[Joint House and Senate Hearing, 114 Congress]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 114-311

                          THE ECONOMIC OUTLOOK

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

                                 HEARING

                               BEFORE THE

                        JOINT ECONOMIC COMMITTEE
                     CONGRESS OF THE UNITED STATES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                               __________

                            DECEMBER 3, 2015

                               __________

          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]

SENATE                               HOUSE OF REPRESENTATIVES
Daniel Coats, Indiana, Chairman      Patrick J. Tiberi, Ohio, Vice 
Mike Lee, Utah                           Chairman
Tom Cotton, Arkansas                 Justin Amash, Michigan
Ben Sasse, Nebraska                  Erik Paulsen, Minnesota
Ted Cruz, Texas                      Richard L. Hanna, New York
Bill Cassidy, M.D., Louisiana        David Schweikert, Arizona
Amy Klobuchar, Minnesota             Glenn Grothman, Wisconsin
Robert P. Casey, Jr., Pennsylvania   Carolyn B. Maloney, New York, 
Martin Heinrich, New Mexico              Ranking
Gary C. Peters, Michigan             John Delaney, Maryland
                                     Alma S. Adams, Ph.D., North 
                                         Carolina
                                     Donald S. Beyer, Jr., Virginia

                  Viraj M. Mirani, Executive Director
                 Harry Gural, Democratic Staff Director
                            
                            
                            C O N T E N T S

                              ----------                              

                     Opening Statements of Members

Hon. Daniel Coats, Chairman, a U.S. Senator from Indiana.........     1
Hon. Carolyn B. Maloney, Ranking Member, a U.S. Representative 
  from New York..................................................     3
Hon. Patrick J. Tiberi, Vice Chairman, a U.S. Representative from 
  Ohio...........................................................     5

                               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. Daniel Coats, Chairman, a U.S. Senator 
  from Indiana...................................................    36
Prepared statement of Hon. Carolyn B. Maloney, Ranking Member, a 
  U.S. Representative from New York..............................    36
    Chart titled ``Private-Sector Job Growth Continues in 
      October''..................................................    41
    Report titled ``The Financial Crisis: Lessons for the Next 
      One''......................................................    42
    Letter dated November 16, 2015, from Chair Yellen addressed 
      to Hon. Paul Ryan and Hon. Nancy Pelosi....................    97
Prepared statement of Hon. Janet L. Yellen, Chair, Board of 
  Governors of the Federal Reserve System, Washington, DC........    38
Chart titled ``Low-Income Workers Have Lost the Most Work Hours'' 
  submitted by Senator Bill Cassidy..............................   100
Questions for the record and responses:..........................
    Questions for Hon. Janet L. Yellen submitted by Chairman 
      Daniel Coats...............................................   101
    Questions for Hon. Janet L. Yellen submitted by Senator Mike 
      Lee........................................................   104
    Questions for Hon. Janet L. Yellen submitted by Ranking 
      Member Carolyn B. Maloney..................................   111
    Questions for Hon. Janet L. Yellen submitted by Senator 
      Robert P. Casey, Jr........................................   116
    Questions for Hon. Janet L. Yellen submitted by Senator Amy 
      Klobuchar..................................................   119

 
                          THE ECONOMIC OUTLOOK

                              ----------                              


                       THURSDAY, DECEMBER 3, 2015

             Congress of the United States,
                          Joint Economic Committee,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:01 a.m. in Room 
216 of the Hart Senate Office Building, the Honorable Daniel 
Coats, Chairman, presiding.
    Representatives present: Tiberi, Paulsen, Hanna, 
Schweikert, Grothman, Maloney, Delaney, Adams, and Beyer.
    Senators present: Coats, Cruz, Cassidy, Klobuchar, Casey, 
Sasse, Heinrich, and Peters.
    Staff present: David Bauer, Doug Brunch, Barry Dexter, 
Connie Foster, Harry Gural, Colleen Healy, Jason Kanter, 
Christina King, David Logan, Kristine Michalson, Viraj Mirani, 
Brian Neale, Thomas Nicholas, Robert O'Quinn, Leslie Philips, 
Stephanie Salomon, Sue Sweet, Phoebe Wong.

   OPENING STATEMENT OF HON. DANIEL COATS, CHAIRMAN, A U.S. 
                      SENATOR FROM INDIANA

    Chairman Coats. I would like to first welcome our new Vice 
Chairman, Congressman Tiberi. We have had Congressman Brady, I 
don't want to say promoted or demoted, to Chairman of the Ways 
and Means Committee and we are very, very happy to have 
Congressman Tiberi to take over as Vice Chairman. Welcome.
    I also want to welcome our distinguished Chair of the 
Federal Reserve, Janet Yellen, and thank her for appearing 
before us this morning.
    This Committee has a long tradition of receiving regular 
updates from the Chair of the Federal Reserve, and we are 
pleased to be continuing that tradition today.
    The U.S. economy has struggled through a long season of 
tepid growth. It has been six years since our last Recession 
technically ended, and over that time our economy has grown at 
a historically slow pace, averaging 2.2 percent per year.
    Some have suggested that a 2 percent growth rate is and 
will be the new normal for the economy. All of us should view 
these low economic expectations as unacceptable.
    The Fed certainly has an important role to play in setting 
monetary policy, and that is where its focus should be. There 
will no doubt be discussion of Fed policy and interest rates 
during today's hearing, as accommodative monetary policy by the 
Fed has been the norm for some time now.
    However, we should also be mindful that changing interest 
rates is not a long-term prescription for achieving a more 
dynamic economy.
    Unlocking the full potential of our economy will require 
policy decisions that incentivize the private sector, including 
better fiscal management of spending by the Federal Government, 
as well as pursuing pro-growth policies such as tax reform and 
a more balanced regulatory environment and passage of trade 
agreements, and other policy commitments.
    Our commitment to successfully addressing these other 
policy issues--and by ``our'' I mean the United States 
Congress, not the Federal Reserve--will go a long way toward 
creating certainty and confidence among both businesses and 
consumers.
    If we do not succeed in furthering pro-growth policies, we 
may face an economic future defined by low expectations and 
diminished standards of living. At the same time, questions 
arise regarding the impact of weakening economies in Europe, 
China, and emerging market countries.
    This morning the European Central Bank announced that it is 
expanding its stimulus measures and taking its overnight 
deposit rates further into negative territory.
    China devalued its currency in August in response to 
financial turmoil and other major international trading 
partners face significant economic challenges. The actions 
taken by these countries will have an impact on the value of 
the Dollar and the U.S. economy. We look forward to hearing the 
Chairman address that issue, also.
    These are some of the major issues we will discuss, and I 
certainly look forward to hearing Chair Yellen's thoughts on 
those.
    There is global uncertainty also, I think we should add to 
this equation. Too many mornings we tune in to breaking news, 
or pick up the newspaper and find headlines that we do not want 
to read. That appears to be a spreading cancer not only in the 
United States but also throughout the world.
    And so the uncertainty that that levels and the impact that 
it has on economic policies is perhaps another issue that we 
ought to be discussing.
    This morning, unfortunately, the House of Representatives 
has a series of votes coming up shortly, so there may be some 
in and out of Members having to deal with that as we are trying 
to wrap up our session.
    I will ask our members to try to keep their remarks and 
questions to five minutes. If we need a second round, we will 
try to accommodate that. And also, try to accommodate those 
that have had to run out for votes and will come back.
    Chair Yellen, most of us sitting--not all of us sitting up 
here today would love to wake up to headlines in The Wall 
Street Journal, headlines in The New York Times, pictures on 
the front page of Financial Times, and I have all these things 
that highlight you this morning as the person of the day.
    [Laughter.]
    I don't expect that you have that same enthusiasm for 
waking up every morning, but we are really pleased to have you 
here and look forward to your testimony.
    First, though, I would like to turn to Congresswoman 
Maloney, our Ranking Member, and then ask Mr. Tiberi to take a 
minute or so just to introduce himself to us as our new Vice 
Chairman.
    [The prepared statement of Chairman Coats appears in the 
Submissions for the Record on page 36.]
    Congresswoman Maloney.

OPENING STATEMENT OF HON. CAROLYN B. MALONEY, RANKING MEMBER, A 
               U.S. REPRESENTATIVE FROM NEW YORK

    Representative Maloney. Thank you, so much, Mr. Chairman. 
And so welcome, Chair Yellen. I am so pleased you are here 
today for this important and timely discussion. I look forward 
to your testimony in advance of the Federal Open Market 
Committee's meeting at which you will decide whether or not to 
raise the Federal Funds Rate.
    I am interested in hearing your perspective on the 
following issues, and others:
    What current trends do you find most important in helping 
you assess the short- and long-term challenges facing our 
economy?
    Secondly, how can the Federal Reserve time future rate 
increases so we do not jeopardize the current economic 
recovery, or harm American families?
    Thirdly, what do you think of the legislation recently 
passed by the House of Representatives that would compromise 
the independence of the Federal Reserve?
    Before I turn to these issues and others, I think it is 
important to put this hearing in perspective. At the end of the 
Bush Administration, just a little less than seven years ago, 
we faced what former Fed Chairman Bernanke called, and I quote, 
``the worst financial crisis in global history, including the 
Great Depression.'' End quote.
    We have come a long way since the economic crisis, and that 
progress is in no small part due to the bold actions by the 
nonpartisan, nonpolitical Federal Reserve.
    In the month when President Bush left office, we lost 
almost 820,000 private-sector jobs. Over the past year, we have 
gained an average of 226,000 jobs per month. In fact, we have 
added 13.5 million private-sector jobs over a record-breaking 
68 consecutive months of growth.
    I have this chart, and I would like to put it in the 
record, which explains and documents this growth. In October 
2009, unemployment reached 10 percent. Since then, it has been 
cut in half. It now stands at 5 percent.
    [The chart titled ``Private-Sector Job Growth Continues in 
October'' appears in the Submissions for the Record on page 
41.]
    There were about seven unemployed workers for every job 
opening in July of 2009. Now there are 1.4 unemployed workers 
per job opening, the lowest this ratio has been since early 
2001.
    Real GDP fell 4.2 percent between the end of 2007 and the 
second quarter of 2009. But GDP has increased by more than 14 
percent since then. Growth has been positive in 23 of the last 
25 quarters.
    Average home prices dropped 19 percent between 2007 and 
2011, but now they are back up to where they were in 2007. 
About $17 trillion in wealth evaporated between the summer of 
2007 and the beginning of 2009. All of those losses have been 
recovered and now total wealth is about $10 trillion higher 
than it was at the onset of the financial crisis.
    The Federal Reserve played an extraordinary role in turning 
around the economy. It quickly acted to lower rates to almost 
zero, and has held them there for about seven years, which has 
been a principal factor in our economic recovery.
    The Fed did this despite the opposition of those who 
claimed that inflation was on the horizon, and who were later 
proven wrong. Then, having exhausted the conventional tools of 
monetary policy, the Fed deployed several rounds of 
quantitative easing aimed at keeping long-term rates low and 
further stimulating our economy.
    These efforts helped haul our country out of the depths of 
the Great Recession. But without the Fed's actions, things 
would be very different today. A recent study by economists 
Alan Blinder and Mark Zandi found that efforts by the Federal 
Reserve and the Obama Administration, with support from 
Democrats in Congress, dramatically reduced the severity and 
length of the Great Recession.
    Specifically, the report found that without their joint 
efforts: the recession would have lasted twice as long; the 
unemployment rate would have reached nearly 16 percent; and we 
would have lost twice as many jobs, more than 17 million 
American jobs.
    I would like to enter the Blinder-Zandi report into the 
record.
    [The Blinder-Zandi report titled: ``The Financial Crisis: 
Lessons for the Next One'' appears in the Submissions for the 
Record on page 42.]
    Ironically, Republicans in Congress made recovery more 
difficult. As former Federal Reserve Chairman Ben Bernanke 
wrote in his new book--his new book, which I recommend--and I 
quote:
    ``The economy needed help from Congress, if not from 
additional spending on roads and bridges, for example, then at 
least in areas such as retraining unemployed workers.'' End 
quote.
    But the Republican-led Congress demanded deep spending cuts 
at a time when we needed aggressive fiscal policy to boost the 
economy. They ended up doing more to hurt than to help.
    And now Republicans complain that the economic recovery has 
been too slow. Now they have gone one step further. Two weeks 
ago, Republicans in the House of Representatives passed, in my 
opinion, damaging legislation, the FORM Act, that would 
fundamentally hamper the Fed's ability to conduct monetary 
policy.
    It would hurt the Fed's independence, for example, by 
forcing it to determine target interest rates using a 
mathematical formula, while ignoring a broad range of important 
economic indicators.
    Chair Yellen, as you have noted before, if the Fed had been 
forced to follow such a rule in recent years--and I quote from 
you--``millions of Americans would have suffered unnecessary 
spells of joblessness over that period.'' End quote.
    If the FORM Act had been a law during the time of the 
recession, the Federal Reserve would not have been able to take 
the aggressive steps needed to help pull our Nation out of the 
greatest economic crisis since the Great Depression.
    I hope today that we can focus on the critical issues 
before us: How the Federal Reserve should act to strengthen our 
economic recovery. But, if necessary, we must clearly show that 
efforts to hamstring the Federal Reserve are misguided and 
dangerous.
    Chair Yellen, thank you for appearing before the Joint 
Economic Committee today, and I look very much forward, as 
always, to your testimony.
    [The prepared statement of Representative Maloney appears 
in the Submissions for the Record on page 36.]
    Chairman Coats. Thank you.
    Congressman Tiberi.

