of the United States,
Joint Economic Committee,
Washington, DC.
The committee met, pursuant to call, at 10:09 a.m. in Room
216 of the Hart Senate Office Building, the Honorable Kevin
Brady, Chairman, presiding.
Representatives present: Brady of Texas, Amash, Paulsen,
Hanna, Carolyn B. Maloney, Cummings, and Delaney.
Senators present: Klobuchar, Casey, Sanders, Murphy,
Heinrich, Coats, and Wicker.
Staff present: Douglas Branch, Hank Butler, Conor Carroll,
Gail Cohen, Barry Dexter, Connie Foster, Niles Godes, Paige
Hallen, Colleen Healy, J.D. Mateus, Patrick Miller, Robert
O'Quinn, Andrew Silvia, and Sue Sweet.
OPENING STATEMENT OF HON. KEVIN BRADY, CHAIRMAN, A U.S.
REPRESENTATIVE FROM TEXAS
Chairman Brady. Good morning. The Joint Economic Committee
hearing on The Economic Outlook for the United States will
begin. To start, I congratulate Chair Yellen on her appointment
to head the Board of Governors of the Federal Reserve System. I
and other Members welcome you to your first appearance as Chair
before the Joint Economic Committee and we look forward to many
more.
June will mark the fifth anniversary of the end of the
Great Recession. By virtually every economic indicator, this
recovery ranks as the weakest or near the bottom. This
recovery's persistent weakness has created a Growth Gap
relative to other recoveries over the last half a century.
For example, if this recovery had been merely average, then
the U.S. economy would be $1.4 trillion larger; American
Workers would have 5.7 million more private-sector jobs
available; and a family of four in America would have over
$1,000 more each month in real after-tax income.
Ironically, for an Administration that has repeatedly
bemoaned income inequality, the one exception to this weakness
is Wall Street--where the S&P 500 Total Return Index, adjusted
for inflation, has more than doubled. Last week, the Bureau of
Economic Analysis and the Bureau of Labor Statistics released
conflicting data about the strength of this recovery. On the
one hand, according to the BEA, real GDP growth was basically
flat in the first quarter, and according to the BLS the labor
force participation rate fell in April to 62.8 percent, tying a
multi-decade low only reached in the Carter and now the Obama
Administrations.
Moreover, the employment-to-population ratio is actually
lower than when the recession ended, which means there are
proportionally less adults working today than when the recovery
began. That is headed in the wrong direction.
On the other hand, the BLS reported that for only the fifth
time since the recession ended, the monthly growth of non-farm
payroll jobs in April exceeded the equivalent average monthly
job growth during pat recoveries with the unemployment rate
declining to 6.3 percent from its October 2009 peak of 10
percent.
Correctly judging the strength of the labor market is very
important because the Federal Open Market Committee has tied
the tapering of large-scale asset purchases and the
normalization of interest rates to its assessment of the labor
market. Members of the FOMC attribute much of the slack in the
labor market to cyclical factors and believe that a highly
accommodative monetary policy can strengthen economic output
and employment.
However, if a substantial portion of the weakness in the
labor market is due to structural factors such as an aging
population and a skills mismatch, then maintaining a highly
accommodative monetary policy could instead create economic
bottlenecks that would trigger price inflation.
Addressing structural unemployment requires much different
policies, such as reforming education, strengthening job-
training programs, and modernizing means-tested entitlement
programs to encourage work.
I am encouraged that the FOMC began to taper large-scale
asset purchases in December and appears on track to terminate
these purchases before the end of the year.
However, I am concerned that the FOMC stated that it will
likely maintain its zero-interest rate policy long after QE
ends, and at levels below those that ``the Committee views as
normal in the longer run.''
I am equally concerned that the discretionary nature of
changes to the FOMC's forward-guidance is undermining the Fed's
credibility--weakening the confidence of market participants,
and increasing uncertainty.
I believe the Federal Reserve helped to stabilize financial
markets after the panic in the fall of 2008, but
extraordinarily low interest rates and repeated rounds of
quantitative easing have done much more to stimulate Wall
Street than help hard-working American families on Main Streets
across America.
As I noted earlier, Wall Street is roaring, up 108.2
percent, while for average families and individuals, real
after-tax income per capita is only up a mere 4.2 percent.
Chair Yellen, your predecessor was supremely confident that
the Fed had the knowledge, tools, and political fortitude to
exit smoothly from the Fed's extraordinary monetary actions and
normalize interest rates and the size of its balance sheet
before an inflationary outbreak could occur.
Yet the Fed--like many central banks--has an unsatisfactory
track record over the last century in identifying economic
turning points and acting in a timely manner to maintain stable
prices.
The task is difficult. So today I am hopeful that you can
enlighten the Committee on several points:
First, what is the FOMC's assessment of the strength of the
labor market? How much of the weakness in the labor market do
you believe is due to cyclical factors? And how much is due to
structural ones? What statistics are FOMC members using to
judge the health of the labor market and how much weight are
they being given?
Secondly, can an overly accommodative monetary policy
create asset price inflation that may not be fully captured by
the CPI or the PCE Index? Do high stock prices reflect the
fundamental strength of our economy? Or are they partially due
to a highly accommodative monetary policy?
Three, has the FOMC's failure to abide by its own
``communications channel'' prescription created more
uncertainty and undermined credibility? And when will the FOMC
return to a rules-based approach to monetary policy that helped
to achieve the good performances of the U.S. economy during the
``Great Moderation''?
Fourthly, is the Federal Reserve Bank of San Francisco
correct that higher federal taxes--including higher marginal
rates on individual income, capital gains, and dividends--are
presently the main cause of ``fiscal drag'' on our economy?
Is there a better way for Congress to address the spending
side of our fiscal imbalances than the present sequester
enacted as part of the Budget Control Act of 2011?
Finally, is the Fed willing to make its balance sheet more
transparent? Specifically, will the Fed provide a consolidated
list of holdings that includes not only maturity values but
also average purchase prices for each issue and the current
market value of each holding?
With that, those are a lot of questions, Chair Yellen, and
you do not have to answer all of them, by the way, at this
moment. Just so you know.
And with that, I look forward to your testimony. I note,
for the Members, that the record will be kept open for one week
so Members can submit additional written questions for the
record.
With that, I yield to the Vice Chair of the Joint Economic
Committee, Senator Klobuchar.
[The prepared statement of Chairman Brady appears in the
Submissions for the Record on page 32.]
OPENING STATEMENT OF HON. AMY KLOBUCHAR, VICE CHAIR, A U.S.
SENATOR FROM MINNESOTA
Vice Chair Klobuchar. Well thank you very much, Chairman
Brady, and thank you for holding this timely hearing.
I will only add 15 questions to his list--no, I won't. I am
so pleased you are joining us today, Chair Yellen, for this
important discussion on the Federal Reserve and monetary
policy.
I look forward to your testimony on the short-term and
long-term issues facing our economy. Over the past five years,
we have certainly seen the impact, the important impact, that
monetary policy can have on economic growth. At a time where
Congress has been, I think we all admit, gridlocked on some
very important things, whether it is debt reduction, or whether
it was the sequestration policy, or other fights that we have
had, the Fed has had to step in several times.
And today's hearing provides a chance to look ahead to
policy options in what I hope will be a new environment where
we finally have a budget in place, and other things that we
will be able to move ahead as the Fed continues to wind down
quantitative easing.
Both of us I think would agree, Chairman Brady and myself,
that the recovery has not been as fast as we would like, but I
will say that after a long, hard winter it is good news that
the employment numbers are picking up.
To hit the lowest unemployment rate in 5-1/2 years is a
positive sign. It means something, as we move into a summer
season that we believe will bring more construction jobs, and
especially in my state, more tourism jobs.
As we all know, the economy has added jobs for 50
consecutive months, as you can see from that chart, and has now
regained more private-sector jobs than were lost during the
recession.
In April alone, almost 300,000 jobs were added. And as you
and I discussed, in my State the unemployment rate is down to
4.8 percent. And while I would not say we are roaring, as the
Chairman described Wall Street, on the Main Streets of
Minnesota, we are moving at a fast clip. Major expansions were
announced from Andersen Windows and Kraus Andersen in just the
last few days.
The national unemployment rate of 6.3 percent has dropped
almost 4 percentage points since the height of the downturn.
Inflation is low, as you know, well under 2 percent over the
past 12 months, and there is no sign of a risk in inflation in
the foreseeable future.
Gross Domestic Product has grown for 12 straight quarters,
although growth in the first quarter was slower than
anticipated. I believe that actions taken by the Fed helped
bring about the economic recovery.
I believe Congress did some good things. I believe we
should be doing more. And as the Chairman has outlined some of
them.
The Fed lowered the short-term interest rates to near zero
at the end of 2008, and stated recently that it will keep rates
low for a considerable period of time. Low interest rates have
helped strengthen the economy by helping keeping borrowing
costs affordable for businesses and consumers.
This has spurred investment and consumer spending. Because
the economy has strengthened, the Fed announced in December
that it was reducing its purchases under quantitative easing.
Last month, the Fed announced it would further reduce
purchases to $45 billion each month. It has always been
understood that these efforts would be scaled back as the
economy strengthens.
In its announcement of last month's actions, the Federal
Open Market Committee changed its assessment of the economy
slightly saying that, quote, ``economic activity has picked up
recently.'' End quote.
The Fed also highlighted an acceleration in household
spending. Even with the economic progress, we all know families
who are working several jobs to get by, as well as workers who
cannot find a job after months and months of searching.
Though the short-term unemployment rate has fallen to close
to its pre-recession level, the long-term unemployment rate is
2.2 percent, more than double the pre-recession level, which is
one of the reasons many of us have continued to work on the
unemployment compensation issue.
I have been pleased to hear you express your concerns about
the long-term unemployed, Chair Yellen, and I am glad to know
that addressing this problem is high on your list of
priorities. Addressing long-term unemployment has also been a
focus of my work on this Committee.
Despite some good news recently about job growth, there are
still 3.5 million Americans out of work for longer than six
months. I look forward to hearing your thoughts on the dual
mandate. I look forward to hearing your thoughts on increased
transparency at the Fed. And then of course I would again
mention, as I have several times in this Committee when your
predecessor was here, that I think that there have been some
major issues with Congress in terms of bouncing back and forth,
and careening from fiscal crisis to fiscal crisis, which
certainly does not help the economy.
