    [House Hearing, 115 Congress]
    [From the U.S. Government Publishing Office]

                             SOUND MONETARY POLICY

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

                                    HEARING

                                   BEFORE THE

                            SUBCOMMITTEE ON MONETARY

                                POLICY AND TRADE

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                         ONE HUNDRED FIFTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 MARCH 16, 2017

                                   __________

           Printed for the use of the Committee on Financial Services

                                Serial No. 115-4

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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                        JEB HENSARLING, Texas, Chairman

    PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking
        Vice Chairman                        Member
    PETER T. KING, New York              CAROLYN B. MALONEY, New York
    EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
    FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
    STEVAN PEARCE, New Mexico            GREGORY W. MEEKS, New York
    BILL POSEY, Florida                  MICHAEL E. CAPUANO, Massachusetts
    BLAINE LUETKEMEYER, Missouri         WM. LACY CLAY, Missouri
    BILL HUIZENGA, Michigan              STEPHEN F. LYNCH, Massachusetts
    SEAN P. DUFFY, Wisconsin             DAVID SCOTT, Georgia
    STEVE STIVERS, Ohio                  AL GREEN, Texas
    RANDY HULTGREN, Illinois             EMANUEL CLEAVER, Missouri
    DENNIS A. ROSS, Florida              GWEN MOORE, Wisconsin
    ROBERT PITTENGER, North Carolina     KEITH ELLISON, Minnesota
    ANN WAGNER, Missouri                 ED PERLMUTTER, Colorado
    ANDY BARR, Kentucky                  JAMES A. HIMES, Connecticut
    KEITH J. ROTHFUS, Pennsylvania       BILL FOSTER, Illinois
    LUKE MESSER, Indiana                 DANIEL T. KILDEE, Michigan
    SCOTT TIPTON, Colorado               JOHN K. DELANEY, Maryland
    ROGER WILLIAMS, Texas                KYRSTEN SINEMA, Arizona
    BRUCE POLIQUIN, Maine                JOYCE BEATTY, Ohio
    MIA LOVE, Utah                       DENNY HECK, Washington
    FRENCH HILL, Arkansas                JUAN VARGAS, California
    TOM EMMER, Minnesota                 JOSH GOTTHEIMER, New Jersey
    LEE M. ZELDIN, New York              VICENTE GONZALEZ, Texas
    DAVID A. TROTT, Michigan             CHARLIE CRIST, Florida
    BARRY LOUDERMILK, Georgia            RUBEN KIHUEN, Nevada
    ALEXANDER X. MOONEY, West Virginia
    THOMAS MacARTHUR, New Jersey
    WARREN DAVIDSON, Ohio
    TED BUDD, North Carolina
    DAVID KUSTOFF, Tennessee
    CLAUDIA TENNEY, New York
    TREY HOLLINGSWORTH, Indiana

                      Kirsten Sutton Mork, Staff Director
                   Subcommittee on Monetary Policy and Trade

                         ANDY BARR, Kentucky, Chairman

    ROGER WILLIAMS, Texas, Vice          GWEN MOORE, Wisconsin, Ranking
        Chairman                             Member
    FRANK D. LUCAS, Oklahoma             GREGORY W. MEEKS, New York
    BILL HUIZENGA, Michigan              BILL FOSTER, Illinois
    ROBERT PITTENGER, North Carolina     BRAD SHERMAN, California
    MIA LOVE, Utah                       AL GREEN, Texas
    FRENCH HILL, Arkansas                DENNY HECK, Washington
    TOM EMMER, Minnesota                 DANIEL T. KILDEE, Michigan
    ALEXANDER X. MOONEY, West Virginia   JUAN VARGAS, California
    WARREN DAVIDSON, Ohio                CHARLIE CRIST, Florida
    CLAUDIA TENNEY, New York
    TREY HOLLINGSWORTH, Indiana

                               C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        March 16, 2017...............................................     1
    Appendix:
        March 16, 2017...............................................    49