 OPENING STATEMENT OF HON. PATRICK J. TIBERI, VICE CHAIRMAN, A 
                 U.S. REPRESENTATIVE FROM OHIO

    Vice Chairman Tiberi. Thank you for your courtesy, 
Chairman. I want to thank Speaker Ryan for giving me this 
opportunity, and I want to thank you for your Indiana Hoosier 
niceness in this process. You and your staff have been great in 
welcoming me. I look forward to working with my colleagues from 
the Senate, as well as the House.
    I know we have, in Ohio at least, still many challenges. A 
lot of moms and dads are underemployed. Yes, the unemployment 
rate has gone down, but there is a tremendous amount of anxiety 
I know in our State about the future of the economy. And this 
is so important.
    Chairman Yellen--Chair Yellen, thank you for your time 
today. I look forward to hearing from you.
    Chairman Coats. Thank you. I would like to now introduce 
our witness, Janet L. Yellen, who took office as Chair of the 
Board of Governors of the Federal Reserve System on February 3, 
2014, for a four-year term ending February 3, 2018.
    Dr. Yellen also serves as Chair of the Federal Open Market 
Committee, the System's principal monetary policymaking body.
    Prior to her appointment as Chair, Dr. Yellen served as 
Vice Chair of the Board of Governors, taking office in 2010, 
when she simultaneously began a 14-year term as a member of the 
Board that will expire not until 2024.
    Dr. Yellen is Professor Emeritus at the University of 
California at Berkeley where she was a Eugene E. and Catherine 
M. Trefethen Professor of Business Administration and Professor 
of Economics, and has been a faculty member there since 1980.
    Dr. Yellen took leave from Berkeley for five years starting 
in August of 1994. She served as a member of the Board of 
Governors of the Federal Reserve System through February of 
1997, and then left the Federal Reserve to become Chair of the 
Council of Economic Advisers through August 1999. She also 
chaired the Economic Policy Committee of the Organization for 
Economic Cooperation and Development.
    She has served as President and Chief Executive Officer of 
the Federal Reserve Bank of San Francisco, and has a 
distinguished academic background.
    Dr. Yellen, we are pleased to have you here this morning. 
Thank you very much for coming. This is an important time. You 
have had a busy week, and we appreciate you taking the time to 
share with us your thoughts on where we are and where we are 
going with this economy and the role of the Federal Reserve.