I am hoping, with this period of stability, with the budget
in place, with the work that we did since the tragic shutdown,
that we can now work on these issues that I think will help to
build on the stability that we see now in the economy. I would
list immigration reform, very important in my state, as we have
trouble getting in engineers and spouses of doctors at the Mayo
Clinic.
I would also focus on moving forward with exports on the
job training that the Chairman talked about; on comprehensive
tax reform; and then finally, and last, something that
Minneapolis Fed President Kocherlakota brought up to me
recently, and that is the issue of the tax incentives and the
depreciation incentives for manufacturing equipment, which is
part of the tax extension, and something I think gets a good
bang for the buck and I will be asking you about that as well.
Thank you, very much, for appearing before us, Chair
Yellen.
Chairman Brady. Thank you, Vice Chair.
Dr. Janet Yellen is Chair of the Board of Governors of the
Federal Reserve System. She also serves as Chair of the Federal
Open Market Committee. Prior to her appointment as Chair, Dr.
Yellen served as Vice Chair of the Board of Governors.
She is Professor Emeritus at the University of California
at Berkeley, where she is a professor of business and professor
of economics, and has been a faculty member for over 30 years.
Dr. Yellen has served as Chair of the Council of Economic
Advisers, and as president and chief executive officer of the
Federal Reserve Bank of San Francisco. She also served as an
economist with the Federal Reserve's Board of Governors, and on
the faculty of the London School of Economics and Political
Science.
Dr. Yellen graduated summa cum laude from Brown University
with a degree in Economics, and received her Ph.D. in Economics
from Yale University.
Chair Yellen, welcome to today's hearing.
STATEMENT OF HON. JANET L. YELLEN, CHAIR, BOARD OF GOVERNORS OF
THE FEDERAL RESERVE SYSTEM, WASHINGTON, DC
Chair Yellen. Thank you very much, Chairman Brady.
Chairman Brady, Vice Chair Klobuchar, and other members of
the Committee, I appreciate this opportunity to discuss the
current economic situation and outlook along with monetary
policy before turning to some issues regarding financial
stability.
The economy has continued to recover from the steep
recession of 2008 and 2009. Real gross domestic product growth
stepped up to an average annual rate of about 3\1/4\ percent
over the second half of last year, a faster pace than in the
first half and during the preceding two years.
Although real GDP growth is currently estimated to have
paused in the first quarter of this year, I see that pause as
mostly reflecting transitory factors, including the effects of
the unusually cold and snowy winter weather.
With the harsh winter behind us, many recent indicators
suggest that a rebound in spending and production is already
under way, putting the overall economy on track for solid
growth in the current quarter.
One cautionary note, though, is that readings on housing
activity--a sector that has been recovering since 2011--have
remained disappointing so far this year and will bear watching.
Conditions in the labor market have continued to improve.
The unemployment rate was 6.3 percent in April, about 1\1/4\
percentage points below where it was a year ago. Moreover,
gains in payroll employment averaged nearly 200,000 jobs per
month over the past year. During the economic recovery so far,
payroll employment has increased by about 8\1/2\ million jobs
since its low point, and the unemployment rate has declined
about 3\3/4\ percentage points since its peak.
While conditions in the labor market have improved
appreciably, they are still far from satisfactory. Even with
its recent declines, the unemployment rate continues to be
elevated.
Moreover, both the share of the labor force that has been
unemployed for more than six months and the number of
individuals who work part-time but would prefer a full-time job
are at historically high levels. In addition, most measures of
labor compensation have been rising slowly-- another signal
that a substantial amount of slack remains in the labor market.
Inflation has been quite low even as the economy has
continued to expand. Some of the factors contributing to the
softness in inflation over the past year, such as the declines
in non-oil import prices, will probably be transitory.
Importantly, measures of longer run inflation expectations
have remained stable. That said, the Federal Open Market
Committee recognizes that inflation persistently below 2
percent--the rate that the Committee judges to be most
consistent with its dual mandate--could pose risks to economic
performance, and we are monitoring inflation developments
closely.
Looking ahead, I expect that economic activity will expand
at a somewhat faster pace this year than it did last year; that
the unemployment rate will continue to decline gradually; and
that inflation will begin to move up toward 2 percent.
A faster rate of economic growth this year should be
supported by reduced restraint from changes in fiscal policy,
gains in household net worth from increases in home prices and
equity values, a firming in foreign economic growth, and
further improvements in household and business confidence as
the economy continues to strengthen. Moreover, U.S. financial
conditions remain supportive of growth in economic activity and
employment.
As always, considerable uncertainty surrounds this baseline
economic outlook. Currently, one prominent risk is that adverse
developments abroad, such as heightened geopolitical tensions
or an intensification of financial stresses in emerging market
economies, could undermine confidence in the global economic
recovery.
Another risk--domestic in origin--is that the recent
flattening out in housing activity could prove more protracted
than currently expected, rather than resuming its earlier pace
of recovery. Both of these elements of uncertainty will bear
close observation.
Turning to monetary policy, the Federal Reserve remains
committed to policies designed to restore labor market
conditions and inflation to levels consistent with those that
the Committee judges to be consistent with its dual mandate.
As always, our policy will continue to be guided by the
evolving economic and financial situation, and we will adjust
the stance of policy appropriately to take account of changes
in the economic outlook.
In light of the considerable degree of slack that remains
in labor markets and continuation of inflation below the
Committee's 2 percent objective, a high degree of monetary
accommodation remains warranted.
With the federal funds rate, our traditional policy Tool,
near zero since late 2008, we have relied on two less
conventional tools to provide support for the economy: asset
purchases and forward guidance. And because these policy tools
are less familiar, we have been especially attentive in recent
years to the need to communicate to the public about how we
intend to employ our policy tools in response to changing
economic circumstances.
Our current program of asset purchases began in September
2012 when the economic recovery had weakened and progress in
the labor market had slowed, and we said that our intention was
to continue the program until we saw substantial improvement in
the outlook for the labor market.
By December 2013, the Committee judged that the cumulative
progress in the labor market warranted a modest reduction in
the pace of asset purchases. At the first three meetings this
year, our assessment was that there was sufficient underlying
strength in the broader economy to support ongoing improvement
in labor market conditions, so further measured reductions in
asset purchases were appropriate.
I should stress that even as the Committee reduces the pace
of its purchases of longer term securities, it is still adding
to its holdings, and those sizable holdings continue to put
significant downward pressure on longer term interest rates,
support mortgage markets, and contribute to favorable
conditions in broader financial markets.
Our other important policy tool in recent years has been
forward guidance about the likely path of the federal funds
rate as the economic recovery proceeds.
Beginning in December 2012, the Committee provided
threshold-based guidance that turned importantly on the
behavior of the unemployment rate. As you know, at our March
2014, meeting, with the unemployment rate nearing the threshold
that had been laid out earlier, we undertook a significant
review of our forward guidance.
While indicating that the new guidance did not represent a
shift in the FOMC's policy intentions, the Committee laid out a
fuller description of the framework that will guide its policy
decisions going forward.
Specifically, the new language explains that, as the
economy expands further, the Committee will continue to assess
both the realized and expected progress toward its objectives
of maximum employment and 2 percent inflation.
In assessing that progress, we will take into account a
wide range of information, including measures of labor market
conditions, indicators of inflation pressures and inflation
expectations, and readings on financial developments.
In March and again last month, we stated that we
anticipated the current target range for the federal funds rate
would be maintained for a considerable time after the asset
purchase program ends, especially if inflation continues to run
below 2 percent, and provided that inflation expectations
remain well anchored.
The new language also includes information on our thinking
about the likely path of the policy rate after the Committee
decides to begin to remove policy accommodation.
In particular, we anticipate that even after employment and
inflation are near mandate-consistent levels, economic and
financial conditions may, for some time, warrant keeping the
target federal funds rate below levels that the Committee views
as normal in the longer run.
Because the evolution of the economy is uncertain,
policymakers need to carefully watch for signs that it is
diverging from the baseline outlook and respond in a systematic
way to stabilize the economy.
Accordingly, for both our purchases and our forward
guidance, we have tried to communicate as clearly as possible
how changes in the economic outlook will affect our policy
stance.
In doing so, we will help the public to better understand
how the Committee will respond to unanticipated developments,
thereby reducing uncertainty about the course of unemployment
and inflation.
In addition to our monetary policy responsibilities, the
Federal Reserve works to promote financial stability, focusing
on identifying and monitoring vulnerabilities in the financial
system and taking actions to reduce them.
In this regard, the Committee recognizes that an extended
period of low interest rates has the potential to induce
investors to ``reach-for-yield'' by taking on increased
leverage, duration risk, or credit risk.
Some reach-for-yield behavior may be evident, for example,
in the lower rated corporate debt markets where issuance of
syndicated leveraged loans and high-yield bonds has continued
to expand briskly, spreads have continued to narrow, and
underwriting standards have loosened further.
While some financial intermediaries have increased their
exposure to duration and credit risk recently, these increases
appear modest to date--particularly at the largest banks and
life insurers.
More generally, valuations for the equity market as a whole
and other broad categories of assets, such as residential real
estate, remain within historical norms. In addition, bank
holding companies have improved their liquidity positions and
raised capital ratios to levels significantly higher than prior
to the financial crisis.
For the financial sector more broadly, leverage remains
subdued and measures of short-term funding continue to be far
below levels seen before the financial crisis.
The Federal Reserve has also taken a number of regulatory
steps--mainly in conjunction with other federal agencies--to
continue to improve the resiliency of the financial system.
Most recently, the Federal Reserve finalized a rule
implementing Section 165 of the Dodd-Frank Act to establish
enhanced prudential standards for large banking firms in the
form of risk-based and leverage capital, liquidity, and risk-
management requirements.
In addition, the rule requires large foreign banking
organizations to form a U.S. intermediate holding company, and
it imposes enhanced prudential requirements for these
intermediate holding companies.
Looking forward, the Federal Reserve is considering whether
additional measures are needed to further reduce the risks
associated with large, interconnected financial institutions.
While we have seen substantial improvements in labor market
conditions and the overall economy since the financial crisis
and severe recession, we recognize that more must be
accomplished.
Many Americans who want a job are still unemployed,
inflation continues to run below the FOMC's longer run
objective, and work remains to strengthen our financial system.
