[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

                              ----------                              

                     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

                              ----------                              


                         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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