STATEMENT OF HON. JANET L. YELLEN, CHAIR, BOARD OF GOVERNORS OF 
           THE FEDERAL RESERVE SYSTEM, WASHINGTON, DC

    Chair Yellen. Thank you very much. Chairman Coats, Ranking 
Member Maloney, and Members of the Committee, I appreciate the 
opportunity to testify before you today.
    In my remarks I will discuss the current economic outlook 
before turning to monetary policy.
    The U.S. economy has recovered substantially since the 
Great Recession. The unemployment rate, which peaked at 10 
percent in October 2009, declined to 5 percent in October of 
this year.
    At that level, the unemployment rate is near the median of 
Federal Open Market Committee participants' most recent 
estimates of its longer run normal level. The economy has 
created about 13 million jobs since the low point for 
employment in early 2010, and total nonfarm payrolls are now 
almost 4\1/2\ million higher than just prior to the Recession.
    Most recently, after a couple of months of relatively 
modest payroll growth, employers added an estimated 271,000 
jobs in October. This increase brought the average monthly gain 
since June to about 195,000, close to the monthly pace of 
around 210,000 in the first half of the year and still 
sufficient to be consistent with continued improvement in the 
labor market.
    At the same time that the labor market has improved, U.S. 
economic output as measured by inflation-adjusted Gross 
Domestic Product, or real GDP, has increased at a moderate pace 
on balance during the expansion.
    Over the first three quarters of this year, real GDP is 
currently estimated to have advanced at an annual rate of 2\1/
4\ percent, close to its average pace over the previous 5 
years.
    Many economic forecasters expect growth roughly along those 
same lines in the fourth quarter. Growth this year has been 
held down by weak net exports, which has subtracted more than 
half a percentage point, on average, from the annual rate of 
real GDP growth over the past three quarters.
    Foreign economic growth has slowed, damping increases in 
U.S. exports, and the U.S. Dollar has appreciated substantially 
since the middle of last year, making our exports more 
expensive and imported goods cheaper.
    By contrast, total real private domestic final purchases, 
which includes household spending, business fixed investment, 
and residential investment, and currently represents about 85 
percent of aggregate spending has increased at an annual rate 
of 3 percent this year, significantly faster than real GDP. 
Household spending growth has been particularly solid in 2015, 
with purchases of new motor vehicles especially strong.
    Job growth has bolstered household income, and lower energy 
prices have left consumers with more to spend on other goods 
and services. Increases in home values and stock market prices 
in recent years, along with reductions in debt, have pushed up 
the net worth of households which also supports consumer 
spending.
    Finally, interest rates for borrowers remain low, due in 
part to the FOMC's accommodative monetary policy, and these low 
rates appear to have been especially relevant for consumers 
considering the purchase of durable goods.
    Other components of private domestic final purchases, 
including residential and business investment, have also 
advanced this year. Indeed, gains in real residential 
investment spending have been faster so far this year than last 
year, although the level of new residential construction still 
remains fairly low.
    And outside of the drilling and mining sector, where lower 
oil prices have led to substantial cuts in outlays for new 
structures, business investment spending has posted moderate 
gains.
    Turning to inflation, it continues to run below the FOMC's 
longer run objective of 2 percent. Overall, consumer price 
inflation as measured by the change in the price index for 
personal consumption expenditures, was only one-quarter percent 
of the 12 months ending in October.
    However, this number largely reflects the sharp fall in 
crude oil prices since the summer of 2014. Because food and 
energy prices are volatile, it is often helpful to look at 
inflation excluding those two categories, known as core 
inflation, which is typically a better indicator of future 
overall inflation than recent readings of headline inflation.
    But core inflation which ran at 1\1/4\ percent over the 12 
months ending in October is also well below our 2 percent 
objective, partly reflecting the appreciation of the U.S. 
Dollar which has pushed down the prices of imported goods, 
placing temporary downward pressure on inflation.
    Even after taking account of this effect, however, 
inflation has been running somewhat below our objective.
    Let me now turn to where I see the economy is likely headed 
over the next several years.
    To summarize, I anticipate continued economic growth at a 
moderate pace that will be sufficient to generate additional 
increases in employment, and a rise in inflation to our 2 
percent objective.
    Although the economic outlook, as always, is uncertain, I 
currently see the risk to the outlook for economic activity and 
the labor market as very close to balanced.
    Regarding U.S. inflation, I anticipate that the drag due to 
the large declines in prices for crude oil and imports over the 
past year-and-a-half will diminish next year. With less 
downward pressure on inflation from these factors, and some 
upward pressure from a further tightening in U.S. labor and 
product markets, I expect inflation to move up to the FOMC's 2 
percent objective over the next few years.
    Of course inflation expectations play an important role in 
the inflation process, and my forecast of a return to our 2 
percent objective over the medium term relies on a judgment 
that longer term inflation expectations remain reasonably well 
anchored.
    Let me now turn to the implications of the economic outlook 
for monetary policy.
    In the policy statement issued after its October meeting, 
the FOMC reaffirmed its judgment that it would be appropriate 
to increase the target range for the Federal Funds Rate when we 
had seen some further improvement in the labor market and were 
reasonably confident that inflation would move back to the 
Committee's 2 percent objective over the medium term.
    That initial rate increase would reflect the committee's 
judgment based on a range of indicators that the economy would 
continue to grow at a pace sufficient to generate further labor 
market improvement and a return of inflation to 2 percent, even 
following the reduction in policy accommodation.
    As I have already noted, I currently judge that U.S. 
economic growth is likely to be sufficient over the next year 
or two to result in further improvement in the labor market.
    Ongoing gains in the labor market, coupled with my judgment 
that long-term inflationary expectations remain reasonably well 
anchored, serve to bolster my confidence in a return of 
inflation to 2 percent, as the disinflationary effects of 
declines in energy and import prices wane.
    Committee participants recognize that the future course of 
the economy is uncertain, and we take account of both the 
upside and downside risks around our projections when judging 
the appropriate stance of monetary policy.
    In particular, recent monetary policy decisions have 
reflected our recognition that with the Federal Funds Rate near 
zero we can respond more readily to upside surprises to 
inflation, economic growth, and employment than to downside 
shocks.
    This asymmetry suggests that it is appropriate to be more 
cautious in raising our target for the Federal Funds Rate than 
would be the case if short-term nominal interest rates were 
appreciably above zero.
    Reflecting these concerns, we have maintained our current 
policy stance even as the labor market has improved 
appreciably.
    However, we must also take into account the well-documented 
lags in the effect of monetary policy. Were the FOMC to delay 
the start of policy normalization for too long, we would likely 
end up having to tighten policy relatively abruptly to keep the 
economy from significantly overshooting both of our goals. Such 
an abrupt tightening would risk disrupting financial markets 
and perhaps even inadvertently push the economy into a 
recession.
    Morever, holding the Federal Funds Rate at its current 
level for too long could also encourage excessive risk taking 
and thus undermine financial stability.
    On balance, economic and financial information received 
since our October meeting has been consistent with our 
expectation of continued improvement in the labor market. And 
as I've noted, continuing improvement in the labor market helps 
strengthen our confidence that inflation will move back to our 
2 percent objective over the medium term.
    That said, between today and the next FOMC meeting, we will 
receive additional data that bear on the economic outlook. 
These data include a range of indicators regarding the labor 
market, inflation, and economic activity.
    When my colleagues and I meet, we will assess all the 
available data and their implications for the economic outlook 
in making our policy decision. As you know, there has been 
considerable focus on the first increase in the Federal Funds 
Rate after nearly seven years in which that rate was at its 
effective lower bound.
    We have tried to be as clear as possible about the 
considerations that will affect that decision. Of course, even 
after the initial increase in the Federal Funds Rate, monetary 
policy will remain accommodative. And it bears emphasizing that 
what matters for the economic outlook at expectations 
concerning the path of the Federal Funds Rate over time.
    It is those expectations that affect financial conditions, 
and thereby influence spending and investment decisions. In 
this regard, the committee anticipates that even after 
employment and inflation are near mandate-consistent levels, 
economic conditions may for some time warrant keeping the 
target Federal Funds Rate below levels the committee views as 
normal in the longer run.
    So in closing, let me say the economy has come a long way 
toward the FOMC's objectives of maximum employment and price 
stability.
    When the committee begins to normalize the stance of 
policy, doing so will be a testament also to how far our 
economy has come in recovering from the effects of the 
financial crisis and the Great Recession.
    In that sense, it is a day that I expect we are all looking 
forward to. So thank you. Let me stop there. I would be pleased 
to take your questions.
    [The prepared statement of Chair Yellen appears in the 
Submissions for the Record on page 38.]
    Chairman Coats. Chair Yellen, thank you very much. It is a 
day we have long waited for, and hopefully your positive 
remarks today will bear that out and set us on the right trend, 
a positive trend.
    As we had discussed earlier in private, I want to raise 
this in public. While our trends are moving toward positive 
territory, the EU's trends seem to be moving into negative 
territory, with negative overnight interest in deposit rates, 
also additional thoughts about ways to stimulate their economy. 
They play a major role in the world economy.
    We see slowdowns in China. We see problems, significant 
problems in Brazil and throughout many emerging markets.
    My question is, how--that clearly, much of the world seems 
to be on a negative trend--how do you balance those two issues 
out relative to their impact on each other? And how does the 
FOMC take that into consideration in terms of their decision-
making?
    Chair Yellen. Thank you for that question. We have seen 
relatively weak growth in the global economy with different 
parts of the global economy faring differently, but relatively 
weak growth.
    The U.S. has enjoyed stronger growth in labor market 
performance. That weak growth shows through to the demand for 
U.S. exports, and it is one factor that has been depressing 
U.S. net exports.
    In addition, that difference in strength between the global 
economy and the U.S., and reflected also in different 
expectations about the path of monetary policy, as you noted 
the ECB has added stimulus, has taken additional actions today 
to provide further stimulus, while there is an expectation that 
the FOMC is coming closer to raising rates.
    That difference in expectations about monetary policy 
reflecting different underlying strength has led over the last 
year and a half to a substantial appreciation of the Dollar.
    So the combination of weak foreign growth and a strong 
Dollar has, both of those things have depressed our export 
growth and increased imports, because imports are cheaper.
    So that is a drag on the U.S. economy. But again, we have 
to remember that consumer spending, business investment, 
residential investment, account for 85 percent of total 
spending. And domestic spending is on a solid course. It has 
been growing around 3 percent.
    So the combination of solid domestic spending, coupled with 
a drag from abroad that has been operative and will continue to 
be operative, overall on balance that's led, and I think it 
will continue to lead, to growth that is somewhat above trend 
and on a continuing path of labor market improvement.
    But of course it is highly relevant to our decisions, and 
the strength of the Dollar is one factor that puts----means 
that monetary policy for the U.S. is more likely to follow a 
gradual path.
    Chairman Coats. We also have global uncertainty relative to 
our national security and the world security. We seem to be 
entering a period of time here where violence in one form or 
another, whether it's domestic, international, whether it's 
terrorist-oriented or connected to other means, you can lay 
awake at night thinking of scenarios where coordinated 
terrorist attacks, or just an acceleration of the kind of 
violence that we are seeing, the mass shootings and so forth 
and so on, could have a negative effect. I think would have a 
negative effect, on the economy relative to people's fear of 
spending, going out, enjoying sports entertainment, other types 
of entertainment, or going to malls and shopping, et cetera.
    To what--how does that factor into the Fed's thinking 
regarding its impact on the economy?
    Chair Yellen. So those risks are ones that we watch very 
carefully. And I would agree with you that it does have the 
potential to have a significant economic effect. I would not 
say that I see a significant effect at this point, although 
certainly in the aftermath of the financial crisis we have seen 
rather cautious behavior on the part of households and firms.
    And while I think there are many different factors that 
contribute to that cautious behavior, the crisis itself, the 
slow growth we've seen, many businesses talk about regulatory 
uncertainty, I would add geopolitical risk as a further factor 
that is causing that kind of cautiousness.
    Chairman Coats. Thank you. My time has expired, and so I 
can show a good example to my colleagues in terms of 
implementing the five-minute rule, I will call on our Ranking 
Member, Congresswoman Maloney.
    Representative Maloney. Thank you so much.
    Thank you so much, Chair Yellen. In the speech you gave 
yesterday at the Economic Club of Washington, you said, and I 
quote, ``Many FOMC participants indicated in September that 
they anticipated, in light of their economic forecast at the 
time, that it would be appropriate to raise the target range 
for the Federal Funds Rate by the end of the year.'' End quote.
    What are the longer term trends that would give you the 
most pause when deciding the timing of liftoff? For example, 
how would you assess tomorrow's jobs number in the context of 
its long-term trends?
    Chair Yellen. Well I think the two things that we focus on 
most in our evaluation are economic developments that affect 
the labor market, and also those that affect inflation. Our 
Congressional mandate calls for us to achieve maximum 
employment and price stability. And therefore in my testimony I 
tried to indicate that I do see there are ups and downs. Every 
series is noisy. We will be looking of course carefully at 
tomorrow's jobs report.
    What we are looking to see is a continued solid trend of 
job creation that, while we are close to full employment or 
maximum employment, at least to my mind there remains some 
margins of slack in the labor market. Part-time, involuntary 
employment remains too high. Labor force participation is a 
declining trend. But nevertheless, I think it is to some extent 
depressed by the fact that the job market hasn't been stronger.
    So we want to see the economy being on a path where we will 
continue to erode that labor market slack over time. So we will 
be looking very carefully at that.
    But we can't over-weight any particular number. We need to 
be looking at underlying trends in the data, and not over-
weighting any number.
    Inflation is also clearly very important. We articulated 
several years ago that the Committee has a 2 percent inflation 
objective. Inflation has been running significantly below that 
for some time. Just as we don't want to see persistent 
inflation above our objective, we also don't want to see 
persistent inflation below our 2 percent objective.
    So as I discussed, where I think much of it is transitory 
but we will be looking at data to see if our expectation that 
it's going to move up over time will be realized. And those are 
key pieces.
    Representative Maloney. Chair Yellen, two weeks ago the 
House passed legislation that would interfere with the Fed's 
operations in numerous ways. You wrote a sharply worded letter 
to Congressional leadership expressing your opposition to the 
bill, and I request unanimous consent to place that letter in 
the record.
    Chairman Coats. Without objection, we will do that.
    [The letter from Chair Yellen addressed to Hon. Paul Ryan 
and Hon. Nancy Pelosi appears in the Submissions for the Record 
on page 97.]
    Representative Maloney. And you said, and I quote, that it 
would, quote, ``severely damage the U.S. economy were it to 
become law.'' End quote.
    Could you describe why you believe that this legislation 
would be so damaging to the independence of the Fed?
    Chair Yellen. Thank you. Just briefly, this legislation 
would force the Fed to set monetary policy according to a 
simple rule, something called ``the Taylor rule,'' or a variant 
of it, that would tie short-term interest rates to only two 
economic variables: the current level of inflation and the 
current level of output.
    And while such rules are useful as reference points in 
thinking about monetary policy, to set the Federal Funds Rate 
in that way without deeper analysis of what is appropriate for 
the economy would be extremely damaging. At this point, that 
rule would call for a Federal Rules Rate well over 2 percent. 
And while we might be close to the point at which we should be 
raising it above zero, I think that if we were to follow that 
rule it would be damaging.
    But maybe more important, I want to say that this is an 
approach to monetary policy that severely threatens the 
independence of the Federal Reserve in making decisions free of 
short-term political pressures in the best long-run interests 
of the economy.
    It would subject us to regular GAO audits of our monetary 
policy decision-making in a way that Congress has decided 
repeatedly and over many years it is wise to insulate the 
operational decisions of the Federal Reserve from those short-
term political pressures.
    And I believe that almost all countries around the world 
have independent central banks. They have recognized it leads 
to stronger economic performance, and I believe this would be a 
step in interfering with the independence of the Federal 
Reserve in conducting monetary policy.
    Representative Maloney. Thank you. My time has expired.
    Chairman Coats. Congresswoman Maloney, we thank you. We 
understand that you have a series of votes in the House.
    Senator Klobuchar.
    Senator Klobuchar. Thank you very much.
    Thank you for being here, Chair Yellen. My first question 
is about income inequality. We have done studies on this when I 
was the Ranking Member of this Committee, and I know you have 
written extensively on trends.
    What do you see as the impact? And what do you think could 
be done to reverse the trend?
    Chair Yellen. So I do think there is a very disturbing 
trend toward rising income inequality in this country. 
Economists have looked carefully at many different factors that 
might be responsible for it, and these are factors that are not 
recent. They have been in operation at least since the early or 
mid-1980s.
    Two that stand out are, first, that technological change 
has been biased in the direction of increasing the demand for 
skilled labor, and diminishing the demand for less-skilled 
labor, and particularly people who engage in rather routine 
jobs that can be computerized.
    So technical change, and globalization also appears to have 
played a role in reducing the number of jobs especially in 
middle-income jobs that can be outsourced or automated away.
    So I think those are key factors. There are others, also, 
that people have studied. So let me just make clear that these 
trends are not ones that the Federal Reserve can address. The 
best contribution we can make is to try to achieve our goals, 
and particularly maximum employment and a job market where 
people who want to work can find jobs using their skills.
    But there are many things that Congress could consider. 
Clearly the return to education, the gap between high and low 
skill people is very high. And so policies that enable 
individuals to get appropriate education and training. I think 
those are important.
    There are many things I think that Congress could do that 
would make a positive difference here.
    Senator Klobuchar. So this is on us----
    Chair Yellen. It is, it is on you.
    Senator Klobuchar [continuing]. In terms of trying to do--