I will continue to work closely with my colleagues and
others to carry out the important mission that the Congress has
given the Federal Reserve.
Thank you. I will be pleased to take your questions.
[The prepared statement of Hon. Janet L. Yellen appears in
the Submissions for the Record on page 39.]
Chairman Brady. Thank you, Madam Chair.
I would like to get a clear picture of the Fed's
comprehensive exit strategy in a number of areas.
Assuming the Fed's economic projections hold, can we expect
the QE bond purchasing to end sometime this fall?
Chair Yellen. We have indicated that as long as we continue
to see improvements in the labor market, and we believe the
outlook is for continued progress, and as long as we continue
to believe and see evidence that inflation will move back up
over time to our 2 percent longer run objective, we anticipate
continuing to reduce the pace of our asset purchases in
measured steps.
So the answer is, yes.
Now if something were to change notably about the outlook,
we would reconsider that plan. But if those conditions hold, we
would continue on our current course, yes.
Chairman Brady. I will leave it to my colleagues to ask
about the notably different changes. But just beyond that, the
Fed holds $4.7 trillion on the balance sheet, extraordinarily
large. When do you expect to begin normalizing the size of the
Fed's balance sheet? Is there a range of years?
Chair Yellen. When we complete the asset purchase program,
the Committee has indicated that it expects it will be a
considerable time before we begin to normalize policy in the
sense of beginning to raise our target for short-term interest
rates.
Chairman Brady. What range--let's move to that. But before
I do, what is the appropriate size? Do you have an appropriate
size for the Fed's balance sheet?
Chair Yellen. I can't give you a number that would be an
appropriate size. I believe the Committee anticipated that our
balance sheet over time will move down to substantially lower
levels than it is now.
Whether or not it will ultimately return to pre-crisis
levels, or remains somewhat larger, is something that we will
determine as we gain experience with exit.
One way that we are likely to turn to to normalize the size
of our balance sheet eventually would be to cease reinvestment
of principal as it comes due. The Committee has not given
definite guidance at this point about when it would take the
step of stopping reinvestment of maturing principal, and
eventually as we come closer to normalization I expect we will
give such guidance.
Chairman Brady. When do you expect--on normalizing interest
rates, when do you expect that to begin? Assuming the Fed's
economic projections hold.
Chair Yellen. What we have said in our most recent guidance
is that in determining when that time is right, we will be
looking at how much progress we have actually made in coming
close to our mandate from Congress to attain maximum employment
and inflation of 2 percent, and we will evaluate the pace at
which we expect progress going forward.
Concretely, the Committee indicated that at the time the
purchase program ends, it thinks that it will be a considerable
time beyond that before it will be appropriate to begin that
process.
And the reason is that under its baseline outlook it would
like to see, or expects it will need to see, further progress
in the labor market. And it has emphasized that the level of
inflation will also matter.
Chairman Brady. If the Fed's economic projections hold what
is that range? If I were to say you will begin normalizing
interest rates in 2015, would I be wrong?
Chair Yellen. There is no mechanical formula or timetable
for when that will occur.
Chairman Brady. But I know--I know that you've worked
through your projections going forward, and certainly if those
were to hold you have some range of time that you will begin
that process. What range is that?
Chair Yellen. The Committee has simply said ``a
considerable time'' without mechanically stating what that time
interval is.
Chairman Brady. Is ``considerable''--if I were to say this
will begin normalizing in 2016, would I be wrong?
Chair Yellen. Again, there is no specific timeline for
doing that. Individual members of the Federal Open Market
Committee, however, every three months provide their own
forecasts for how they see the economy evolving under
appropriate monetary policy. And that becomes a basis for
discussion in the Committee.
And you can look at those projections that include
individual participants' expected paths for normalization. You
would see that most members believe that in 2015 or 2016,
normalization would begin, under their baseline outlook.
Chairman Brady. Do you, to put it in perspective, what
year, what range of years, could we expect the targeted rate to
reach 2 percent, for example?
Chair Yellen. I think the answer is that it depends on the
evolution of the economy. What we are focused on is adjusting
our monetary policy in light of incoming evidence about the
evolution of the economy----
Chairman Brady. But if it holds--granted. Obviously all
this is dependent from your view on economic performance. But
given your projections, you know, how far out are we looking at
to just move about halfway back to normalization?
Chair Yellen. Again, I'm afraid I cannot give you a
timetable, but the Committee did try to, in its recent
statements in March and April, provide some guidance to the
public about the pace at which it expects interest rates,
short-term rates, to increase once that process is started.
And what they said is that they think it will take some
time, even after the economy is in a sense functioning
normally--namely, we're operating at full employment, and
inflation is around 2 percent--they think it is likely it will
take some time to come back to normal or historically average
levels of interest rates.
Short-term interest rates they would see as normal levels,
based on history, of something on the order of 4 percent. And
they have indicated that they think it is going to take some
time to reach levels like that.
I would emphasize that that is a forecast. It is not a
promise----
Chairman Brady. Sure----
Chair Yellen [continuing]. But we have had headwinds that
have acted on the economy, and headwinds in the global economy,
and perhaps a slowdown in the pace of growth in the economy.
And those are some of the factors that lead them to believe a
gradual pace of interest rate increases will prove appropriate.
Chairman Brady. Understood.
The Fed holds about $1.6 trillion in residential mortgage-
backed securities, a large amount. So again, assuming the Fed's
economic projections hold, when do you expect to begin moving
them back into the market, reverse repos, or other approaches?
What range of years--and I do worry. I think there will be
political resistance when you take those steps, but what years
will you see that occurring?
Chair Yellen. We have indicated that we do not intend to
sell mortgage-backed securities from our portfolio, except
perhaps when the holdings are very small, to eliminate some
residual holdings.
Eventually--and the Committee hasn't decided on the timing
of this--we are likely to cease reinvestment of principal. And
at that point, our holdings of mortgage-backed securities would
begin to decline over time as principal matures.
And so it would take a period of some years for our
holdings to diminish, to be worth doing.
Chairman Brady. A final question about bank reserves of
$2.6 trillion. For many, including me, it is potential fuel for
inflation. When the economy strengthens and banks begin to
lend--we hope sooner rather than later--to keep rapid inflation
checked, will you raise reserve requirements for the rate of
interest paid on the reserves? Do you have a view at this
point?
Chair Yellen. It's my expectation that when the time comes
to raise the level of short-term interest rates, that we will
certainly raise the interest rate that we pay on excess
reserves and are likely to use a number of complementary tools
that we have developed, including our tool kit that includes
overnight reverse repos, term repos, and our term deposit
facility. We will use those tools to push up the general level
of short-term interest rates. But interest on reserves will be
a key tool that we will be using.
Chairman Brady. What impact will that have on economic
growth?
Chair Yellen. We will only be taking that step when we have
judged that the economy is strong enough that economic growth
is sufficient, the labor market has recovered enough, and
inflation is moving back toward 2 percent, we will have judged
that the time is appropriate to tighten financial conditions in
order to make sure that we don't overshoot our inflation
objective.
And so the effect that it will have on the economy is to
restrain the economy to make sure that we don't allow inflation
to rise above our longer term objective.
Chairman Brady. Thank you. I will conclude with this--my
main concern, having served on the Committee, in early to mid-
2000s your able and very highly respected predecessor sat where
you sat and assured the Committee that maintaining low interest
rates for an extended period would not cause general price
inflation or inflate an unsustainable asset bubble, which did
not prove to be the case.
After the credit-fueled housing bubble burst in 2007, your
predecessors assured the Committee that the resulting weakness
would be confined to the subprime segment of the housing market
and the damage would be limited to about $150 billion, roughly
the cost of the S&L crisis.
Following the financial crisis in the Fall of 2008, we were
repeatedly assured the Fed had the strategy to exit from the
large expansion of its balance sheet to normalize monetary
policy, including the federal funds target rate. Yet, the
goalposts have been moved time and time again, and now re-
moved.
Today you have assured the Committee once again, and I so
appreciate your testimony, that the Fed is confident it can
exit without sparking high inflation. But that we cannot know
the details or the timetable, but that the Fed and FOMC have it
essentially handled.
I do not expect the Fed to be perfect. Yours is a tough
job. Theirs is a tough job. But it just strikes me that over
time this ``don't worry, be happy'' monetary message isn't
working, at least in my view for the Committee, certainly not
for the economy at this point.
I know my colleagues will ask about today's Wall Street
Journal where noted economist, Federal Reserve historian Dr.
Alan Meltzer makes the point: Never in history has a country
that's financed big budget deficits with large amounts of
central bank money avoided inflation. My worry is that the
track record of central banks, including the Fed, in
identifying these economic turning points and acting quickly to
prevent inflation, that track record is not as good as we would
like.
So forgive me for being skeptical. I believe we need more
specifics, and a clear timetable on the comprehensive exit
strategy.
With that, again, thank you so much for being here. Vice
Chair Klobuchar.
Vice Chair Klobuchar. Thank you very much, Mr. Chairman.
Thank you, Chair.
As the Chairman was talking about with the change to the
forward guidance policy, in the past it was tied of course--
rising interest rates was tied to the 6.5 percent unemployment
rate. And now the Fed says it will consider a wide range of
economic indicators and not just the unemployment rate.
And he questioned you a little bit about this with the
other indicators, but could you tell me what you see the
benefits are of this new approach, and what are the drawbacks
of moving away from an exact number?
Chair Yellen. Let me, if I might, explain about the number,
the 6.5 percent.
We issued the number 6.5 percent at a time when the
unemployment rate was around 8 percent. And we were very far
from what anyone could call full employment, which is our goal.
And we wanted to indicate to markets that we would need to
see a lot of improvement in the labor market and, assuming
inflation was under control, before we would dream of raising
our target for short-term interest rates.
And to make that clear, we took the number 6.5 percent. We
felt confident that we would not, if inflation was under
control, consider it appropriate to begin that process as long
as the unemployment rate was over 6.5 percent, the gap would be
sufficiently wide that something we shouldn't consider as a
possibility.
So we gave the number 6.5, considerable distance from where
we were, to the public to say we will wait at least that long.
Now we did not say that we would raise our target for the
federal funds rate when we reached the level of 6.5 percent.