                                   WITNESSES
                            Thursday, March 16, 2017

    Allison, John, Executive in Residence, Wake Forest School of
      Business, and former Chairman and CEO, BB&T Corporation........     5
    Bivens, Josh, Director of Research, Economic Policy Institute....    11
    Goodfriend, Marvin, Friends of Allan Meltzer Professor of
      Economics, Tepper School of Business, Carnegie Mellon
      University, and former Senior Vice President and Policy
      Advisor, Federal Reserve Bank of Richmond......................     7
    Taylor, John B., Mary and Robert Raymond Professor of Economics,
      Stanford University, and former Under Secretary of the Treasury
      for International Affairs......................................     9

                                    APPENDIX

    Prepared statements:
        Allison, John................................................    50
        Bivens, Josh.................................................    53
        Goodfriend, Marvin...........................................    67
        Taylor, John B...............................................    75

                  Additional Material Submitted for the Record

    Barr, Hon. Andy:
        Chart entitled, ``America's Constrained Economic Potential''.    81
    Davidson, Hon. Warren:
        Chart entitled, ``Federal Debt as % of GDP''.................    82

                             SOUND MONETARY POLICY

                                  ----------

                            Thursday, March 16, 2017

                 U.S. House of Representatives,
                               Subcommittee on Monetary
                                      Policy and Trade,
                               Committee on Financial Services,
                                                       Washington, D.C.
        The subcommittee met, pursuant to notice, at 10:08 a.m., in
    room 2128, Rayburn House Office Building, Hon. Andy Barr
    [chairman of the subcommittee] presiding.
        Members present: Representatives Barr, Williams, Huizenga,
    Pittenger, Love, Hill, Emmer, Mooney, Davidson, Tenney,
    Hollingsworth; Moore, Foster, Sherman, Green, Kildee, Vargas,
    and Crist.
        Ex officio present: Representatives Hensarling and Waters.
        Chairman Barr. The Subcommittee on Monetary Policy and
    Trade will come to order.
        Without objection, the Chair is authorized to declare a
    recess of the subcommittee at any time.
        Today's hearing is entitled, ``Sound Monetary Policy.'' I
    now recognize myself for 5 minutes to give an opening
    statement.
        Before joining our Financial Services Committee in 2013, I
    had to learn a new language: ``Fedspeak.'' One of the first
    words I learned was ``headwinds.'' Translated for the
    layperson, ``headwinds'' means unconventional monetary policies
    promised a lot, but delivered little on what really matters:
    economic opportunity for every American.
        In recent testimony, Federal Reserve Chair Yellen cited
    slow productivity as a headwind. Specifically, she said, ``We
    are not able to address every problem. If there is slow
    productivity growth in the United States, that is not something
    that the Fed has much ability to address.''
        Sharing a widely held sentiment among economists, The Wall
    Street Journal recently characterized slow productivity growth
    as, ``the biggest factor affecting Americans' living
    standards.'' Yet, Chair Yellen questioned if there is slow
    productivity growth.
        The data are clear. Productivity growth is remarkably slow,
    yet Chair Yellen chalked it up as a headwind. According to her
    testimony, that is not something that the Fed has much ability
    to address. I disagree. Almost 8 years out of recession, the
    absence of sound monetary policy continues to weigh on
    productivity growth and the economic opportunities it can offer
    to every American.
        Testimony from today's hearing will show us a better way.
    The longer we go without a reliable strategy for monetary
    policy, the longer households and businesses will continue
    losing their direction in the thickest of economic fogs.
        Absent clear price signals about when and where goods and
    services can find their most promising opportunities,
    productivity will continue to fall well short of potential.
        Today's monetary policy is data-dependent in name only. It
    is a policy that never tells us what data matter, let alone how
    they matter. It is a policy that continues to leave households
    and businesses scratching their heads about when and where the
    oracles from the Fed's Eccles Building will turn next. It is a
    policy that creates uncertainty instead of clarity. It is a
    policy that has weighed on productivity from its start a decade
    ago.
        Slow productivity growth cannot be dismissed as an
    unavoidable headwind. It is time to ditch the Fedspeak.