--
    Chair Yellen. We're trying to do the best we can.
    Senator Klobuchar. I agree. Shifting here, you and I have 
talked about this. We have a lot of community banks in our 
states and we know we're losing a number of them through 
consolidation. Dodd-Frank, which I strongly supported, has 
protected many of our consumers. But we know for some of the 
smaller banks it has been hard for them to do all the paperwork 
with this increasing regulatory complexity.
    Any ideas on what we should be doing there? Because I am 
sure you agree we need to have strong competition in the 
banking market, and we do not want the smaller players to just 
be eaten up.
    Chair Yellen. So I think that small community banks really 
are suffering from regulatory overload. And I think it behooves 
us to focus carefully on what we can do to try to diminish 
those burdens.
    Let me say that we recognize how high the burdens are in 
community banks, and for our own part we are heavily focused on 
trying to tailor our regulations so that it is appropriate. And 
we are looking carefully for ways that we can make life better 
for community banks, especially those that are well managed and 
have adequate capital.
    We have raised the threshold under our Small Bank Holding 
Company policy so that now banks under one billion dollars are 
not subject--the holding companies are not subject to our 
capital requirements.
    We are trying to do more of our supervisory work offsite, 
and to target our exams toward risk areas. We are engaged with 
the other agencies in the so-called EGRPRA process in which we 
are holding hearings and trying to identify things that we can 
do to reduce regulatory burden.
    We will be reporting to Congress, and I am sure there will 
be a number of things that come out of that review, that will 
enable us to take steps that will be helpful. But I do 
recognize there are significant burdens, and I think it 
behooves us to address them.
    Senator Klobuchar. Well thank you. I am going to put two 
other questions on the record. One is an issue that is getting 
a lot of attention, and that is the $50 billion asset 
threshold, and your views if that could be modified with the 
systemically important financial institution (SIFI) issue, and 
maybe someone else will ask it.
    And then the second issue is just your views on, I am a 
strong supporter of the infrastructure bill that we are about 
to vote on today, but I would imagine you might have concerns 
on how some of this was paid for. It was not actually a Senate 
side proposal, but that might affect the Federal Reserve.
    And I wish we had more time. Maybe someone else, one of my 
colleagues, can ask that question. But I will, in any case, put 
it on the record. So thank you.
    Chair Yellen. I appreciate that.
    Senator Klobuchar. Thank you.
    Chairman Coats. I am going to exercise a little bit of 
discretion here and allow you to answer that question, because 
I know that is on a number of our minds here. Just for those 
who understand the issue here, we are about to pass a Highway 
bill, which is long needed, but part of the pay-for is--comes 
from your bank at the Fed.
    And the word is that there is plenty of profit sloshing 
around there that eventually is going to come back to the 
Treasury anyway, so why don't we take some of it now as an 
early withdrawal.
    Do you want to respond to that?
    Chair Yellen. Yes. I appreciate the opportunity to do so. 
So the Highway bill, as I understand it, will take a large 
share of our operating surplus, which is part of the Federal 
Reserve's capital, to pay for this bill and not allow us to 
build it up.
    This concerns me. I think financing federal fiscal spending 
by tapping the resources of the Federal Reserve sets a bad 
precedent and impinges on the independence of the central bank.
    It weakens fiscal discipline. And I would point out that 
repurposing the Federal Reserve's capital surplus doesn't 
actually create any new money for the Federal Government. If 
you don't mind my quoting what CBO wrote in scoring this bill, 
they said as follows:
    ``It's important to note that the transfer of surplus funds 
from the Federal Reserve to the Treasury has no import for the 
fiscal status of the Federal Government. Although Federal 
budget accounting does not recognize additions to the Federal 
Reserve Surplus Account as revenues, such additions have the 
same effects as if they had instead been paid to the Treasury 
and were counted as revenues. A transfer of those funds would 
have no effect on national savings, economic growth, or 
income.''
    So in effect, by taking our surplus our holdings of U.S. 
Treasury securities declines, and the interest we would earn on 
those securities would be money that would be transferred every 
year for many years to come back to the federal coffers. And by 
taking the surplus now you are diminishing the stream of 
revenues into the federal budget over many years.
    Now a central bank differs from a commercial bank and the 
role of capital is somewhat different. But almost all central 
banks do hold some capital in operating surplus, and holding 
such a surplus or capital is something that I believe enhances 
the credibility and confidence in the central bank.
    And so on those grounds, as well, our policy--we don't have 
a lot of capital, but we have long had capital in surplus that 
I think creates confidence in our ability to manage monetary 
policy.
    Chairman Coats. Well thank you. I think it was important to 
get an answer to that question. It is so relevant right now. 
And there is the narrative that this is easy money. I think you 
have given us a pretty good response to that question.
    Senator Klobuchar. We appreciate it. Thank you.
    Chair Yellen. Thank you, very much.
    Chairman Coats. Senator Cassidy.
    Senator Cassidy. Madam Chair, thanks for being here. I 
share--so segueing off of Senator Klobuchar's concern about 
income inequality, you have written about the problem of those 
who are involuntarily working part-time. We have also looked at 
that.
    And knowing that you know this, but just for context to the 
further conversation, Purnay, would you hold up the poster, 
please, we have noted that--we have noted that this effect 
occurs in all quintiles, but disproportionately upon the lowest 
quintile.
    So if these are the five quintiles of workers in terms of 
income, actually post-recession most have returned in terms of 
the average number of hours per week except the bottom quintile 
is the one which is still lagging way behind. No dispute there, 
I'm sure. It is your data, so I am guessing you will agree with 
it.
    And my concern is that the CBO did a study pointing out the 
marginal tax rate that the Affordable Care Act essentially puts 
a marginal tax rate upon the employer providing employment.
    If someone is working full-time, obviously you've got to 
pay more to give them insurance and that effect is seen most 
profoundly upon that lowest quintile of workers. Would you 
agree with all that?
    Chair Yellen. Well, so I think the data you presented is 
interesting. I am not aware we have tried to monitor ourselves, 
but I know others have looked at the impact of the Affordable 
Care Act. I am not aware that it has had a very large effect on 
the phenomenon that we are talking about.
    It is of course worth monitoring going forward. You know, 
it is important to note that the degree of involuntary part-
time employment has declined quite a lot as the economy----
    Senator Cassidy. But not in that lowest quintile. Is that a 
fair statement? I mean, that data, which is from the Bureau of 
Labor Statistics, shows that it persists in that lowest 
quintile.
    Chair Yellen. It does persist, but it is diminished.
    Senator Cassidy. Relatively speaking, but still far greater 
than at this point in previous recoveries.
    Chair Yellen. Yes, I think it is disproportionately high.
    Senator Cassidy. Now let me ask, and I am sorry to 
interrupt but we don't--he is going to hold me to five 
minutes--I am looking at something from Valletta and Bengali 
from 2013 that suggests that rising costs for health benefits 
may prompt employers to shift towards part-time work to hold 
labor costs down, perhaps intensified by the ACA's requirement 
that medium-sized and large employers provide health benefits, 
et cetera.
    Now again intuitively if the cost of health benefits is 
added to the wages paid as total compensation, the marginal 
effect of increasing the cost for health benefits for the lower 
quintile is going to be greater than the marginal effect for 
the upper quintiles.
    So I am just curious that, as much as you have looked at 
this, that is not something that you have noted. I will move 
on, if you just say, well, I haven't. But I would appreciate 
any further thoughts you have regarding that.
    Chair Yellen. I am not aware of any estimates of the size 
of it. Most significant-sized employers have covered and 
continue to cover their workers. So while there has been a lot 
of anecdotal discussion of this, I have not seen a study that 
shows that it is large.
    Senator Cassidy. Let me return to something you said 
earlier, that you implied that the Dollar will weaken over the 
coming year, because you said that both the price of oil, you 
imply, would begin to rise----
    Chair Yellen. I'm sorry? I did not mean to make a forecast 
about--I don't believe I did--I didn't make a forecast in terms 
of----
    Senator Cassidy. Well in terms of the inflationary 
pressure, you said that you thought that the downward effect 
upon inflation will be eased because of the kind of return to 
the norm, both----
    Chair Yellen. If I might, when the Dollar appreciates, 
while it is moving up that tends to push import prices down, 
which cuts inflation. But if the Dollar simply stabilizes at a 
new higher level, then inflation is no longer held down.
    So simply stabilizing the value of the Dollar, stabilizing 
at a new higher level----
    Senator Cassidy. Let me ask, will that----
    Chair Yellen [continuing]. Will diminish that effect.
    Senator Cassidy.--will that also apply--then once it 
plateaus, it still intuitively seems to me that our 
manufacturing is going to be negatively impacted.
    Chair Yellen. Yes, that is true. I mean, I think that the 
strong Dollar has been one of the factors, along with the cut 
in drilling activity, yes.
    Senator Cassidy. If the EU is planning, ECB is planning to 
stimulate, and we are sending signals that we are going to 
raise interest rates, it seems like we are creating the dynamic 
where the Dollar will continue to strengthen.
    Chair Yellen. Well the Dollar has strengthened quite a lot 
over the last year-and-a-half.
    Senator Cassidy. But do you anticipate that plateauing? Or 
do you anticipate that continuing? Because if it continues, you 
mention how the downward pressure on inflation eases once 
stabilized, but if they are stimulating and we are raising 
rates, it suggests that we might continue to rise.
    Chair Yellen. Well I believe much of that expectation is 
already built into the market and into exchange rates. So I 
think that that explains importantly why the Dollar has risen 
as much as it has.
    I wouldn't forecast--I wouldn't forecast where the Dollar 
is heading.
    Senator Cassidy. Thank you. I yield back.
    Chairman Coats. Just a comment off the side. But related to 
that, I noticed this morning that the Euro actually rose based 
on the decisions made by the ECB, which surprised me. But 
perhaps the thinking was that they were taking the right path 
to get the economy to a better position. I don't know if you 
want to just remark on that, but I just thought that was--I 
fully expected the Dollar to strengthen this morning against 
the Euro, and it didn't, based on what the ECB did.
    Chair Yellen. Just watching a little bit of this morning's 
events, my understanding is that the market expected some 
actions that were not forthcoming.
    Chairman Coats. That has always been the problem with the 
market, isn't it? We can never predict what it's going to do.
    Senator Heinrich.
    Senator Heinrich. Thank you, Chairman.
    And, Chair Yellen, welcome again. I want to kind of return 
to this line of questioning that Senator Klobuchar and Chairman 
Coats had touched on with infrastructure in particular.
    And I want to thank you for very diplomatically describing 
why it is a bad idea to pay for things in this way. I might be 
less diplomatic in my characterization of those types of pay-
fors, but I think it is very important that we, in our efforts 
to pay for things as important as infrastructure, have honest 
payments.
    One of the changes that was made along the way had to do 
with the exemption of community banks from that sort of 
structure. And at this point, Fed Member Banks with assets less 
than $10 billion will be exempted from the changes in the Fed 
Shared Dividend Rate that were included in the Highway Trust 
Fund bill.
    Community banks in New Mexico and across the country depend 
on the Fed Share Dividend for its solid return on capital 
investment. And I have been very vocal about how misguided it 
is to ask small community institutions to finance our Nation's 
infrastructure.
    Do you have any thoughts on what the impact could have 
been, especially given your previous comments today, on the 
regulatory burden on those institutions, had that change not 
been made to the pay-for?
    Chair Yellen. So I mean obviously there would have been a 
burden on those institutions. Something that worried me is that 
it might affect the incentives of many of those institutions to 
be members of the Federal Reserve, to be members of the Fed 
System. And I thought that was something that before one makes 
a change of that significance it is wise to think through more 
fully.
    Senator Heinrich. Do you think it would have any impact on 
their ability to--on the decision-making in terms of lending to 
small businesses that are on the margin of their business plan?
    Chair Yellen. That is difficult for me to say. I mean 
clearly there is a tax in that, but I don't know how 
significant that would be to lending decisions.
    Senator Heinrich. So shifting gears a little bit by just 
going back to interest rates, by potentially raising interest 
rates the Fed would endorse the idea that our economy is on a 
stable path towards full recovery.
    And I am interested in how this potential action may signal 
improving conditions for job creation in states like my own, 
especially given the fact that New Mexico and a number of other 
states have not experienced the same economic recovery as the 
country as a whole has.
    Do you have thoughts on that?
    Chair Yellen. Well there certainly are differences across 
states and localities in terms of how much the recovery has 
aided employment in those states. My expectation going forward 
is that the labor market and the economy will continue--the 
labor market will continue to improve, and eventually I think 
all states will see improvements as that occurs. But of course 
the exact industrial structure of a state can matter.
    But there probably have been improvements, substantial 
improvements, and I think the labor market will continue to 
improve over time.
    Senator Heinrich. So returning to an issue that a number of 
my colleagues have raised, just generally when you are looking 
at a situation where the FOMC is looking at increasing interest 
rates, but the actions of other central banks around the world 
are in a countervailing direction, how do you overall factor in 
the actions of those other central banks into the broad 
picture? And how does that impact your decision-making as to 
whether or not it is the right time to move forward?
    Chair Yellen. So we are trying to assess the overall U.S. 
economic outlook, and we need to factor in all the different 
elements that determine that. Our success in selling goods to 
the rest of the world, and the strength of our imports, that's 
an important determinant of the outlook. And when we have 
divergent monetary policies globally, it often means that there 
will be exchange rate movements that accompany that. We have 
seen that over the last year-and-a-half.
    And as I've said, the combination of the weak growth 
abroad, plus the movement in the Dollar, has been a factor that 
has been depressing net exports, and that has been a 
subtraction from growth. And I think it will continue to be 
going forward.
    So that is a negative. And of course it is something that 
makes us much more cautious in terms of raising rates. But 
still, 85 percent of spending on U.S. goods and services comes 
from consumers, investment spending, housing, and for very 
good, fundamental reasons there is greater strength there.
    So when we put it altogether, we are still seeing an 
overall picture of slightly above-trend growth, ongoing 
improvements in the labor market. You know, obviously there are 
risks there. There are risks that come from the global 
environment that we have monitored carefully and recognize, but 
overall I would say that the total--while there is this foreign 
weakness--overall, we are on a solid course.
    Senator Heinrich. Thank you.
    Chairman Coats. Senator Peters.
    Senator Peters. Thank you, Mr. Chairman.
    And thank you, Chair Yellen, for your testimony here today 
and the wonderful work that you do.
    Chair Yellen. Thank you.
    Senator Peters. I want to pick up a little bit on some of 
the comments you made on income inequality. And I realize that 
the Fed doesn't have the ability to alter that, but certainly 
you have to respond to that in terms of your policymaking and 
the effectiveness of your policy given some significant 
structural changes that are occurring in our economy as a 
result of the fact that a vast majority of people in this 
country have not seen increases in wages. The middle class in 
fact has been stagnant.
    And it seems to be a disconnect from some of the policy, or 
the theory I should say, that I remember learning years ago in 
economics that normally when you have increases in 
productivity, that productivity translates into higher wage 
levels.
    We have not seen that. In fact, in recent years we have 
seen that productivity has gone up significantly more than wage 
levels. And if you are looking at formulating monetary policy, 
you are looking at aggregate demand----
    Chair Yellen. Right
    Senator Peters [continuing]. And how you get that demand is 
income in the economy and wages. You mentioned that consumers 
are 80-plus percent of it. So the more money the consumers 
have, the stronger the economy is. And yet, if it is not 
growing from wages, then it has to grow from them taking on 
debt. And yet if we look at the fact that wages have been 
stagnant, and that actually in recent years consumers are 
starting to de-leverage, which is a different trend from what 
we saw before.
    You do not have those engines of growth, although in your 
testimony you mentioned there is a 3 percent increase in 
consumer spending. But I believe that is down from previous 
years, as well, where we saw 3\1/2\ or more in consumer 
spending per year, which led to higher GDP growth.
    We are seeing this long-term, many-year trend of lower 
wages, de-leveraging of debt, and the fact that most of all of 
the economic gains are only going to the very top of the income 
ladder. And the folks at the very top don't spend as much, 
consumer-wise, as folks in the middle class. There may be more 
resources available for investment and other types of uses of 
that cash. But how do you see this long-term trend of income 
inequality, how is that going to impact the ability for the Fed 
to be as effective as it may have been in past years using 
these tools when those things were in balance a lot more than 
what we are seeing right now?
    Chair Yellen. Well that is a great question, and you 
introduced a lot of different elements into it. Clearly the 
trends in income, or disposable income for households, are one 
of the most important factors determining consumer spending.
    And the fact that wages have been pretty stagnant for a 
number of years, I guess compensation has been growing in the 2 
to 2\1/2\ percent range, that that is something we have had to 
take account of in forecasting what the strength of the overall 
U.S. economy has been, and it is integral to our forecasts.
    But I guess I would say that job growth has been pretty 
solid now for a number of years. So disposable income, in spite 
of the fact that that wage growth has remained in that 2, 2\1/
2\ percent range, there has been a lot of job growth that has 
added to disposable income.
    So the saving rate moved up after the financial crisis, and 
it remains in positive territory and has been pretty stable. So 
the consumer spending we are seeing is not largely being 
supported by taking on additional debt. It is being supported 
by income that households are earning.
    As the economy progresses, the labor market strengthens 
further, I would expect to see some upward pressure on wage 
growth. Recently in measures of hourly compensation in average 
hourly earnings I think we have seen some welcome hints. It is 
tentative evidence. We don't know if it will last. But at least 
recent data does suggest some upward movement in wage 
increases.
    But over the last couple of years, the spending we have 
seen has been supported by income growth. So inequality 
definitely plays a role here, and of course we need to see 
sufficient wherewithal for households to spend in a way that 
generates a forecast of continuing growth.
    Senator Peters. Alright. Thank you.
    Chairman Coats. Senator Casey.
    Senator Casey. Mr. Chairman, thank you.
    Madam Chair, we are grateful for your testimony today, your 
presence here, and your public service. I will have just one 
question and I will submit a second for the record because of 
the limitations on time that we have today, and we have in the 
Senate as well.
    I wanted to say first that I was heartened by some of the 