What we said was, that would be close enough that we need to
look very carefully at what--to assess using many different
metrics of the labor market: where is it? And what is
appropriate policy? And now it's appropriate to really look at
many more things.
And we changed our forward guidance only because we were
coming close to 6.5 percent and we have now crossed it. And
there is no change in the guidance. We are saying: Now that we
are there, we want you to understand, we have to develop a more
nuanced approach to what is going on in the labor market.
Now, the unemployment rate is a good indicator of the state
of the labor market. And if I could only have one, I think
that's the metric I would probably choose. But there are
different things happening in the labor market we need to take
account of.
For example, part-time employment that is involuntary--
people working part-time who want full-time jobs, want to work
more. It is at exceptionally high levels, 5 percent of the
labor market, which is unusually high relative to the
unemployment rate.
We have really never seen a situation where long-term
unemployment is so large a fraction of total unemployment,
around 35 percent. That is very unusual. Other things are
happening that we really, in evaluating how much slack is there
in the labor market. Labor force participation rate has fallen
a lot.
Now there are some structural reasons for that:
demographics, Baby Boomers are aging and getting into the years
when they retire and their labor force participation naturally
declines. So the decline we have seen, it is not entirely
because of a weak economy. But I think some of it is because of
a weak economy, and in a sense, it is hard to give you a
precise number for how much of that decline is cyclical.
But to the extent there is a cyclical decline, that is more
slack. And that is what we are looking at and trying to judge.
We are also looking at wage developments and the level of
payroll employment creation.
Vice Chair Klobuchar. Let me follow up on a few of those
things. What do you think the Fed can be doing about long-term
unemployment, which we all acknowledge is too high?
Chair Yellen. I think that a stronger economy, as we have
growth in the economy, my expectation is that long-term
unemployment is going to come down.
Short-term unemployment is around normal levels. But I
fully expect long-term unemployment to decline as the economy
strengthens.
There is a debate about whether or not long-term
unemployment may have less effect on wages and in turn on
inflation than short-term unemployment; and that is something
that is receiving a great deal of public attention and
discussion, rightly so.
But I have very little doubt that if growth in the economy
picks up and continues in an above-trend pace, that long-term
unemployment will come down, too.
Vice Chair Klobuchar. One of the hearings that I chaired
this last year was with Robert Reich, and it was about income
inequality. And he talked about how right now we have a
situation in our country where the wealthiest 400 have the same
amount of wealth as the bottom 50 percent.
And the International Monetary Fund recently warned that
income inequality is actually a drag on our country's economy.
Why do you think we have seen this rise? And how does it
affect economic growth for the country as a whole? Do you think
it is a factor?
Chair Yellen. We have seen a trend toward rising inequality
in income, and also in wealth. And I personally view this as a
very disturbing trend that policymakers should be looking at
and considering what is the appropriate response.
You know, in part a weak economy, the people who are
affected by unemployment are disproportionately people at the
lower income end of the spectrum. And so a weak economy
contributes something to income inequality. And I think what
the Fed can do is to promote a stronger economy, a stronger job
market generally, and that will help.
But the trends that are responsible for rising inequality
go much deeper than the fact that we have had a deep recession.
We can see those secular trends in operation at least since the
mid-'80s. There is a great deal of discussion about what they
are, but they probably have to do with technological change in
the way it has increased the demand for skills in the workforce
with globalization. And so the return to education, and to
skill has gone up dramatically.
There may be institutional changes that are at work, as
well. So there are deeper forces that are affecting this that
go beyond anything that the Fed can do, but I really do think
it is----
Vice Chair Klobuchar. But it is something that we should be
taking up in Washington.
Chair Yellen. We should be thinking about it very
carefully.
Vice Chair Klobuchar. One of the things that you mentioned
in your opening was about how housing had flattened out. And
could you expand on that? I think what we have seen, while the
housing market has come back with housing prices--and my State
is one of the ones where they have gone up the most--
residential construction, all moving up, but one thing that has
held housing back is the significant drop in household
formation, which gets some to the income inequality.
During and after the recession, about 800,000 fewer
households were created each year than in the previous 7 years.
Young people are not forming households as much, and getting
new houses.
Could you comment on this?
Chair Yellen. I agree with the data that you are citing. We
have seen very slow household formation. Many young people are
living with their parents. It is also very difficult for people
who come out of school with heavy burdens of student debt to be
able to qualify for mortgages.
Vice Chair Klobuchar. This is very timely since my daughter
is arriving tonight at 10:00 p.m., but she is only a first-year
in college, but still, yes.
Chair Yellen. My expectation is that as the job market
strengthens and the economy strengthens, we will see household
formation pick up. But it is hard to note here exactly what the
new normal is. And I think we need to see some pickup in
household formation in order to see continued recovery in the
housing market.
Mortgage rates went up quite a lot over the Spring and
Summer. They are still quite low by historical standards. So in
that sense, housing remains affordable. And I expect housing to
pick up, but really it has flattened out and a recovery that
seemed to be in progress really has now flattened out.
Vice Chair Klobuchar. And you mentioned the cold weather,
something near and dear to our heart in Minnesota. The first
quarter, that is one of the major reasons we saw a slowdown in
the first quarter. So then you would anticipate some
improvement in the next few quarters?
Chair Yellen. Yes. Definitely. And we have heard many
different pieces of evidence, as well as what we see in broader
statistics, that suggest that the weather played a role. And
recent data is certainly much more encouraging on a wide range
of fronts, from car sales, retail sales, industrial production.
So I am quite hopeful that we will see, and are seeing, a
pick up in economic activity.
Vice Chair Klobuchar. And in my opening I talked about how
we do not foresee a rise in inflation in the near future, a
significant rise in inflation. Do you agree with that?
Chair Yellen. That is my forecast. Inflation has been
running under 2 percent. We expect it to move gradually back
over time up to 2 percent. There are some transitory things
that can give it a boost over the next year or so, but my
expectation is that it will be gradually moving back to 2. But
obviously this is something we will watch very closely.
Vice Chair Klobuchar. I asked that for a guy that Tweeted
me and said I was wrong. So I thought I would maybe have you on
my side.
Chair Yellen. I am with you on that.
Vice Chair Klobuchar. So whoever he is out there with his
strange handle, he knows the answer now.
Okay, so I mentioned--this is my last question here--I
mentioned in my opening about what we can be doing to continue
to do in Congress. I mentioned a bunch of things: immigration
reform, tax reform to make things more straightforward so we
are not playing red-light/green-light every single year with
our tax code, and some of these incentives.
One of the things I mentioned to you about the head of the
Minneapolis Federal Reserve talked to me about in my office
just last week was the Section 179 deduction limits for
depreciation of business investment; that they were increased
to $500,000 in 2010, but the increased depreciation deduction
expired at the end of 2013.
And ironically, after I met with him, I met with a bunch of
small businesses through the next few days and, as they had
said to me during the height of the downturn, they thought this
was a very useful thing to stimulate investment and add more
jobs.
And I wanted to get your thought about that, as we look at
these tax extenders.
Chair Yellen. I think the cost of capital is an important
factor that influences investment. Although the state of the
economy and business confidence and optimism about growth is a
very important role as well. And the tax provision that you
mentioned is something that was put into effect at a time when
investment spending was very weak.
And I cannot quantify what its impact was, but it probably
played a role in having it pick up. There are a number of
different tax provisions that affect the cost of capital. And
so tax policy generally, including the provision you mentioned,
are definitely relevant to the strength of investment spending.
Vice Chair Klobuchar. Thank you very much, Chair Yellen.
Chairman Brady. Thank you. Members should note, we have
been very generous to make sure the Chair has plenty of time to
answer questions. We will be returning to the five-minute
questioning period.
Representative Hanna.
Representative Hanna. Thank you very much. Thank you for
being here.
I want to follow up on something that Chairman Brady talked
about briefly. Milton Friedman once said that inflation is
always and everywhere. And today we see that the United States
Department of Agriculture estimates that food costs may go up
as much as 3-1/2 percent this year; and that is the highest
potential rate in the last I think three years.
In this morning's Wall Street Journal, Alan Meltzer, a
distinguished Federal Reserve historian, writes: The Fed
focuses far too much attention on distracting monthly and
quarterly data, while ignoring the long-term effects of money
growth. Beyond the pure inflationary concerns, he says, some
side effects of the Fed policies have ugly consequences. One of
the worst is the ultra low interest rates for retired persons
to take--that forces them to take substantially greater risks
than bank CDs, and that many of them relied on in the past.
He goes on to say: This ends usually in tears for a lot of
people. And we see people that planned on a retirement and
simply, based on historic rates, and they are just not there
for them anymore.
Is maintaining an extraordinarily low interest rate for a
decade creating market distortions that will have long-term
effects on the economy?
And, you know, it is nice to talk about being able to
control inflation going forward, and that you will respond to
it and keep it below 2 percent, but last year it was a percent-
and-a-half.
So can the Federal Reserve identify, you think, accurately
a change in economic conditions and execute an exit strategy
before inflation occurs? Since, as Mr. Brady said and Mr.
Meltzer said, never at any time in history of this country that
financed big budget deficits with large amount of central bank
money avoided inflation.
Chair Yellen. I do believe that we have the tools and
absolutely the will and the determination to remove monetary
accommodation at an appropriate time to avoid overshooting our
inflation objective.
Everybody on the Committee, a formative experience for them
was the 1970s when we saw very high inflation and a huge effort
by Chairman Volcker to tighten monetary policy to bring it
down.
We lived through a period in which Fed policy was not
sufficiently tight, and high inflation led to a rise in
inflation expectations. We saw that those inflation
expectations could become a persistent source of high
inflation, and that it could be very costly to lower inflation.
Representative Hanna. And of course----
Chair Yellen. Hence, the lessons from that period are very
real for all of us, and none of us want to make that mistake
again.
I do believe we have the tools and the determination to
avoid that. We indicate inflationary developments and
inflationary expectations are part of our focus as we watch
what the likely evolution of inflation is. And I can't say that
we will get it perfect. But I can tell you that the Committee
has adopted a 2 percent inflation objective in order to make
clear our commitment to achieving that objective, and to be
held accountable for it. And we are determined to have that
happen.
Representative Hanna. And of course if we raise interest
rates, our debt payments, our interest payments, will exceed
our national defense budget I think within 7 or 8 years, I
think 2021 is the estimate.