    Productivity demands clear monetary policy.
        The longer the Fed continues to leave us guessing about
    where policy will move next, the longer the malaise of
    ``Obamanomics'' will linger.
        As the chart on our hearing room screen shows, each year of
    President Obama's Administration saw the ceiling on economic
    opportunity drop sharply. For 5 straight years, productivity
    did not rise above 1 percent.
        Unfortunately, as the Fed's policy fog kept getting
    thicker, Americans saw their untapped potential grow faster
    than their economy. Ignoring this clear signal, that
    unconventional monetary policy had stopped working, if it
    worked at all, the Fed decided last December to extend its
    unprecedented streak of sub 1 percent policy rates to almost
    100 straight months.
        For years, so-called forward guidance has served better as
    a fog machine than a clear communication program. Throughout,
    the Fed told us that policy rates will gradually rise to more
    conventional levels, but always found a last-minute reason to
    pull back.
        According to The Wall Street Journal, ``Bad news delayed
    rate increases, but good news didn't speed them up.'' Central
    bank officials began in both 2015 and 2016 projecting three to
    four quarter percentage point rate increases and in both years
    delivered just one, in December.
        A few weeks ago, the Fed decided to hide yet again behind
    policies that depend on the data in name only. This time while
    central bankers have been characterized as loathe to tighten
    policy when the market is not anticipating such a move, the Fed
    did just that.
        Absent any substantive change in the data for inflation or
    employment, the Fed surprised again by spiking expectations for
    what became yesterday's rate increase.
        The Committee on Financial Services is dedicated to a set
    of reforms that will blow away the lingering policy fog,
    reforms that will bring monetary policy back into the sunlight
    so that transparency and discipline can help all Americans
    finally get back on track.
        I look forward to testimony from our panel of accomplished
    business, policy, and academic leaders. Their counsel will help
    us not only jettison a decade of interest rate and balance
    sheet policies that distort economic decisions and threaten
    policy independence, but also establish a reliable strategy
    that supports economic opportunity for every American.
        The Chair now recognizes the ranking member of the
    subcommittee, the gentlelady from Wisconsin, Ms. Moore, for 3
    minutes for an opening statement.
        Ms. Moore. Yes, sir. Good morning, everyone. Let me, first,
    congratulate our brand new Chair, Mr. Barr, for his elevation
    to this position. I certainly look forward to working with you.
        And I want to thank our witnesses for taking the time to be
    here again. I always find it very instructive and informative.
    Some of you are old friends, familiar faces, and I look forward
    to our hearing today.
        The Federal Reserve was forced to take unconventional
    actions to address the serious nature of the fiscal downturn.
    And I am glad they did. I was here, Mr. Barr, when Hank Paulson
    walked in and said, ``Give us $700 billion or else we will have
    no economy.''
        And it seems clear when we were losing 700,000 jobs a
    month. And it seems clear that in the macro sense, the policies
    implemented by the Fed have been successful. The current
    unemployment rate is 4.7 percent, and at the height of the
    crisis in 2009, the first year of President Obama's tenure, it
    was a full 10 percent.
        The GOP suddenly seems thrilled about these job reports
    that are the same or less to what we saw throughout the Obama
    Administration, steady growth in new jobs. And for the first
    time in many years, the Fed raised its short-term interest
    rate, signaling more to come, a judgment that our economy is
    finally healthier. Thank you, Barack Obama.
        Unfortunately, the recovery has been uneven. The gains made
    by the comfortable have not found their way to the afflicted.
    And this is largely due to austerity measures. We want to talk
    about how to make the recovery make its way to all of our
    citizens.
        This committee should unanimously urge President Trump to
    restore the Obama rule that reduced the annual premium FHA fee
    for the first-time home buyers. It was amazing that his first
    act was to nick low- income homeowners.
        We also need to get additional help to help homeowners in
    distressed areas that have not seen their home values rise. A
    big complaint that we get is that we, ``rescued the financial
    markets and left homeowners under water,'' people who were
    paying their mortgages every month.
        We also need to protect retirement savers by urging the