numbers in the first page of your testimony that we all have 
heard here or there but we do not emphasize enough. The 
statement you made that the economy has created about 13 
million jobs since the low point for employment in early 2010. 
That is good news.
    Good news on the unemployment rate itself, which as you 
note peaked at 10 percent in October 2009, and declined to 5 
percent in October of this year. So, literally, cut in half.
    So that is good news. And I think we should emphasize that 
even as we highlight, or itemize some of the challenges with 
labor force participation rate, or folks really discouraged 
from seeking employment.
    The question I had, though, was more long term, and it 
really is just one question about steps that we should be 
taking, and steps that you might recommend for long-term 
competitiveness.
    One of the policy steps that I hope we could take, and we 
had a step in the right direction on early learning a couple of 
months ago when we voted in connection with an education bill 
on an amendment that was my amendment, which was the first time 
in a decade really where the Senate was on record voting on a 
substantial early learning commitment for the country.
    Just to summarize it, if every state signed up--and it 
would be optional--but if every state participated, we could 
have provided early learning to 3 million children at 200 
percent of the poverty level and lower. So a substantial new 
investment.
    We did not win. We did not prevail on that vote, but it was 
good to have a clarifying sense of where people stood.
    But I guess just my basic question is: What would you hope 
we would do on taking steps on long-term investments in a more 
competitive workforce?
    Chair Yellen. So let me say I think that one of the most 
disappointing aspects of U.S. economic performance is that the 
pace of growth and the pace of productivity growth have been 
very depressed. They have fallen very substantially from what 
we saw in pre-crisis times.
    Now the good side of it is, it has not taken very much 
growth to see a substantial improvement in the labor market. 
The bad way to read that complex set of facts--namely, not a 
lot of growth, quite a lot of jobs--is the productivity growth 
has been very slow. And, ultimately, long-term living 
standards, how well our children will do and whether or not 
they will have better lives than we have, really do depend on 
productivity growth.
    And thinking, then, I would say that Congress should put 
considerable attention into thinking about policies that could 
serve to speed the productivity growth in the economy, and 
education is one of the things that would head my list.
    The fact that we have seen such a large gap between the 
wages of more educated and less educated workers, that is a 
signal that there is a high return to investment in education, 
and making it more available.
    I know there are studies, many studies with respect to 
early childhood education that have particularly pointed to the 
importance of that in creating skills and better performance. 
But at all levels, at all levels education is important.
    In addition to that, I would say it is well documented that 
support for basic research and development is an important 
foundation for economic growth. And I would say policies to 
make entrepreneurship easier, and to encourage it. All of those 
are the kinds of things that are important to long-run trends 
in economic growth.
    Senator Casey. Thank you, very much.
    Thank you, Mr. Chairman.
    Chairman Coats. I am told the House of Representatives may 
be wrapping up its voting, and members may be coming back. With 
that, it gives us a little more time here. We know you have a 
cutoff time, and we will make sure we hit that. But if you are 
willing to stay a bit to see if members come back.
    Chair Yellen. Yes.
    Chairman Coats. I know Senator Cassidy would like to----
speaking of coming back. Congressman Delaney, thank you. You 
are up.
    Representative Delaney. Oh, wow. Okay. Good timing, indeed.
    Thank you, Chair Yellen, for the clarity of your testimony, 
but more importantly for your incomparable leadership of the 
Federal Reserve during this obviously particularly important 
time.
    I wanted to focus on your view as to the effect of higher 
rates, or let's say it differently, the first step towards 
raising interest rates will have on borrowing. Because the 
conventional wisdom is always that lower interest rates 
encourages more borrowing, because credit costs are cheaper.
    But we have had interest rates at such unusually low levels 
for such a sustained period of time that that has obviously 
been a bit of an anomaly in terms of historical rate patterns.
    And I have wondered if that has kind of psychologically 
changed people's perspective on borrowing, and if a return to a 
view that things are more normal, which is what I think many 
people would interpret an increase in rates would certainly 
signal, at the levels we are at now a modest increase in rates 
will have, you know, largely an inconsequential effect on debt 
service coverage. And the free option that people, borrowers 
have had. You have talked about how corporate investment is 
kind of moderate. New home construction is still below 
standard, or below where you would like it to be.
    So, you know, you worry that a lot of those decision makers 
have viewed the zero interest rates as kind of a free option. 
Well, you know, I don't have to do anything because they are so 
low and they seem to be low for a long period of time.
    So I guess my question is: As you look at a day when rates 
do go up--because that day will occur; as we all know, you were 
very clear about that; exactly when, none of us know yet, of 
course--but do you think that will encourage more credit 
formation, more borrowing? Which I personally think will be 
good for the economy because some of these people will start 
looking at rates differently.
    Chair Yellen. So a few things I would like to say. When the 
Fed takes its initial step in raising the target for the 
Federal Funds Rate, it is important to understand that that 
does not mean that there is some predetermined path----
    Representative Delaney. No.
    Chair Yellen [continuing]. Back to historically normal 
rates.
    Representative Delaney. I understand.
    Chair Yellen. So the notion that it should be----
    Representative Delaney. But it is still a signal.
    Chair Yellen [continuing]. Gradual. I mean, in general, 
higher levels of interest rates I think do tend to make 
borrowing more expensive and discourages it. But it will occur 
in the context of a stronger economy, with higher income where 
people are doing better. It's not the only thing that affects 
investment decisions or borrowing or spending decisions.
    So I would not expect to see borrowing go down, or lending 
go down when we raise rates modestly.
    Representative Delaney. Do you think it might encourage 
more borrowing?
    Chair Yellen. Well, one does often hear especially 
anecdotal evidence that I hear along the lines that you are 
suggesting, that there are people who do feel, I have a free 
option, rates will stay low for a long time. And if they see 
rates going up, there may be people who are on the fence who 
may decide now is the hour to act.
    So that is----
    Representative Delaney. So that would not surprise you as 
an outcome from this decision?
    Chair Yellen. It wouldn't surprise me as an outcome, but we 
would not be--that is a temporary effect, in a way borrowing 
from the future----
    Representative Delaney. And you are not making the 
decision----
    Chair Yellen. So I don't want to encourage the idea that I 
believe that higher rates in and of themselves would 
permanently tend to boost borrowing and spending.
    Representative Delaney. Right. One other quick question, if 
I can. Switching gears. Governor Carney gave a speech about two 
months ago where he talked about one of the long term risks to 
financial markets being climate change because it will cause a 
repricing of carbon-related assets and potentially the 
reinsurance industry around risk related to weather.
    Do you share some of those concerns? I know you don't have 
much time, so just a short answer.
    Chair Yellen. So I thought it was an extremely interesting 
speech. I cannot say that I am aware of work that we have done 
looking at that, but I think it is something that is worth--
certainly worth considering.
    Representative Delaney. Do you think you will be doing some 
work in that area?
    Chair Yellen. I will--it is something we can get back to 
you on and have a look on.
    Representative Delaney. Great. Thank you, Chair.
    Chairman Coats. Thank you.
    Senator Cruz.
    Senator Cruz. Thank you, Mr. Chairman.
    Chair Yellen, welcome. In the summer of 2008, responding to 
rising consumer prices, the Federal Reserve told markets that 
it was shifting to a tighter monetary policy.
    This in turn set off a scramble for cash which caused the 
Dollar to soar, asset prices to collapse, and CPI to fall below 
zero, which set the stage for the financial crisis.
    In his recent memoir, former Fed Chairman Ben Bernanke says 
that the decision not to ease monetary policy at the September 
2008 FOMC meeting was, quote, ``in retrospect, certainly a 
mistake.''
    Do you agree with Chairman Bernanke that the Fed should 
have eased in September of 2008, or earlier?
    Chair Yellen. Are you talking about 2008, or 2007?
    Senator Cruz. 2008.
    Chair Yellen. Um, I mean I think the Fed responded pretty 
promptly in easing monetary policy to the pressures that were 
emerging. And I mean I don't, I don't disagree with his 
analysis of a particular decision. But I certainly wouldn't say 
that that decision is what caused the financial crisis.
    And by December of 2008, the Federal Funds Rate had been 
lowered to zero.
    Senator Cruz. So when you say you don't disagree, does that 
mean you agree with Chairman Bernanke that it was a mistake?
    Chair Yellen. So I can't recall the exact passage that 
you're referring to, so before I say if I would agree I would 
like to have a chance to review exactly what he's said.
    Senator Cruz. Well I would be very interested if you would 
have the opportunity to review the passage and let the 
Committee know whether you agree with his assessment.
    Chair Yellen. Okay.
    Senator Cruz. I want to shift to a different Fed Chairman, 
which is Paul Volcker, who said in a speech before the Bretton 
Woods Committee last year, quote, ``By now I think we can agree 
that the absence of an official rules-based cooperatively 
managed monetary system has not been a great success. In fact, 
international financial crises seem at least as frequent and 
more destructive in impeding economic stability and growth.''
    Chairman Volcker went on to say, ``The United States in 
particular had in the 1970s an unhappy decade of inflation 
ending in stagflation. The major Latin American debt crisis 
followed in the 1980s. There was a serious banking crisis late 
in that decade, followed by a new Mexican crisis. And then the 
really big and damaging Asian crisis. Less than a decade later, 
it was capped by the financial crisis of the 2007 through 2009 
period and the Great Recession. Not a pretty picture.'' Now you 
have said, quote, ``It would be a grave mistake for the Fed to 
commit to conduct monetary policy according to a mathematical 
rule.''
    Do you agree with Chairman Volcker's characterization that, 
quote, ``the absence of an official rules-based cooperatively 
managed monetary system has not been a great success and has 
not been a pretty picture''?
    Chair Yellen. Well you have pointed to a large number of 
very damaging financial crises, and in that sense I do believe 
it was very important for us to take steps to have a stronger 
financial system, and one that is less crisis prone.
    I don't think that Former Chairman Volcker was proposing a 
rule-based monetary policy in the sense of following a simple 
mechanical rule. And I guess I would argue that many countries 
do have in essence rule-based monetary policy in the sense that 
most countries have inflation targeting regimes, and 
transparent monetary policies where the central banks are 
independent and spell out and are accountable to achieve an 
inflation objective.
    And the Federal Reserve has very much strengthened its 
transparency as to what our goals are, what our strategy is for 
trying to achieve those goals, and provided the public with 
very detailed forecasts of what policies we think are 
appropriate to achieve the goals that Congress has assigned to 
us, including a 2 percent inflation objective.
    And over the last 20 years, inflation has been highly 
stable, around 2 percent. So in that sense, even though we may 
not follow the Taylor Rule, or some simple mathematical 
formula, I believe we do have a rules-based monetary policy in 
the United States, or at least a systematic policy in the 
United States and many other countries, most other countries do 
as well.
    Senator Cruz. And one final question. In 2008, the Fed 
began paying interest on reserves. In the seven years since 
then, do you know how much in interest the Fed has paid to 
banks under that policy?
    Chair Yellen. It has been set at 25 basis points, and I 
don't have the exact numbers at my fingertips. But I want to 
say it is a critically important tool of monetary policy. It is 
a tool that all most certainly advanced countries' central 
banks have and rely on as a key tool of monetary policy.
    Senator Cruz. So what has the impact been of paying 
billions of dollars to those banks in the last seven years?
    Chair Yellen. It has helped us to set interest rates at 
levels that we thought were appropriate for economic growth and 
price stability in this country.
    Senator Cruz. Thank you.
    Chairman Coats. Senator Cassidy.
    Senator Cassidy. Madam Chair, I get to go again. A lot of 
turmoil in China. There was an earlier discussion about how 
obviously foreign markets are a part of how we judge our 
growth.
    China may be devaluing their currency. It seems like they 
have weakened their currency. I could go on on things you know 
better than I.
    What do you see as the stability of the Chinese market? And 
how does that impact us?
    Chair Yellen. So China has grown obviously very rapidly for 
a very long period of time, and in recent years has been on a 
general slowing trend for reasons that are entirely 
understandable. Namely, slower labor force growth; a reduction 
in the pace of investment growth; a desire that they have, 
which is in their own interest and one that we share, that 
their economy rebalance from such heavy dependence on trade as 
a source of growth to domestic consumption.
    And as they have moved toward the technological frontier, 
further progress in adopting technological changes tend to 
slow.
    Senator Cassidy. Are they truly attempting to increase 
domestic consumption? I always had a sense the way that they 
kind of encouraged savings and use those savings to, among 
other things, prop up their stock market, that their rhetoric 
says that they are attempting to increase domestic consumption 
but their policies do not seem to reflect that rhetoric.
    Chair Yellen. So my impression is that they are trying to 
rebalance their economy. Consumer spending is a smaller share, 
a far smaller share of their economy than consumer spending is 
of ours. And it has been growing rapidly.
    There are challenges that they have faced in trying to 
boost it, but I believe that that is a course that they are on 
that they regard as in their own best interest, and we would 
agree.
    Senator Cassidy. Okay. Changing subjects, by the way so you 
feel the turmoil we're currently seeing, and the threat that 
they might devalue their currency, just to be specific, you 
don't feel like that threatens our economy? And let me ask a 
secondary question: Are they attempting to, if you will, game 
it by increasing their exports by devaluing their currency, et 
cetera, et cetera?
    Chair Yellen. Well there was disruption last summer in 
financial markets when they made a decision to devalue the 
Renminbi by a couple of percent. I think, to put that in 
context, remember that the U.S. Dollar has been rising, has 
been appreciating significantly over the last year-and-a-half. 
And the Chinese currency has been linked to the U.S. Dollar. 
And so during that period, the Chinese currency had been 
strengthening rather substantially relative to many of its 
trading partners. And they made a modest adjustment of their 
Exchange Rate, but in a way that was arguably not well 
communicated and proved disruptive. And then they say very 
large capital outflows.
    I think they recognize that stability of their Exchange 
Rate is probably in their best interests. But ultimately would 
like to move to a more market-based and flexible system of 
Exchange Rate determination.
    Senator Cassidy. I wish you were their central banker. I'm 
not sure--but that's--I hope you're right.
    Secondly, in January of this year the economy actually 
slowed. I think growth actually became negative. At the time it 
was attributed to a slowdown in the energy market because oil 
prices had fallen, so energy states which produced a lot of 
jobs, and by the way jobs for those lower income less skilled 
workers that we have spoken much of here today.
    Now it seems as if that fell. Oil production rose a little 
bit, for a variety of reasons. And now it appears that oil 
production is decreasing once more. The rig counts are falling. 
My State is impacted by this. Any comments upon how this 
shedding of jobs in the exploration and production component of 
the energy industry is going to impact our economy?
    Chair Yellen. Well we have seen a huge decline in oil 
prices for reasons pertaining to both huge increases in supply 
and perhaps some slowing in demand. It has had an enormous 
impact on drilling activity, on jobs in that sector, and that 
has been one of the things that has been holding back growth.
    Senator Cassidy. So even though we have gotten some benefit 
for consumer spending in terms of employment, now going forward 
as those jobs are further shed what impact do you feel like 
that has upon our growth?
    I am struck that your forecast is that the economy is going 
to continue to grow at this kind of 2.5 percent rate, not the 
3\1/2\ percent we had under Reagan and Clinton, but this kind 
of 2.5 percent. But if we are shedding all these jobs in the 
industry which provides such a tremendous number of jobs for 
less skilled workers, it seems as if that endangers even this 
2.5 percent growth we have.
    Chair Yellen. Well remember that we have been creating 
roughly 200,000 jobs a month for the entire year.
    Senator Cassidy. I was told once that it actually takes 
about 270,000 jobs a month to both bring back into employment 
those who are currently unemployed, to take care of those--but 
who would prefer to work, and because our labor participation 
market is so low--for those newer workers who are entering the 
market, to employ them, as well as to maintain full employment 
for those currently, I'm struck that something I read speaks of 
those 20 to 25-year-old workers being underemployed, a higher 
rate of unemployment among those.
    So all this to say, 210,000 a month, is that adequate to, 
to both increase job participation but also to account for 
those newly entering?
    Chair Yellen. So to simply provide jobs for those who are 
newly entering the labor force probably requires under 100,000 
jobs per month. And there is a downward trend in the labor 
force due to its aging.
    If labor force participation is stable, that helps to 
absorb people who are discouraged and who have dropped out. But 
that still requires quite a bit less than the 200,000 or so 
jobs----
    Senator Cassidy. But in terms of increasing back up to full 
employment--excuse me--our labor market participation is the 
lowest it has been since Jimmy Carter. And so whenever the 
President speaks about how great the unemployment rate is, I 
always think--or labor participation is as low as it has been 
since Jimmy Carter. So I guess my question is: How do we 
increase our labor participation, as well as take care of those 
who are entering now? Because we do not seem to be 
accomplishing that with even a 210,000 per month labor growth.
    Chair Yellen. Well we are on the path of declining labor 
force participation due to the aging of the work force, of the 
population. So I don't think that we should expect to see labor 
force participation move up a great deal over time.
    If it were simply stable over time, rather than on that 
declining trend, I think we would be absorbing people who were 
perhaps discouraged and in a stronger job market would move 
back. But 200,000 jobs a month is enough to make progress on 
those dimensions.
    Senator Cassidy. I yield back. Thank you.
    Chairman Coats. Thank you, Senator.
    We have had the return now of two of our key members of the 
Committee, and so we have a little bit of time. We have a hard 
12:00 stop, so we have time for both of you to ask your 
questions.
    Vice Chairman Tiberi. Thank you, Chairman.
    Thank you, Chair Yellen. Sorry about the vote. So in your 
comments when I was here earlier, you mentioned moderate growth 
within the economy. But yet earlier this week economists at 
Citigroup predicted not only a tightening of the U.S. labor 
market will force the Fed to increase short term interest rates 
more rapidly than was anticipated, they said it would result in 
an inverted yield curve which typically precedes a recession. 
And actually they said, the economists said, that they would 
assign about a 65 percent likelihood of a recession in the 
United States in 2016.
    Now 65 percent seems high to me, but I am not an economist, 
and I am not the Fed Chair. But zero risk may be too low, as 
well. So what would you assign a risk level of a recession next 
year?
    Chair Yellen. So I don't have a number for you, but a 