So all of that working together, we really need to grow our
economy to afford to be able to manage that.
Chair Yellen. We want to be able to, and we expect as the
economy recovers that a point will come when it will be
appropriate to raise short-term interest rates. Long-term
interest rates are likely to be rising over time as that
occurs, and this is something I think Congress should certainly
be taking into account as you look at what fiscal burdens will
be down the road.
Representative Hanna. Thank you. My time has expired.
Chairman Brady. Thank you.
Representative Delaney.
Representative Delaney. Thank you, Mr. Chairman.
And thank you, Chair Yellen, for being here. And I also
want to comment. I was stunned at how remarkably clear and
linear your remarks have been here today. It should not be a
surprise, but it is quite impressive to observe it first-hand.
So thank you for that.
You touched on something a few minutes ago about some
deeper structural trends going on in the employment market and
the job market. And you tied those, I think very appropriately,
to the trends, or the macro trends of globalization and
technology, which as we all know have benefitted people with
terrific educations, or with access to capital, or with highly
refined skills, but they have been very disruptive to the
average American.
And in my judgment, this is the root cause of some of the
concerns that we have around income inequality and job
creation, and particularly job creation of jobs that have a
decent standard of living. We are creating high-skill jobs and
low-skill jobs, but not a lot of middle-skill jobs.
Is it possible--and you hate to use those four words that
people always regret, quote, ``this time is different,'' is it
possible that these trends as they continue to play out in our
economy and in our job market, put us in a position that we
have, the Fed would have accommodating monetary policy for a
sustained period of time, as we work through these things, and
particularly absent Congress doing things like immigration
reform, greater investment in infrastructure, a more targeted
way to work through these challenges, is it possible that that
is the new norm and that the size of the Federal Reserve's
balance sheet in fact stays quite large for a reasonable period
of time?
Which I do not necessarily think is a problem--which will
be my second question--but I am just curious about your
thoughts on that.
Chair Yellen. I think these longer term trends have to do
with relative wages of different groups in the labor force, and
they have been going on for a long time for the reasons you
stated.
I do not think that those trends are ones that the Federal
Reserve can really address.
Representative Delaney. Right.
Chair Yellen. The appropriate policies lie elsewhere. They
may have to do with education and training. So in that sense,
when the labor market has returned to normal in the sense that
most people who were looking for work are able to find work for
which they are suited and skilled in a reasonable period of
time, there really will not be much more that is in our domain
that we can do----
Representative Delaney. Got it.
Chair Yellen [continuing]. So we would not keep our balance
sheet large, or refrain from raising interest rates for that
reason. But there----
Representative Delaney. But----
Fed Chair Yellen [continuing]. Are some people who have
suggested that the distribution of income and rising inequality
are pulling down spending----
Representative Delaney. Right.
Chair Yellen [continuing]. And holding down spending
growth. And it is hard to get clear evidence on that. To the
extent that that is true, it would be a way in which inequality
would be slowing the pace of recovery back to full employment.
In that sense, it would affect how long we would hold interest
rates where they are.
Representative Delaney. And my second question is around--
and you mentioned in your testimony about how you think about
certain financial indicators--asset bubbles, in particular.
Because we have definitely seen in the last couple of years a
de-linking that has gone on between leveraged spreads and
leverage, right? Which is as leverage goes up, spreads normally
widen; as leverages go down, spreads normally tighten.
We have seen that de-linked, just as we have seen the de-
linking of equity market values with corporate earnings. So
this de-linking, I think of it more as froth as opposed to
formation of asset bubbles.
How do you think about these things? Or what kind of
benchmarks do you use to indicate that we may in fact be
creating asset bubbles in different markets?
Chair Yellen. We can't detect with any certainty whether or
not there is an asset bubble, but we can look at a variety of
different valuation metrics akin to price earnings ratios and
the stock market, a variety of ways of measuring those. And we
can look to see, have valuations in that sense moved out of
historically normal ranges.
And I would say for the equity market as a whole, the
answer is that valuations are in historically normal ranges.
Now interest rates, long-term interest rates are low, and that
is one of the factors that feeds into equity market valuations.
So there is that linkage.
So there are pockets where we could potentially see
misvaluations in smaller cap stocks, but overall those broad
metrics do not suggest that we are in obviously bubble
territory. But we do not have targets for equity prices and
can't detect if we are in a bubble with certainty.
Representative Delaney. Thank you, very much.
Chairman Brady. Great. Thanks.
Senator Coats.
Senator Coats. Thank you, Mr. Chairman, and thank you,
Chair, for your presentations here today.
I want to just ask you if you would be willing to step
aside for a moment in terms of just responding as representing
the Fed, and give us some of your personal thoughts, as
appropriate, relative to a couple of--well, this question in
particular:
As I travel throughout Indiana and talk to businesses,
large, small, and everything in between, so many of the CEOs
and owners of those businesses indicate that they are
underperforming. They are underperforming because of the
uncertainty that they face relative to fiscal policies,
relative to prospects of uncertainty about what their tax and
regulatory policies are going to be.
Now essentially they say it is a disincentive to their
private-sector business investment, which as we know is the
foundation of job creation. I asked your predecessor the
question what his opinion was relative to the policies that
really fall in our bucket up here. His answer was: You know, we
have pretty much exhausted the major tools that we have to
address some of these problems. He agreed that these were
disincentives for investment, and sitting on an awful lot of
unused capital. But, he said, that really is a function for you
people at the other end of Constitution Avenue.
He is right. It is. But my question is, I think it was in
your statement to the New York Fed you made reference to the
fact that it is going to be, and I quote `` . . . a gradual
return over the next two to three years of economic conditions
consistent with the Fed mandate.''
And given that, would you be willing to give us some
direction relative to what legislative policies we could take,
or not take? And the consequences of either accelerating that
movement to where we want to get to, beyond the two- or three-
year period? Or disincentivizing and perhaps pushing that even
further out?
What recommendation would you give to us in terms of
dealing with this uncertainty that is basically causing a lot
of businesses to underperform?
Chair Yellen. I agree with you. In my own discussions with
businesses, I hear exactly the same things that you're citing:
concern about regulations, about taxation, about uncertainty,
about fiscal policy.
I guess one recommendation that I would give you is that
long-term budget deficits, we can see in for example CBO's very
long-term projections, that they remain. There is more work to
do to put fiscal policy on a sustainable course; that progress
has been made over the last several years in bringing down
deficits in the short term, but with a combination of
demographics, the structure of entitlement programs, and
historic trends in health care costs, we can see that over the
long term deficits will rise to unsustainable levels relative
to the economy and putting in place a package of reforms--I
know these are very controversial matters--but that would
probably help confidence.
As regulators ourselves in the aftermath of a financial
crisis, we also can see very clearly, for example, that the
kinds of regulations we are putting in place and during the
process of doing that, create uncertainty and burdens. We hear
this, for example, from community banks all the time.
And, here I would say to some extent the regulations, we
are doing this for a very good reason. We had a financial
crisis. It is important to make the financial system safer and
sounder. And for our own part, we will try to make sure that we
worry about regulatory burden. We try to design regulations
that are different and appropriate for different sectors of the
economy.
I think it is important for us, too, to be sensitive to
regulatory burden in order to minimize its impact on the
economy, but we are doing things that are important to make the
economy safer and sounder.
Senator Coats. Well thank you for that answer. And in
closing here, because I have been noticed that my time is up,
you join a long list of very responsible Americans who have the
experience and the expertise to give us some warnings about
what may happen in the future, and the consequences of our
inability to act over the last several years now in addressing
these major problems that are going to have significant
consequences on the economy of this country, and on future
generations.
I do not know what it is going to take for us to summon the
will to do what we all know we need to do, but I appreciate you
adding your name to that long list saying Congress has a
responsibility up here and is not fulfilling that
responsibility.
Thank you.
Chairman Brady. Senator Casey.
Senator Casey. Thanks very much, Mr. Chairman.
Madam Chair, thank you and welcome. It is good to be with
you this morning.
I wanted to ask you a couple of questions about jobs and
manufacturing. I will start with that. And then I will ask you
a question about the preparation for job growth and some of the
investments I think we are not making in our children.
But I will start with the job picture. We have a lot to be
positive about with all of the cautionary notes that your
testimony articulates. When I think about it from the national
perspective, both good job numbers in the last couple of months
and even the recent report, a lot less in the way of good news
in terms of the labor participation rate which I am told is at
a 35-year low.
I noted though in your testimony that you said on page 1
and I'm quoting: ``During the economic recovery so far, payroll
employment has increased by about 8\1/2\ million jobs since its
low point, and the unemployment rate has declined about 3\3/4\
percentage points since its peak.'' End quote.
So that is good news both in terms of the recent news, as
well as over a number of years, but we have still got a long
way to go. I guess the real cautionary note though, or the
reason for concern, or the main reason for concern, would be on
labor force participation.
Can you speak to that in terms of what you had hoped to
see, or what you are concerned about with regard to that
number?
Chair Yellen. We have seen a substantial decline,
especially over the last year or so, in labor force
participation. And I think it is clear that part of it is
demographic, secular, and will continue. And it purely reflects
the fact that we have an aging population and, as people move
into that 60-plus age bracket, the amount that they work
declines notably in spite of the fact that current vintages of
retirees are working more and participating more in the labor
force than earlier vintages.
But nevertheless, if we had a strong economy, even for that
group, it would not surprise me at all if we didn't see more
participation in the labor force by retirees.
In addition, we are seeing for all age groups, prime age
workers and younger people, a reduction in labor force
participation. For young people, it is partly related to going
back to school. But eventually of course those people will
enter the labor force and seek jobs.
And especially in those non-retiree demographic groups, to
me it is clear that the weak state of the labor market partly
explains why we have seen a decline in labor force
participation.
So I will be looking very carefully at trends in labor
force participation as the economy strengthens, as the
unemployment rate comes down. We need to really figure out what
portion of the labor force participation decline is secular and
what portion is cyclical, and that is what we are going to be
looking at very closely.
But I guess I would expect, as the economy recovers, we
might see labor force participation strengthen rather than
continue to decline.
Senator Casey. One thing that we talk about a lot is the
skills gap and the disconnect there between the jobs that we
need to fill, or that need to be created in the future, and the
skill level of folks that are seeking those jobs or looking for
work in the marketplace.
And I guess one of the questions that I have for you is:
You look at trends all the time. You look at the economic
impact of policies that we put in place here. And you see those
trends and the kind of skills that folks would need for the
jobs of the future. And I guess I would ask:
My youngest daughter is a junior in high school. If she
were three, or say two or three years old right now, what would
you hope that she would get to be placed in one of those high-
skill jobs that we hope we are creating and we hope that we
have policies that undergird a strategy to get us to the point
where we no longer have that kind of skills gap? What would you
hope that either I or society at large could provide her in
terms of a healthy or smart start?
Chair Yellen. I hope that you and society at large will
make sure that she has access to a good college education. The
gap in earnings between those with a college degree and those
with less education has increased enormously, and good
opportunities to get advanced training and skills I think will
clearly--every bit of evidence suggests that they will make a
difference to her lifelong earnings.
Senator Casey. I will send you some questions for the
record, as well. Thank you, very much.
Chair Yellen. Thank you.
Chairman Brady. And don't worry, Madam Chair, knowing
Senator Casey she will get a good education.
Chair Yellen. I have no doubt.
Chairman Brady. Senator Wicker.
Senator Wicker. Thank you, Dr. Yellen. This has been very
enlightening.
Let me first just try to clean up a few things. In his very
fine opening statement Chairman Brady got to a point where he
said he was hopeful you would enlighten the Committee on six
specific points.
There is no time for you to answer those. I would like to
submit those questions as my questions for the record and ask
you if you will answer them on the record. Will you do that?
Chair Yellen. I would be glad to.
Senator Wicker. And the last point is about the
transparency, which I think is a very fine question. Also, I
understand your reluctance to be tied down to specific
predictions of when this or that will happen, but I do think we
got a ``yes'' from you on one thing. And that is, when the
asset purchase program will end.
As I understand it, you have a set of expectations for the
rest of the year. And if those expectations are met, you expect
the asset purchase program to end this fall.
Is that a ``yes''?
Chair Yellen. It is correct, if the labor market continues
to recover and we continue to see the evidence as pointing to
inflation moving up over time to 2, the Committee is likely to
continue taking further steps that would end the program next
Fall.
Senator Wicker. In the Fall of this year?
Chair Yellen. Correct.
Senator Wicker. Okay. And Senator Klobuchar said she saw no
sign of a rise in inflation for the foreseeable future. You do
not agree with that. And ideally, inflation should increase to
2 percent, and that would be a better result as far as you are
concerned?
Chair Yellen. Two percent is the Committee's longer term
objective. And we would not want to see a persistent deviation
either below or above 2 percent.
Senator Wicker. Okay. Good.
Chair Yellen. So it will not be at that level at every
moment, but we expect it to move up gradually over time back
toward 2 percent.
Senator Wicker. Great. You mentioned during your testimony
today ``maximum employment'' and ``full employment.'' Would you
just define those for the Committee?
Chair Yellen. I am using those terms interchangeably.
``Maximum employment'' is the wording that is used in the
Federal Reserve Act. It is our goal that Congress has defined
for us, and I am using the term ``full employment''----
Senator Wicker. And that is--what is--could you reduce that
to a percentage rate? What is ``maximum employment''?
Chair Yellen. So I interpret ``maximum employment'' as
meaning a level of employment in the labor market where people
are able in a reasonable amount of time to gain work for which
they are qualified.
Senator Wicker. For today's purposes, you are not going to
put a percentage point?
Chair Yellen. I am not going to put a percentage point on
that.
Senator Wicker. Now in terms of economic income inequality,
and let's get back to the Meltzer article in today's Wall
Street Journal, he suggests that actually the policies of the
Obama Administration and the Federal Reserve are responsible
for the income inequality. And he says, ironically, despite
often repeated demands for increased redistribution to favor
middle and lower income groups, that policies pursued by the
Obama Administration and supported by the Federal Reserve have
accomplished the opposite.
He goes on to say: Voters should recognize that goosing the
stock market through very low interest rates, not to mention
the subsidies and handouts to cronies, have contributed to that
result.
We will leave the subsidies for another discussion, but
don't you acknowledge, Dr. Yellen, that the interest rates
which you have achieved have driven people to the stock market,
therefore goosing the stock market and contributing to this
maldistribution of income?
Chair Yellen. I would not deny that the level of interest
rates affects the stock market. I would hardly endorse the term
``goosing the stock market.'' We have no target for stock
prices. The policies that we have undertaken are meant to ease
financial conditions in a whole variety of ways that will be
conducive to generating greater spending, and greater spending
means that we create jobs throughout the economy.
So to think of that as something that is promoting an
increase in income inequality I would take issue with. I think
a stronger economy brings benefits to a wide variety of
households throughout the economy, including lower income
households who are gaining jobs.
We do probably have an impact on the stock market. We also
have an impact on house prices. And house prices have come back
up again. And for so many households, middle income households,
that is their most important asset. And that return of house
prices to more normal levels I think has been a major benefit
to many, many American households. They have seen themselves
move from situations where they are underwater on their
mortgages, to being back in the black. And it also helps give
them access to credit, if they want to send a kid to school, or
have an emergency, or want to start a small business.
And so there have been benefits in this policy, in the
policies we have pursued for Main Street as well as for those
who hold the equities in their portfolios.
Senator Wicker. Thank you.
Chairman Brady. Thank you.
Senator Sanders.
Senator Sanders. Thank you, Mr. Chairman.
And, Dr. Yellen, welcome and good luck on your new endeavor
here.
Chair Yellen. Thank you.
Senator Sanders. Mr. Chairman, with your permission I would
like to put into the record a recent BBC article entitled
``Study: U.S. is an oligarchy not a democracy.''
Mr. Chairman, is that all right? Mr. Chairman? Can I place
that into the record?
Chairman Brady. Excuse me, Senator. Without objection.
[The article titled ``Study: U.S. is an oligarchy not a
democracy'' appears in the Submissions for the Record on page
42.]
Senator Sanders. Thank you.
Madam Chair, in the U.S. today the top 1 percent own about
38 percent of the financial wealth of America; the bottom 60
percent own 2.3 percent.
One family, the Walton family, is worth over $140 billion.
That is more wealth than the bottom 40 percent of the American
people.
In recent years we have seen a huge increase in the number
of millionaires and billionaires, while we continue to have the
highest rate of childhood poverty in the industrialized world.
Despite this, as many of my Republican friends talk about
the oppressive Obama economic policies, in the last year
Charles and David Koch struggled under these policies and their
wealth increased by $12 billion in one year--despite the
oppressive Obama economic policies.
In terms of income, 95 percent of new income generated in
this country in the last year went to the top 1 percent. Now a
study, which I have just introduced into the record, by two
professors from Princeton University, Professor Martin Gillins
and Northwestern University Professor Benjamin Page, basically
suggest that while historically we have considered our society
to be a capitalist democracy, we may now have entered into a
phase where we are an oligarchic form of society.
In your judgement, given the enormous power held by the
billionaire class and their political representatives, are we
still a capitalist democracy? Or have we gone over into an
oligarchic form of society in which incredible economic and
political power now rests with the billionaire class?
Chair Yellen. All of the statistics on inequality that you
have cited are ones that greatly concern me. And I think for
the same reason that you are concerned about them.
They can determine the ability of different groups to
participate equally in a democracy, and have grave effects on
social stability over time. And so I don't know what to call
our system, I would prefer not to give labels--but there is no
question that we have had the trend toward growing inequality,
and I personally find it a very worrisome trend that deserves
the attention of policymakers.
Senator Sanders. Thank you. I mean, I think the point that
the professors are making, and others have made, is that there
comes a point where the billionaire class has so much political
power, where the Koch brothers are now because of Citizens
United able to buy and sell politicians, they have so much
political power, at what point is that reversible? And that is
a great concern to me.
I want to go to another point. Some of my colleagues,
especially in the House, believe that we can improve lives for
the middle class and create jobs by completely repealing the
estate tax, which applies now to perhaps less than 1/10th of 1
percent of the wealthiest families in this country.
Would it make sense to you to give enormous tax breaks to
the families of the top 1 percent of people in this country?
Chair Yellen. I have indicated that I share your concern
with inequality, but I guess I am going to say on this that it
is up to the Congress to decide what is appropriate. And there
are a number of different ways to address it; that certainly is
on the list.
Senator Sanders. All right. Well let me ask you another
question.
Some of my friends in the House, on the Ryan budget and so
forth, suggest that one way to stimulate the economy to create
decent-paying jobs is to give more tax breaks to the wealthiest
people in this country, and the largest corporations, despite
the massive wealth and income inequality we have right now.
If we give tax breaks to the Koch brothers, who are worth
$80 billion, do you think that is going to create a whole lot
of jobs in this country?
Chair Yellen. I would say most of the evidence that we have
suggests that transfers to lower income people tend to be
spent, a larger fraction of the dollar is spent, than when
there is a transfer to a wealthy individual, but changes in tax
policy--so that is from the demand side; tax policy also has
supply side effects that one should take into account.
Senator Sanders. Thank you, Mr. Chairman.
Chairman Brady. Thank you.
Representative Paulsen.
Representative Paulsen. Thank you, Mr. Chairman. Dr.
Yellen, thank you for being here and offering your testimony
today. You have mentioned several times that the unemployment
rate is still too high, and clearly we as elected officials
representing our constituencies would agree with that.
Now, in April you made some remarks to the Economic Club of
New York. At that time you said that the central tendency of
the Federal Open Market Committee participant projections for
the unemployment rate at the end of 2016--so this is still out
a year-and-a-half--would be 5.2 to 5.6 percent. And for
inflation, the central tendency is 1.7 to 2 percent. You
mentioned the 2 percent again today.
If this forecast was to become a reality the economy would
be approaching what my colleagues and I view as maximum
employment and price stability for the first time in nearly a
decade.
I guess I am wondering, because you did not want to put a
number on maximum or full employment today but you referenced
this in April. In light of the unemployment rate being around
4-1/2 percent in the middle part of the last decade, you are
indicating that maybe full employment or maximum employment is
significantly higher, that 5.2 to 5.6 percent range.
Is that the new normal that you are potentially targeting
for ``full employment''?
Chair Yellen. This is a number that is purely a guess based
on empirical evidence that each member of our Committee is
asked to make every three months.