decision on the part of the FOMC to increase rates would only 
occur in the context where the committee believed that we were 
going to enjoy at least somewhat above trend growth so that we 
would see an improvement in the labor market. And of course 
there is always uncertainty that pertains to the economic 
outlook. There are always shocks that occur.
    The risks, the risks are on both sides, to faster growth 
and also slower growth. I can't put a number on the risk of a 
recession, but I absolutely would not see it as anything 
approaching 65 percent.
    Vice Chairman Tiberi. Okay. So assuming they either do 
something or don't do something with respect to interest rates, 
I think everybody would probably agree that regardless of what 
you do historically speaking interest rates would still remain 
at a historically lower level.
    What tools would you have? What tools would the Fed have if 
indeed the economists at Citi were right and we did go, the 
U.S. did go into a recession? What would you have to mitigate 
the effects of such a problem?
    Chair Yellen. So we have all of the tools that we 
previously used to try to combat a recession. First of all, if 
we had raised rates we would have the possibility of lowering 
rates.
    Important to markets in setting or determining longer term 
yields is expectations about the future path of policy. For a 
number of years, when we had--after rates had hit zero, we 
discussed the reasons that we thought it would be appropriate 
to keep rates at low levels. As it turned out, seven years 
almost now at zero rates. We discussed why we thought we would 
be keeping rates at low levels for a long time. And this market 
absorbed the notion that they will stay low for a long time and 
longer term yields came down.
    Of course we had asset purchases. We undertook substantial 
asset purchases in order to stimulate the economy. I think 
those purchases were successful, as well, in conjunction with 
that forward guidance in bringing down longer term rates, and 
those tools are still available.
    Vice Chairman Tiberi. Last question, real quick. I met with 
a group of Ohio bankers yesterday, and in December they brought 
up to me that the Basel Committee on Banking Supervision is 
planning to finalize new rules for the amount of capital that 
banks are required to hold against their trading book assets.
    We understand the current proposal could have a negative 
impact on the financial market liquidity, and significantly 
increase borrowing costs for Americans and American businesses.
    So by some estimates they told me the regulatory changes 
proposed by the committee would increase mortgage and auto 
loans by a percent-and-a-half, and home loans in America by as 
much as 6.3 percent.
    I am a former realtor, so that number just kind of popped 
out to me as a huge, huge problem. So there are real concerns 
in the lending community in Ohio that the Basel Committee's 
rules would make borrowing money more expensive and hinder 
growth in Ohio, as well as across the country.
    Does the Fed support the Basel Committee finalizing the 
proposal before these serious concerns are addressed? And will 
you be conducting your own cost/benefit analysis of what impact 
the rules would have in our country?
    Chair Yellen. I believe the Fed is taking part in those 
discussions, along with other regulators, but I am not aware 
that there is any thought--capital requirements on those 
positions did go up previously--I am not aware that there is 
any thought of changing those requirements in the manner that 
would have the kind of impact that you are discussing. But we 
can try to get back to you on this.
    Vice Chairman Tiberi. Thank you.
    Thank you, Chair, my time has expired.
    Chairman Coats. Thanks.
    Congressman Schweikert.
    Representative Schweikert. Thank you, Chairman Coats.
    Madam Chair, how are you? First, because I promised my 
team, we wanted to extend a thank you to your staff and your 
team for sort of tolerating many of our very technical written 
questions, and some of the responses.
    Chair Yellen. Thank you.
    Representative Schweikert. It is appreciated, because some 
of them are lengthy in nature.
    Chair Yellen. Thank you.
    Representative Schweikert. Can I take us in a slightly 
different direction? And, look, I am blessed to sit on 
Financial Services, so we get to cross each other's paths quite 
often.
    Mr. Tiberi a little while ago was discussing some of the 
indices and some of the economists who are saying, look, there 
are storm clouds on the horizon. Our team, we have been 
collecting information about world-wide debt, and does that 
cause any fragility to us in North America? And, you know, when 
I am seeing numbers that in the last nine years, what 
developing countries, $57 trillion new debt, which is about 
double their GDP growth. World-wide debt is, what, 300 percent 
of GDP.
    How do you from a policy standpoint, as you are looking at 
an environment of possibly future interest rate adjustments and 
the effects that will have on U.S. currency, at the same time 
with, let's face it, a developing country debt--I won't call it 
a crisis--but debt stress on the horizon.
    (a) How does that affect your decision-making?
    But (b), does it provide us any fragility to our economic 
growth, or even potential recession threats?
    Chair Yellen. Well it is certainly something that we take 
account of as we try to evaluate the global environment and the 
likely impact it could have on the United States. And it is 
something we look at, as well, as part of our financial 
monitoring to try to determine whether there are risks that 
could impact financial stability in the United States.
    Representative Schweikert. But will the Fed engage in 
certain bilateral agreements, or swap agreements with some of 
the, we'll call them, developing countries' reserve banks to 
actually help wall off a cascade effect?
    Those of us who remember the Tequila crisis and the others. 
What inoculations, what indemnification does the Fed engage in 
from a policy set?
    Chair Yellen. The Fed has swap agreements with a very small 
number of advanced countries' central banks where we think it 
is important to make sure that banks doing dollar-based 
business have access to adequate liquidity.
    We have no swap arrangements with emerging market 
countries. And the only reason that we engage in those swap 
market arrangements is to essentially protect financial 
stability in the United States. So there is no--I don't know 
the word you used, indemnification----
    Representative Schweikert. Yes, I was trying to find a way, 
inoculation, I could pick a few of them.
    Chair Yellen. I mean, these are risks that we consider in 
looking at U.S. financial markets. When we talk about debts, I 
think what has been discussed over the last year or so is the 
fact that private companies in many emerging markets have taken 
on Dollar-denominated debt.
    Representative Schweikert. Yes.
    Chair Yellen. I think my sense is that the banking systems 
and the financial sectors of those emerging markets have been 
much more carefully regulated in recent years and are less 
vulnerable. They have themselves less dollar denominated in 
short-term debts, but the companies and corporations in these 
countries do, have taken on a large quantity of debt.
    Representative Schweikert. Do you see cascade risks from 
developing countries in both sovereign debt loads and private 
debt loads in those countries that would affect our economy?
    Chair Yellen. It is a risk that we monitor. I would not at 
this point say that it is a very serious risk to the U.S. 
financial system.
    Representative Schweikert. Okay. And this is not meant to 
be sort of a one-off, another one-off question, but we were 
looking at some data about a month ago. And we'll call it 
Dollar/Euro contracts. And the movement away from their being 
settled in New York. And some of that I did not know was 
because of a regulatory or a cost situation; they were not 
being settled under our regulatory environment.
    Does that movement of Dollar-denominated contracts being 
settled overseas have any threat or difficulty to the Federal 
Reserve's ability to both see data but also influence 
regulatory and even the movement of those resources?
    Chair Yellen. So I am not aware that there is such a trend, 
but I will try to look at that and get back to you.
    Representative Schweikert. Okay. That is one of those 
technical written questions that we submit.
    Chair Yellen. Yes.
    Representative Schweikert. Mr. Chairman, I yield back. 
Thank you.
    Chairman Coats. Thank you. I just want to inform the 
members here, the Chair has a need to leave at noon and we want 
to honor that. I just talked to the Ranking Member and she 
agrees, which maybe means what we could do is, I want to give 
everybody a chance to get a question in, but could we limit it 
to one question and maybe keep it to two to three minutes so 
that everybody has an opportunity to do that before we run out 
of time?
    Dr. Adams, you are next.
    Dr. Adams. Thank you, Mr. Speaker, or Mr. Chair, and thank 
you Ranking Member Maloney for hosting the hearing and, Chair 
Yellen, thank you for being here.
    Based on the commentary I have heard from some of my 
colleagues made in the media claiming that the Federal Reserve 
over-reaches in its ability to adjust interest rates, it may 
not be clear that one of the most important factors impacting 
how the Federal Reserve will set interest rates is based on 
what is called the Equilibrium Real Interest Rate, which has 
been consistently low and maybe even below zero.
    And given that the Equilibrium Rate is very low, close to 
zero, what has not been receiving enough attention is how 
fiscal policy should play an increasing role in stimulating 
demand and providing an uptick to the economy.
    Since the Federal Reserve has limited tools on how it can 
impact economic recovery through monetary policy, including 
adjusting interest rates and implementing quantitative easing 
or forward guidance, can you speak to the impact that fiscal 
policy, particularly sequestration and the lack of support and 
certainty for certain tax expenditures, even financial tools, 
as the Export-Import Bank has had on the rate of recovery for 
our economy?
    Chair Yellen. Well let me say generally that there is 
evidence that the so-called Equilibrium Rate--this is a real 
rate of interest or inflation and adjusted rate of interest--
fell sharply after the financial crisis and remains quite 
depressed.
    And it is a factor that leads us to believe that even when 
we start raising rates that those rate increases will be 
gradual.
    Now in general when this rate comes down it means that 
rates are likely to be lower than the historical norm. And to 
the extent that we are operating in a low, even a positive 
interest rate environment, if the economy is hit by negative 
shocks, while we do have tools that we can use, our most sure 
and certain instrument of policy is the Fed Funds Rate.
    So when the average level of the Fed Funds Rate is low, we 
have less room to respond to negative shocks. So it would be 
helpful to be in an environment and give us more scope to be 
stimulating the economy and responding to adverse shocks if the 
average level of interest rates were somewhat higher. And I 
don't want to give you advice on fiscal policy--that is up to 
you--but a more stimulative fiscal policy is something that 
would in a sense enable the Fed on average to have somewhat 
higher level of rates, and then have more scope to respond to 
negative shocks.
    Dr. Adams. Thank you very much, Mr. Chairman. I will yield 
back.
    Chairman Coats. Congressman Beyer.
    Representative Beyer. Thank you, Mr. Chairman.
    And, Madam Chair, thanks so much. The recent FOMC 
projections have a medium- and longer-run unemployment rate of 
4.9 percent, which is very close to what we were always taught 
was maximum unemployment. But the broader labor market that the 
BLS uses, the U6, counts those who have recently given up 
looking for work, or are employed part-time for economic 
reasons, and the U6 stood at 9.8 percent in October, which is 
still higher than its average 9 percent during the last 
economic expansion from 2001 to 2007.
    So this suggests there may still be considerable slack in 
the labor market. So how important is the U6 and other labor 
tools? And basically, given the considerable slack suggested by 
this 9.8 percent, is this going to be the right time to raise 
rates?
    Chair Yellen. Well, so I would agree with you that U6 
remains elevated relative to its historic norms. It is higher 
than I would have expected based on our historical experience, 
given where the standard, or U3 unemployment rate is. And it is 
one of the things that leads me to believe that even though we 
are close to that 4.9 percent median, there does remain a 
margin of slack in the labor market.
    An important part of U6 that makes it that high is 
involuntary part-time employment. And while that has come down 
substantially, it is still hard to tell for sure because there 
is a trend over time toward more part-time employment in the 
U.S. economy. But I believe that it remains higher than it 
ought to be in a so-called ``full employment'' economy.
    In addition, as you noted, there are also discouraged and 
marginally attached workers, and a fair number of them. Again, 
that has come down, too. So I do see margins of slack, and I 
think they are reflected in that discrepancy on U6.
    Representative Beyer. Very good. Thank you, Madam Chair.
    Chairman Coats. Congressman Paulsen.
    Representative Paulsen. Thank you, Mr. Chair. And thank 
you, Chair Yellen, for being here. I appreciate your patience.
    I am going to follow up a little bit on what Vice Chairman 
Tiberi had mentioned. It is more along the cumulative impact 
that I had concerns with from a regulatory perspective, that 
the financial institution or the financial sector had to deal 
with.
    I am thinking of the recent adoption of capital surcharges 
and the total loss-absorbing capacity or TLAC proposal.
    Can you describe what all of these changes mean on a 
cumulative basis, both on the industry and on the economy, and 
in particular this cost/benefit idea or analysis. Have you 
done, or has it been talked about or discussed about doing a 
more comprehensive cost/benefit analysis of what the 
accumulation of all these regulations have on the industry in 
particular, and on the economy?
    I am just thinking from the perspective of this regulatory 
rulebook that has been in a constant state of revision, 
essentially, for the last six years. Can you see any benefit of 
pausing the process just to assess that cumulative impact of 
regulations on the economy?
    Chair Yellen. So I do think the regulation is having an 
important impact on the economy. And my assessment would be the 
most important impact it has had is to make the banking system 
and the financial system more broadly far safer and sounder and 
less crisis prone than it was prior to the financial crisis.
    You described two regulations, the so-called TLAC, or Long-
Term Debt Requirement, we proposed recently. And I believe you 
also mentioned capital surcharges.
    Now it is important to understand that those regulations 
only apply to the eight largest systemically important banks. 
In our regulations, we are trying to make sure that community 
banks that are not systemic are not responsible for the 
financial crisis, are not going to be hit with all of those 
regulations. But I do think it is critically important that the 
very largest and most systemic organizations need to be safer 
and sounder.
    They need to have more capital. They need to have more 
liquidity. And Congress told us that they need, in the event 
that they encounter difficulties or insolvency, we need to be 
able to resolve those institutions.
    We do not want the taxpayer bailing out those institutions 
again. And the SIFI surcharges, or higher capital standards 
means that they are much less likely to fail. It gives an 
advantage to medium and smaller sized institutions to the 
extent it burdens them in competing away their business, and 
that is safer.
    And if they did need to be resolved, that loss absorbency 
that comes from having long-term at the holding company is 
going to be something that is very important that would enable 
their resolution either under Title II or under the Bankruptcy 
Code.
    So I do think that, yes, there are some costs associated 
with these regulations, and certainly on parts of it we have 
done significant cost/benefit analysis. But really there is a 
huge benefit.
    I mean according to one estimate the cost to the United 
States of the financial crisis probably amounted to $16 
trillion. I've seen one estimate that puts it at $16 trillion. 
So having a safer and sounder financial system, by having more 
capital and liquidity and resolvability, is really I think 
clearly a net benefit.
    Representative Paulsen. Thank you, Mr. Chairman.
    Representative Grothman. Thank you. I hope this question 
has not been asked before.
    Your two publicly stated mandates are price stability and 
full employment. And insofar as when you answer my question on 
full employment, I want you to remember we have a lot of safety 
net programs, and a lot of people feel that we are not going to 
achieve any better than when we were at 4.9 right now because 
the safety nets are so generous, people are either not looking 
or working part time because they make so much more on that.
    But at least right now, price stability and full employment 
are supposedly where you want them to be. So given that we are 
in a period of price stability, full employment, and the 
banking system is recovered, can you explain to all the 
savers--and I used to represent older people; you know, you'd 
save money, a hundred grand in the bank, you live off the 
interest rate--could you explain to our savers and our elderly 
population why you continue to maintain a zero interest rate, 
given that it appears we are at full employment, given it 
appears our banks are stable, and given it appears we have no 
inflation?
    Chair Yellen. Well, so I would say that inflation is 
running, I think we are pretty close to maximum employment. 
Inflation is running below our 2 percent objective. And we 
certainly want to see that changed.
    But the economy is in the sense that you have described 
doing well. And that is the reason that it is a live option for 
us at our December meeting to discuss, as we indicated, whether 
or not it is appropriate to raise rates.
    But we do have to ask the question: What is a so-called 
``neutral rate'' at which the economy would continue to operate 
near full employment, and approach price stability?
    And a good deal of research, and I discuss some of this in 
a speech I gave just yesterday, suggests that the neutral rate 
of interest is very much lower than it has been historically. 
In real or inflation-adjusted terms, perhaps close to zero at 
present.
    So the level of interest rates that would support a 
continuation of these desirable trends is probably low. Of 
course when we were recovering from the Great Recession with 
high unemployment, to stimulate all the job creation we had we 
had to keep interest rates at very low levels, zero. We are 
contemplating raising them, but we have said that we expect 
that process to be gradual.
    And we want to make sure that, having achieved this 
progress in the labor market, we maintain it and don't put it 
in danger.
    Representative Grothman. You mean my whole lifetime, when 
older people put money in the bank and they were getting 3, or 
4, or 5 percent, we didn't know it but during that whole time 
we were putting an unnecessary drag on the economy?
    Chair Yellen. We had a different economy then, and many 
things are different domestically and globally than they were 
then.
    The rates of return that savers are able to get depend on 
the strength of investment demand, the strength of demand for 
borrowing the funds that savers are trying to provide, and we 
live in an economy globally as well as domestically where in 
some sense there is a great deal of savings relative to the 
demand for those funds.
    And that is a market force that shapes the reality that the 
Federal Reserve operates in, and conditions our ability to set 
rates that will be consistent with the attainment of Congress's 
objectives they have asked us to achieve.
    Representative Grothman. Okay, so people are saving more 
money now so we can't give them as much interest rates? They 
are saving more than they used to.
    Chair Yellen. Well if there were a huge demand for those 
funds, interest rates would be bid up to the levels that we are 
more accustomed to having experienced historically. But the 
demand for those funds is simply not strong enough to generate 
a level of interest rates that is more historically normal.
    Chairman Coats. Thank you, Congressman. Congressman Hanna 
has graciously waived his time, but I want to say, Madam Chair, 
that I think this has been a very instructive and timely 
hearing and we deeply appreciate your willingness to be with 
us.
    We have a common goal, those of us on both ends of 
Constitution Avenue. The Congress of the United States, along 
with the Executive Branch, but also the Federal Reserve. I 
think that common goal is to enact and implement sound policies 
that achieve a dynamic economy, that provides meaningful 
employment not only for our generation but meaningful 
employment for future generations.
    And the more we can work together, and the more we can 
share how we get to those common goals and pass that on to 
future generations, that clearly is a goal that has to be 
pursued with a lot of passion and a lot of intellect. And you 
provide both. So we thank you for that.
    And with that, the hearing is adjourned.
    (Whereupon, at 12:02 p.m., Thursday, December 3, 2015, the 
hearing was adjourned.)