What they are trying to write down is the level of the
unemployment rate that they think would be consistent with
stable inflation, rather than gradually rising inflation over
time. And based on the evidence that they see, their current
read--and these are again just estimates and something that
changes from time to time--but their best assessment, most of
them are in a range of 5.2 to 5.6 percent.
Now when unemployment was as low as 4 percent previously,
to some extent that may have involved overshooting. It's
nothing that says that 5.2 to 5.6 is a floor on how low
unemployment can go. For example, in the late 1990s
unemployment fell well below those levels.
But there may have been special factors, an increase in
productivity growth, and a strong dollar appreciation of the
dollar that was holding inflation down and made that happy
coincidence of very low unemployment and stable inflation
possible.
So at the moment, this is their best guess. And it is where
they envision the economy as being in 2016.
Representative Paulsen. You mentioned, too, that with the
April jobs numbers that came out, it was nice to see the
unemployment level fall to 6.3 percent. But you said you wanted
to look at the details of that labor force participation rate,
which fell to essentially tying a low of 62.8 percent. That was
one of the most concerning numbers for me, 800,000 people that
have now left the work force, right? Or the labor force has
declined by 800,000. That is a pretty significant number.
What do you envision the labor force participation rate
might actually be if we hit that 5.2 to 5.6 percent full
employment rate?
Chair Yellen. It's a little bit hard for me to give you an
estimate of that. We had a huge move. It is very unusual to see
a 4/10ths percent decline in the unemployment rate in a single
month with a comparable move in labor force participation.
We always tell ourselves, and I'll state, I think one
should not make too much of any single month's numbers. My
preference would be to look at those labor force and labor
market statistics over three or six months to get a read on
things.
If we do that, what we see is the unemployment rates come
down. For the last six months, job growth has been, employment
has been gaining about 200,000 jobs a month, and somewhat
higher over the last 3 months.
The labor force participation rate has bounced around, but
it has been roughly stable. So it came down. It had gone up
previously. Over the last six months, it has been roughly
stable, which is--I think there is a declining labor force
participation rate as a trend--so a stable labor force
participation rate could signify that some cyclical slack in
the labor market is gradually diminishing over time.
So looking over three to six months, I would say that the
patterns we are seeing are consistent with improvement in the
labor market.
Representative Paulsen. Thank you.
Chairman Brady. Thank you.
Representative Cummings.
Representative Cummings. Chair Yellen, in February Senator
Elizabeth Warren and I wrote to you urging that a formal vote
of the Board of Governors be required before the Fed enters
into consent orders over a million dollars.
My staff reviewed all Fed enforcement actions between 1997
and 2013 and found that only about 2 percent resulted in
penalties over $1 million.
During the hearings before the Senate Banking Committee on
February 27, Senator Warren asked whether you agreed with our
proposal.
You answered, and I quote: ``I do think it's appropriate
for us to make changes, and I fully expect that we will.'' End
of quote.
Yesterday, Senator Warren and I received the response
letter from you--thank you--in which you wrote: ``I agree that
it is appropriate for the Board of Governors to be fully
involved in important decisions relating to the enforcement and
supervisory matters.'' You went on to say: ``Steps are already
underway to develop new processes and procedures for review and
approval of significant enforcement actions.''
My question is this: Can you tell me what specific steps
are underway for the Board procedures to be changed to require
formal votes on all major enforcement actions? And if so, by
what date will that occur? And if this is not the procedural
change you anticipate making, what new processes and procedures
for review and approval of enforcement actions will be
introduced?
Chair Yellen. We have met and it is in the public record
that we have had a number of meetings at this point over the
last couple of months to discuss enforcement actions.
We are participating in those discussions with our staff
early so that we can guide their handling of these matters. I
think this is fully appropriate, and I pledge that we will
continue to do so.
We have taken a vote on at least one very important
enforcement matter. And I want to take a little bit more time
working with the staff to decide exactly what the guidelines
will be for when we should delegate and when Board action is
required.
You suggested a particular cutoff, and I want to think more
carefully about how to define precisely which actions should
require Board votes, when it's appropriate for us to vote. But
what I do want to pledge is that the Board will be very
involved, discuss, and meet to discuss major enforcement
actions.
Representative Cummings. Thank you.
Chair Yellen. And we have done so.
Representative Cummings. You were Vice Chair of the Board
of Governors when the Fed and the OCC terminated the
Independent Foreclosure Review and agreed to a settlement with
the mortgage servicing companies in January 2013.
Did the Board formally approve the amendments to the
consent decrees that terminated the IFR?
Chair Yellen. The Board did not vote on that agreement.
Under the procedures in place, this was a matter that was
delegated to the staff. But the staff consulted closely with
members of the Board before they took those actions. And so the
Board did have input in an informal way when those decisions
were made. But there was no formal vote.
Representative Cummings. On March 4th, I joined with
Oversight Chairman Darrell Issa in a letter requesting that
both the Fed and the OCC produce documents relating to this
decision. The OCC produced its documents several weeks ago. We
received the Fed's documents yesterday. Thank you. And we are
still reviewing them.
The documents produced by the OCC showed that there were no
reliable data or error rates at the time you terminated the
IFR, but there are preliminary data showing double-digit error
rates in some categories and some services.
Deep dives were planned to identify the full extent of
harm, but they could not be completed because the IFR was
terminated. Did you know this when the IFR was terminated? Did
you know that?
Chair Yellen. The IFR was terminated because it was decided
that the process was too slow in terms of its time frame and
its ability to get money into the pockets of homeowners who had
been harmed.
It was a decision that the OCC took the lead in, and the
Federal Reserve went along with, after consulting closely with
community groups and looking at the process that was in--that
was taking place with the independent consultants reviewing
these files.
It was not a happy outcome. It was a----
Representative Cummings. It was a horrible outcome.
Chair Yellen. It was horrible----
Representative Cummings. It was horrible. I mean--and I
don't know whether you have looked into it, but it is a very
sad commentary on what happened here.
Chair Yellen. It is.
Representative Cummings. I know I am out of time, but I
will send you some follow-up questions along with Senator
Warren.
Chair Yellen. Yes. I'd be happy to answer them.
Chairman Brady. Thank you, Representative.
Madam Chair, thank you for being here today and for your
testimony and answering the questions. You have a difficult
job. We wish you well, and we look forward to future hearings
to come.
The hearing is adjourned.
(Whereupon, at 11:49 a.m., Wednesday, May 7, 2014, the
hearing was adjourned.)
SUBMISSIONS FOR THE RECORD
Prepared Statement of Hon. Kevin Brady, Chairman, Joint Economic
Committee
To start, I congratulate Chair Yellen on her appointment to head
the Board of Governors of the Federal Reserve System. I welcome you to
your first appearance before the Joint Economic Committee and look
forward to many more.
June will mark the fifth anniversary of the end of the ``Great
Recession.'' By virtually every economic indicator, this recovery ranks
as the weakest or near the bottom. This recovery's persistent weakness
has created a Growth Gap relative to other recoveries over the last
half century. For example, if this recovery had merely been average,
then:
The U.S. economy would be $1.4 trillion larger (Figure
1);
American workers would have 5.7 million more private-
sector jobs available (Figure 2); and
A family of four would have over $1,000 per month in
additional real after-tax income (Figure 3).
Ironically, for an Administration that has repeatedly bemoaned
income inequality, the one exception to this weakness is Wall Street--
where the S&P 500 Total Return Index, adjusted for inflation, has more
than doubled.
Last week, the Bureau of Economic Analysis (BEA) and the Bureau of
Labor Statistics (BLS) released conflicting data about the strength of
this recovery. On the one hand, according to the BEA, real GDP growth
was basically flat in the first quarter, and according to the BLS, the
labor force participation rate fell in April to 62.8 percent, tying a
multi-decade low only reached in the Carter and Obama Administrations.
Moreover, the employment-to-population ratio is actually lower than
when the recession ended, which means there are proportionally less
adults working today than when the recovery began. That's headed the
wrong direction.
On the other hand, the BLS reported that, for only the fifth time
since the recession ended, the monthly growth of non-farm payroll jobs
in April exceeded the equivalent average monthly job growth during past
recoveries with the unemployment rate declining to 6.3 percent from its
October 2009 peak of 10 percent.
Correctly judging the strength of the labor market is very
important because the Federal Open Market Committee has tied the
tapering of large-scale asset purchases and the normalization of
interest rates to its assessment of the labor market.
Members of the FOMC attribute much of the slack in the labor market
to cyclical factors and believe that a highly accommodate monetary
policy can strengthen economic output and employment. However, if a
substantial portion of the weakness in the labor market is due to
structural factors such as an aging population and a skills mismatch,
then maintaining a highly accommodative monetary policy could instead
create economic bottlenecks that would trigger price inflation.
Addressing structural unemployment requires much different policies
such as reforming education, strengthening job-training programs, and
modernizing means-tested entitlement programs to encourage work.
I am encouraged that the FOMC began to taper large-scale asset
purchases in December and appears on track to terminate these purchases
before the end of this year. However, I am concerned that the FOMC
stated that it will likely maintain its zero-interest rate policy long
after QE ends, and at levels below those that ``the Committee views as
normal in the longer run.''
I am equally concerned that the discretionary nature of changes to
the FOMC's forward-guidance is undermining the Fed's credibility--
weakening the confidence of market participants and increasing
uncertainty.
I believe the Federal Reserve helped to stabilize financial markets
after the panic in the fall of 2008, but extraordinarily low interest
rates and repeated rounds of quantitative easing have done more to
stimulate Wall Street than help hard-working American families on Main
Streets across America. As I noted earlier, since the recession ended
the S&P 500 Total Return Index, adjusted for inflation, is up 108.2
percent, while real after-tax income per capita is only up 4.2 percent.
The Fed has Wall Street roaring, but has left middle-class families
and Main Street business behind.
Chair Yellen, your predecessor was supremely confident that the Fed
had the knowledge, tools, and political fortitude to exit smoothly from
the Fed's extraordinary monetary actions and normalize interest rates
and the size of its balance sheet before an inflationary outbreak could
occur.
Yet the Fed--like many central banks--has an unsatisfactory track
record over the last century in identifying economic turning points and
acting in a timely manner to maintain stable prices.