                       SUBMISSIONS FOR THE RECORD

    Prepared Statement of Hon. Dan Coats, Chairman, Joint Economic 
                               Committee
    The committee will come to order. I would first like to welcome 
Congressman Tiberi to the committee, and congratulate him on his new 
position as Vice Chairman of the Committee. I look forward to working 
with him.

      I would now like to welcome Federal Reserve Chair Janet 
Yellen and thank her for appearing before the Joint Economic Committee 
today to share her outlook on the U.S. economy. This committee has a 
long tradition of receiving regular updates from the Chair of the 
Federal Reserve, and we are pleased to be continuing that tradition 
here today.
      The U.S. economy is in the midst of a long season of 
tepid growth. It has been six years since our last recession 
technically ended, and over that time, our economy has grown at a 
historically slow pace, with real GDP growth averaging 2.2 percent per 
year.
      Our labor market also continues to underwhelm. 
Unemployment has hovered around 5 percent for some time now, but this 
doesn't tell the whole story. The labor force participation rate 
continues to fall, standing today at a recovery low of 62.4 percent, 
and millions of workers in their prime earning years are either out of 
work or underemployed.
      Many developed countries in the global economy haven't 
fared much better, experiencing growth rates of less than 2 percent, 
high youth unemployment and general lack of opportunity.
      In part due to these subpar expectations in advanced 
economies, some have suggested that a 2 percent growth rate is the 
``new normal'' for our economy. All of us should view these low 
economic expectations as unacceptable.
      The Fed certainly has an important role to play in 
setting monetary policy, and that is where its focus should be. There 
will no doubt be discussion of interest rates during today's hearing, 
as accommodative monetary policy by the Fed has been the norm for some 
time now. However, we should be mindful that changing interest rates is 
not a long-term prescription for what ails our economy.
      It is the role of Congress and the President, not the 
Federal Reserve, to set the stage for greater economic growth.
      For example, in my home state of Indiana, things are 
looking up. Our labor force participation is trending upward, and our 
unemployment rate has fallen to 4.4 percent. This is remarkable given 
that Indiana's unemployment rate once topped the nation's recession 
high of 10 percent.
      Indiana has benefitted from pro-growth policies, and 
Congress should follow suit.
      We already know how to unlock the full potential of our 
economy: through free trade, tax reform, and elimination of regulatory 
barriers. Our commitment to putting our fiscal house in order will also 
go a long way toward creating certainty and confidence among both 
businesses and consumers.
      History confirms that it is up to public policymakers to 
enact laws that allow the private sector to thrive.
      If we do not succeed in furthering pro-growth policies, 
we may face an economic future defined by low expectations and 
diminished standards of living.
      I would like to again thank Chair Yellen for joining us 
today. I look forward to hearing her thoughts on the state of the 
economy and what we might expect in the coming months.