So today, I am hopeful that you can enlighten this Committee on
several points:
1. What is the FOMC's assessment of the strength of the labor
market? How much of the weakness in the labor market do you
believe is due to cyclical factors and how much is due to
structural factors? What statistics are FOMC members using to
judge the health of the labor market and how much weight are
they being given?
2. Can an overly accommodative monetary policy create asset
price inflation that may not be fully captured by the CPI or
the PCE index? Do high stock prices reflect the fundamental
strength of our economy, or are they partially due to a highly
accommodative monetary policy?
3. Has the FOMC's failure to abide by its own ``communications
channel'' prescriptions created more uncertainty and undermined
the FOMC's credibility? And, when will the FOMC return to a
rules-based approach to monetary policy that helped to achieve
the good performance of the U.S. economy during the ``Great
Moderation''?
4. Is the Federal Reserve Bank of San Francisco correct that
higher federal taxes--including higher marginal rates on
individual income, capital gains, and dividends--are presently
the main cause of ``fiscal drag'' on our economy?
5. Is there a better way for Congress to address the spending
side of our fiscal imbalances than the present sequester
enacted as part of the Budget Control Act of 2011?
6. Is the Fed willing to make its balance sheet more
transparent? Specifically, will the Fed provide a consolidated
list of holdings that includes not only maturity values, but
also average purchase prices for each issue and the current
market value of each holding?
With that, Chair Yellen, I look forward to your testimony. And, I
note that the record will be kept open for one week so that Members can
submit additional written questions for the record.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Statement of Janet L. Yellen, Chair, Board of Governors of the Federal
Reserve System
Chairman Brady, Vice Chair Klobuchar, and other members of the
Committee, I appreciate this opportunity to discuss the current
economic situation and outlook along with monetary policy before
turning to some issues regarding financial stability.
current economic situation and outlook
The economy has continued to recover from the steep recession of
2008 and 2009. Real gross domestic product (GDP) growth stepped up to
an average annual rate of about 3\1/4\ percent over the second half of
last year, a faster pace than in the first half and during the
preceding two years. Although real GDP growth is currently estimated to
have paused in the first quarter of this year, I see that pause as
mostly reflecting transitory factors, including the effects of the
unusually cold and snowy winter weather. With the harsh winter behind
us, many recent indicators suggest that a rebound in spending and
production is already under way, putting the overall economy on track
for solid growth in the current quarter. One cautionary note, though,
is that readings on housing activity--a sector that has been recovering
since 2011--have remained disappointing so far this year and will bear
watching.
Conditions in the labor market have continued to improve. The
unemployment rate was 6.3 percent in April, about 1\1/4\ percentage
points below where it was a year ago. Moreover, gains in payroll
employment averaged nearly 200,000 jobs per month over the past year.
During the economic recovery so far, payroll employment has increased
by about 8\1/2\ million jobs since its low point, and the unemployment
rate has declined about 3\3/4\ percentage points since its peak.
While conditions in the labor market have improved appreciably,
they are still far from satisfactory. Even with recent declines in the
unemployment rate, it continues to be elevated. Moreover, both the
share of the labor force that has been unemployed for more than six
months and the number of individuals who work part time but would
prefer a full-time job are at historically high levels. In addition,
most measures of labor compensation have been rising slowly--another
signal that a substantial amount of slack remains in the labor market.
Inflation has been quite low even as the economy has continued to
expand. Some of the factors contributing to the softness in inflation
over the past year, such as the declines seen in non-oil import prices,
will probably be transitory. Importantly, measures of longer-run
inflation expectations have remained stable. That said, the Federal
Open Market Committee (FOMC) recognizes that inflation persistently
below 2 percent--the rate that the Committee judges to be most
consistent with its dual mandate--could pose risks to economic
performance, and we are monitoring inflation developments closely.
Looking ahead, I expect that economic activity will expand at a
somewhat faster pace this year than it did last year, that the
unemployment rate will continue to decline gradually, and that
inflation will begin to move up toward 2 percent. A faster rate of
economic growth this year should be supported by reduced restraint from
changes in fiscal policy, gains in household net worth from increases
in home prices and equity values, a firming in foreign economic growth,
and further improvements in household and business confidence as the
economy continues to strengthen. Moreover, U.S. financial conditions
remain supportive of growth in economic activity and employment.
As always, considerable uncertainty surrounds this baseline
economic outlook. At present, one prominent risk is that adverse
developments abroad, such as heightened geopolitical tensions or an
intensification of financial stresses in emerging market economies,
could undermine confidence in the global economic recovery. Another
risk--domestic in origin--is that the recent flattening out in housing
activity could prove more protracted than currently expected rather
than resuming its earlier pace of recovery. Both of these elements of
uncertainty will bear close observation.
monetary policy
Turning to monetary policy, the Federal Reserve remains committed
to policies designed to restore labor market conditions and inflation
to levels that the Committee judges to be consistent with its dual
mandate. As always, our policy will continue to be guided by the
evolving economic and financial situation, and we will adjust the
stance of policy appropriately to take account of changes in the
economic outlook. In light of the considerable degree of slack that
remains in labor markets and the continuation of inflation below the
Committee's 2 percent objective, a high degree of monetary
accommodation remains warranted.
With the federal funds rate, our traditional policy tool, near zero
since late 2008, we have relied on two less conventional tools to
provide support for the economy: asset purchases and forward guidance.
And, because these policy tools are less familiar, we have been
especially attentive in recent years to the need to communicate to the
public about how we intend to employ our policy tools in response to
changing economic circumstances.
Our current program of asset purchases began in September 2012 when
the economic recovery had weakened and progress in the labor market had
slowed, and we said that our intention was to continue the program
until we saw substantial improvement in the outlook for the labor
market. By December 2013, the Committee judged that the cumulative
progress in the labor market warranted a modest reduction in the pace
of asset purchases. At the first three meetings this year, our
assessment was that there was sufficient underlying strength in the
broader economy to support ongoing improvement in labor market
conditions, so further measured reductions in asset purchases were
appropriate. I should stress that even as the Committee reduces the
pace of its purchases of longer-term securities, it is still adding to
its holdings, and those sizable holdings continue to put significant
downward pressure on longer-term interest rates, support mortgage
markets, and contribute to favorable conditions in broader financial
markets.
Our other important policy tool in recent years has been forward
guidance about the likely path of the federal funds rate as the
economic recovery proceeds. Beginning in December 2012, the Committee
provided threshold-based guidance that turned importantly on the
behavior of the unemployment rate. As you know, at our March 2014
meeting, with the unemployment rate nearing the threshold that had been
laid out earlier, we undertook a significant review of our forward
guidance. While indicating that the new guidance did not represent a
shift in the FOMC's policy intentions, the Committee laid out a fuller
description of the framework that will guide its policy decisions going
forward. Specifically, the new language explains that, as the economy
expands further, the Committee will continue to assess both the
realized and expected progress toward its objectives of maximum
employment and 2 percent inflation. In assessing that progress, we will
take into account a wide range of information, including measures of
labor market conditions, indicators of inflation pressures and
inflation expectations, and readings on financial developments. In
March and again last month, we stated that we anticipated the current
target range for the federal funds rate would be maintained for a
considerable time after the asset purchase program ends, especially if
inflation continues to run below 2 percent, and provided that inflation
expectations remain well anchored. The new language also includes
information on our thinking about the likely path of the policy rate
after the Committee decides to begin to remove policy accommodation. In
particular, we anticipate that even after employment and inflation are
near mandate-consistent levels, economic and financial conditions may,
for some time, warrant keeping the target federal funds rate below
levels that the Committee views as normal in the longer run.
Because the evolution of the economy is uncertain, policymakers
need to carefully watch for signs that it is diverging from the
baseline outlook and respond in a systematic way to stabilize the
economy. Accordingly, for both our purchases and our forward guidance,
we have tried to communicate as clearly as possible how changes in the
economic outlook will affect our policy stance. In doing so, we will
help the public to better understand how the Committee will respond to
unanticipated developments, thereby reducing uncertainty about the
course of unemployment and inflation.
financial stability
In addition to our monetary policy responsibilities, the Federal
Reserve works to promote financial stability, focusing on identifying
and monitoring vulnerabilities in the financial system and taking
actions to reduce them. In this regard, the Committee recognizes that
an extended period of low interest rates has the potential to induce
investors to ``reach for yield'' by taking on increased leverage,
duration risk, or credit risk. Some reach-for-yield behavior may be
evident, for example, in the lower-rated corporate debt markets, where
issuance of syndicated leveraged loans and high-yield bonds has
continued to expand briskly, spreads have continued to narrow, and
underwriting standards have loosened further. While some financial
intermediaries have increased their exposure to duration and credit
risk recently, these increases appear modest to date--particularly at
the largest banks and life insurers.
More generally, valuations for the equity market as a whole and
other broad categories of assets, such as residential real estate,
remain within historical norms. In addition, bank holding companies
(BHCs) have improved their liquidity positions and raised capital
ratios to levels significantly higher than prior to the financial
crisis. Moreover, recently concluded stress tests mandated by the Dodd-
Frank Act have provided a level of confidence in our assessment of how
financial institutions would fare in an extended period of severely
adverse macroeconomic conditions or a sharp steepening of the yield
curve alongside a moderate recession. For the financial sector more
broadly, leverage remains subdued and measures of wholesale short-term
funding continue to be far below levels seen before the financial
crisis.
The Federal Reserve has also taken a number of regulatory steps--
many in conjunction with other federal agencies--to continue to improve
the resiliency of the financial system. Most recently, the Federal
Reserve finalized a rule implementing section 165 of the Dodd-Frank Act
to establish enhanced prudential standards for large banking firms in
the form of risk-based and leverage capital, liquidity, and risk-
management requirements. In addition, the rule requires large foreign
banking organizations to form a U.S. intermediate holding company, and
it imposes enhanced prudential requirements for these intermediate
holding companies. Looking forward, the Federal Reserve is considering
whether additional measures are needed to further reduce the risks
associated with large, interconnected financial institutions.
While we have seen substantial improvements in labor market
conditions and the overall economy since the financial crisis and
severe recession, we recognize that more must be accomplished. Many
Americans who want a job are still unemployed, inflation continues to
run below the FOMC's longer-run objective, and work remains to further
strengthen our financial system. I will continue to work closely with
my colleagues and others to carry out the important mission that the
Congress has given the Federal Reserve.
Thank you. I will be pleased to take your questions.
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