    I now recognize Ranking Member Maloney for her opening statement.
                               __________
                               
     Prepared Statement of Hon. Carolyn B. Maloney, Ranking Member
    Thank you, Mr. Chairman. Chair Yellen, I am pleased you are here 
today for this important and timely discussion. I look forward to your 
testimony in advance of the Federal Open Market Committee's meeting at 
which you will decide whether or not to raise the federal funds rate.
    I am interested in hearing your perspective on the following issues 
and others:

      What current trends do you find most important in helping 
you assess the short- and long-term challenges facing our economy?
      How can the Federal Reserve time future rate increases so 
we don't jeopardize the current economic recovery or hurt American 
families?
      What do you think of the legislation recently passed by 
the House that would compromise the independence of the Fed?

                  recovering from the great recession
    Before I turn to these issues, I think it's important to put this 
hearing in context.
    At the end of the Bush administration, just a little less than 7 
years ago, we faced what former Fed Chairman Ben Bernanke called ``[ . 
. . ] the worst financial crisis in global history, including the Great 
Depression.''
    We have come a long way since that economic cataclysm. And that 
progress is in no small part due to bold actions by the non-partisan, 
non-political Federal Reserve.

        In the month when President Bush left office we lost almost 
        820,000 private-sector jobs. Over the past year, we have gained 
        an average of 226,000 jobs per month. In fact, we have added 
        13.5 million private-sector jobs over a record-breaking 68 
        consecutive months.
        This chart shows this impressive growth--I'd like to enter it 
        into the record.

        In October 2009, unemployment reached 10.0 percent. Since then 
        it has been cut in half--it now stands at 5.0 percent.

        There were about seven unemployed workers for every job opening 
        in July 2009. Now there are 1.4 unemployed workers per job 
        opening, the lowest this ratio has been since early 2001.

        Real GDP fell 4.2 percent between the end of 2007 and the 
        second-quarter of 2009. But GDP has increased by more than 14 
        percent since then. Growth has been positive in 23 of the last 
        25 quarters.

        Average home prices dropped 19 percent between 2007 and 2011. 
        But now they are back up to where they were in 2007.

        About $17 trillion in wealth evaporated between the summer of 
        2007 and the beginning of 2009. All of those losses have been 
        recovered, and now total wealth is about $10 trillion higher 
        than it was at the onset of the financial crisis.

         the federal reserve played a key role in the recovery
    The Federal Reserve played an extraordinary role turning around the 
economy. The Fed quickly acted to lower rates to almost zero and has 
held them there for about seven years, which has been a principal 
factor in the economic recovery.
    The Fed did this despite the opposition of those who claimed that 
inflation was on the horizon--and who were later proven wrong.
    Then, having exhausted the conventional tools of monetary policy, 
the Fed deployed several rounds of quantitative easing aimed at keeping 
long-term rates low and further stimulating the economy.
    These efforts helped haul our country out of the depths of the 
Great Recession. But without the Fed's actions, things would be very 
different today.
    A recent study by economists Alan Blinder and Mark Zandi found that 
efforts by the Federal Reserve and the Obama Administration--with 
support from Democrats in Congress--dramatically reduced the severity 
and length of the Great Recession.
    Specifically, the report found that without their joint efforts:

      the recession would have lasted twice as long,
      the unemployment rate would have reached nearly 16 
percent, and
      we would have lost twice as many jobs, more than 17 
million.

    I'd like to enter the Blinder-Zandi report into the record.
                     congress hampered the recovery
    Ironically, Republicans in Congress made recovery more difficult.
    As former Federal Reserve Chairman Ben Bernanke wrote in his new 
book

        ``The economy needed help from Congress--if not from additional 
        spending (on roads and bridges for example), then at least in 
        areas such as retraining unemployed workers.''

    But the Republican-led Congress demanded deep spending cuts at a 
time when we needed aggressive fiscal policy to boost the economy.
    They ended up doing more to hurt than to help.
    And now Republicans complain that the economic recovery has been 
too slow.
                              the form act
    Now they have gone a step further. Two weeks ago, Republicans in 
the House passed legislation--the FORM Act--that would fundamentally 
hamper the Fed's ability to conduct monetary policy.
    It would limit the Fed's independence, for example, by forcing it 
to determine target interest rates using a mathematical formula, while 
ignoring a broad range of important economic indicators.
    Chair Yellen, as you have noted before, if the Fed had been forced 
to follow such a rule in recent years, quote ``[ . . . ] millions of 
Americans would have suffered unnecessary spells of joblessness over 
this period.''
    If the FORM Act had been a law during the time of the recession, 
the Federal Reserve would not have been able to take the aggressive 
steps needed to help pull our nation out of the greatest economic 
catastrophe since the Great Depression.
                               conclusion
    I hope today that we can focus on the critical issue before us--how 
the Federal Reserve should act to strengthen our economic recovery.
    But if necessary, we must clearly show that efforts to hamstring 
the Fed are misguided.
    Chair Yellen--thank you for appearing before the Joint Economic 
Committee today. I look forward to your testimony.
                               __________
                               
Prepared Statement of Janet L. Yellen, Chair, Board of Governors of the 
                         Federal Reserve System
    Chairman Coats, Ranking Member Maloney, and members of the 
Committee, I appreciate the opportunity to testify before you today. In 
my remarks I will discuss the current economic outlook before turning 
to monetary policy.
                          the economic outlook
    The U.S. economy has recovered substantially since the Great 
Recession. The unemployment rate, which peaked at 10 percent in October 
2009, declined to 5 percent in October of this year. At that level, the 
unemployment rate is near the median of Federal Open Market Committee 
(FOMC) participants' most recent estimates of its longer-run normal 
level. The economy has created about 13 million jobs since the low 
point for employment in early 2010, and total nonfarm payrolls are now 
almost 4\1/2\ million higher than just prior to the recession. Most 
recently, after a couple of months of relatively modest payroll growth, 
employers added an estimated 271,000 jobs in October. This increase 
brought the average monthly gain since June to about 195,000--close to 
the monthly pace of around 210,000 in the first half of the year and 
still sufficient to be consistent with continued improvement in the 
labor market.
    At the same time that the labor market has improved, U.S. economic 
output--as measured by inflation-adjusted gross domestic product (GDP), 
or real GDP--has increased at a moderate pace, on balance, during the 
expansion. Over the first three quarters of this year, real GDP is 
currently estimated to have advanced at an annual rate of 2\1/4\ 
percent, close to its average pace over the previous five years. Many 
economic forecasters expect growth roughly along those same lines in 
the fourth quarter.
    Growth this year has been held down by weak net exports, which have 
subtracted more than \1/2\ percentage point, on average, from the 
annual rate of real GDP growth over the past three quarters. Foreign 
economic growth has slowed, damping increases in U.S. exports, and the 
U.S. dollar has appreciated substantially since the middle of last 
year, making our exports more expensive and imported goods cheaper.
    By contrast, total real private domestic final purchases (PDFP)--
which includes household spending, business fixed investment, and 
residential investment, and currently represents about 85 percent of 
aggregate spending--has increased at an annual rate of 3 percent this 
year, significantly faster than real GDP. Household spending growth has 
been particularly solid in 2015, with purchases of new motor vehicles 
especially strong. Job growth has bolstered household income, and lower 
energy prices have left consumers with more to spend on other goods and 
services. Increases in home values and stock market prices in recent 
years, along with reductions in debt, have pushed up the net worth of 
households, which also supports consumer spending. Finally, interest 
rates for borrowers remain low, due in part to the FOMC's accommodative 
monetary policy, and these low rates appear to have been especially 
relevant for consumers considering the purchase of durable goods.
    Other components of PDFP, including residential and business 
investment, have also advanced this year. Indeed, gains in real 
residential investment spending have been faster so far this year than 
last year, although the level of new residential construction still 
remains fairly low. And outside of the drilling and mining sector, 
where lower oil prices have led to substantial cuts in outlays for new 
structures, business investment spending has posted moderate gains.
    Turning to inflation, it continues to run below the FOMC's longer-
run objective of 2 percent. Overall consumer price inflation--as 
measured by the change in the price index for personal consumption 
expenditures--was only \1/4\ percent over the 12 months ending in 
October. However, this number largely reflects the sharp fall in crude 
oil prices since the summer of 2014. Because food and energy prices are 
volatile, it is often helpful to look at inflation excluding those two 
categories--known as core inflation--which is typically a better 
indicator of future overall inflation than recent readings of headline 
inflation. But core inflation--which ran at 1\1/4\ percent over the 12 
months ending in October--is also well below our 2 percent objective, 
partly reflecting the appreciation of the U.S. dollar, which has pushed 
down the prices of imported goods, placing temporary downward pressure 
on inflation. Even after taking account of this effect, however, 
inflation has been running somewhat below our objective.
    Let me now turn to where I see the economy is likely headed over 
the next several years. To summarize, I anticipate continued economic 
growth at a moderate pace that will be sufficient to generate 
additional increases in employment and a rise in inflation to our 2 
percent objective. Although the economic outlook, as always, is 
uncertain, I currently see the risks to the outlook for economic 
activity and the labor market as very close to balanced.
    Regarding U.S. inflation, I anticipate that the drag due to the 
large declines in prices for crude oil and imports over the past year 
and a half will diminish next year. With less downward pressure on 
inflation from these factors and some upward pressure from a further 
tightening in U.S. labor and product markets, I expect inflation to 
move up to the FOMC's 2 percent objective over the next few years. Of 
course, inflation expectations play an important role in the inflation 
process, and my forecast of a return to our 2 percent objective over 
the medium term relies on a judgment that longer-term inflation 
expectations remain reasonably well anchored.
                            monetary policy
    Let me now turn to the implications of the economic outlook for 
monetary policy. In the policy statement issued after its October 
meeting, the FOMC reaffirmed its judgment that it would be appropriate 
to increase the target range for the federal funds rate when we had 
seen some further improvement in the labor market and were reasonably 
confident that inflation would move back to the Committee's 2 percent 
objective over the medium term. That initial rate increase would 
reflect the Committee's judgment, based on a range of indicators, that 
the economy would continue to grow at a pace sufficient to generate 
further labor market improvement and a return of inflation to 2 
percent, even following the reduction in policy accommodation. As I 
have already noted, I currently judge that U.S. economic growth is 
likely to be sufficient over the next year or two to result in further 
improvement in the labor market. Ongoing gains in the labor market, 
coupled with my judgment that longer-term inflation expectations remain 
reasonably well anchored, serve to bolster my confidence in a return of 
inflation to 2 percent as the disinflationary effects of declines in 
energy and import prices wane.
    Committee participants recognize that the future course of the 
economy is uncertain, and we take account of both the upside and 
downside risks around our projections when judging the appropriate 
stance of monetary policy. In particular, recent monetary policy 
decisions have reflected our recognition that, with the federal funds 
rate near zero, we can respond more readily to upside surprises to 
inflation, economic growth, and employment than to downside shocks. 
This asymmetry suggests that it is appropriate to be more cautious in 
raising our target for the federal funds rate than would be the case if 
short-term nominal interest rates were appreciably above zero. 
Reflecting these concerns, we have maintained our current policy stance 
even as the labor market has improved appreciably.
    However, we must also take into account the well-documented lags in 
the effects of monetary policy. Were the FOMC to delay the start of 
policy normalization for too long, we would likely end up having to 
tighten policy relatively abruptly to keep the economy from 
significantly overshooting both of our goals. Such an abrupt tightening 
would risk disrupting financial markets and perhaps even inadvertently 
push the economy into recession. Moreover, holding the federal funds 
rate at its current level for too long could also encourage excessive 
risk-taking and thus undermine financial stability.
    On balance, economic and financial information received since our 
October meeting has been consistent with our expectation of continued 
improvement in the labor market. And, as I have noted, continuing 
improvement in the labor market helps strengthen our confidence that 
inflation will move back to our 2 percent objective over the medium 
term. That said, between today and the next FOMC meeting, we will 
receive additional data that bear on the economic outlook. These data 
include a range of indicators regarding the labor market, inflation, 
and economic activity. When my colleagues and I meet, we will assess 
all of the available data and their implications for the economic 
outlook in making our policy decision.
    As you know, there has been considerable focus on the first 
increase in the federal funds rate after nearly seven years in which 
that rate was at its effective lower bound. We have tried to be as 
clear as possible about the considerations that will affect that 
decision. Of course, even after the initial increase in the federal 
funds rate, monetary policy will remain accommodative. And it bears 
emphasizing that what matters for the economic outlook are expectations 
concerning the path of the federal funds rate over time: It is those 
expectations that affect financial conditions and thereby influence 
spending and investment decisions. In this regard, the Committee 
anticipates that even after employment and inflation are near mandate-
consistent levels, economic conditions may, for some time, warrant 
keeping the target federal funds rate below levels the Committee views 
as normal in the longer run.
                                summary
    In closing, the economy has come a long way toward the FOMC's 
objectives of maximum employment and price stability. When the 
Committee begins to normalize the stance of policy, doing so will be a 
testament, also, to how far our economy has come in recovering from the 
effects of the financial crisis and the Great Recession. In that sense, 
it is a day that I expect we all are looking forward to.
    Thank you. I would be pleased to take your questions.
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