    Administration to not delay the implementation of a rule
    requiring investment advisors to put their clients' financial
    interests ahead of their own. What is wrong? Who could possibly
    object to a best interest standard?
        We should reject Trump care, a massive tax cut for the top
    one-tenth percent masquerading as a healthcare bill, a bill
    that will further drive damaging inequality, while making
    millions of Americans sick and poor, if not dead.
        We should also reject Trump's budget, a budget that invests
    in weapon systems but neglects humans. A missile does a lot for
    this country. But Meals on Wheels or the Center for Disease
    Control does so much more.
        Thank you, and I yield back. Did I mess up on my time? What
    did I do? No? I have 2 more minutes.
        Chairman Barr. Does the gentlelady yield back?
        Ms. Moore. Yes.
        Chairman Barr. I thank the gentlelady for her kind words,
    and I look forward to working with her as well.
        The gentleman from Texas, Mr. Williams, the vice chairman
    of the subcommittee, is now recognized for 1 minute for an
    opening statement.
        Mr. Williams. Thank you, Chairman Barr and Ranking Member
    Moore. I wanted to take a moment to first congratulate you on
    today's hearing, marking the first as our new subcommittee
    Chair. I am proud to be serving with you this Congress and I
    look forward to a very productive year.
        Mr. Chairman, I would be remiss if I didn't mention that
    last night, at midnight, the debt limit was reset, and
    according to the U.S. Treasury, the United States currently
    owes $19.85 trillion in debt. Now more than ever a sound
    transparent monetary policy is needed to ensure our economy
    doesn't continue to underperform.
        It is vital that we create certainty for the American
    economy, which has grown tired of guessing where monetary
    policy is headed. Our economy needs an effective strategy that
    works for all Americans and doesn't pick winners and losers.
        I look forward to hearing from our witnesses today, and
    with that, Mr. Chairman, I yield back.
        Chairman Barr. The gentleman yields back.
        The Chair now recognizes the gentleman from Illinois, Mr.
    Foster, for 1 minute.
        Mr. Foster. Thank you. I would like to join my colleagues
    in congratulating Chairman Barr and thanking our witnesses for
    being here today.
        One of the only really encouraging developments in the
    quality of our political debate recently is the acknowledgement
    that economic growth is not a single value function of monetary
    policy. In Chair Yellen's recent speech, she emphasized
    technology and scientific progress as crucial inputs to
    economic growth.
        Some studies indicate that over 50 percent of all economic
    growth since World War II has been due to technological
    progress, much of it achieved through federally-funded
    research. And this highlights the shortsightedness of the Trump
    Administration's 15 to 20 percent proposed cut in Federal
    research and development, in particular in science.
        And so, that is going to have a long-term drag on our
    economic growth, and I think that people should pay attention
    to that.
        Thank you, and I yield back.
        Chairman Barr. The gentleman yields back.
        The Chair now recognizes the gentleman from California, Mr.
    Sherman, for 1 minute for an opening statement.
        Mr. Sherman. I welcome the new Chair and disagree with him
    profoundly in criticizing the Fed. To put up a chart showing
    the difference between actual economic growth and what was
    theoretically possible, is to argue for lower interest rates.
        The chairman then condemns the Fed for having interest
    rates that are too low. You can't win for losing. The fact is,
    I think the Fed has done a reasonable job. I have pushed for
    rates to be about a quarter point lower than the Fed has called
    for and regretted the recent decision.
        But the idea that we can eliminate Fed decision-making and
    instead have some published formula: plug in interest rates
    here, plug in the stock market there, and automate the Fed's
    Open Market Committee out of business or to take any discretion
    out of it, I think, overrates what can be done with an
    algorithm.
        And I yield back.
        Chairman Barr. The gentleman yields back.
        Today, we welcome the testimony of Mr. John Allison, former
    chairman and chief executive officer of BB&T Corporation,
    former CEO and president of the Cato Institute, and the current
    executive in residence at the Wake Forest School of Business.
        Dr. Martin Goodfriend is the Friends of Allan Meltzer
    professor of economics at Carnegie Mellon's Tepper School of
    Business, and the former senior vice president and policy
    advisor at the Federal Reserve Bank of Richmond.
        Dr. John B. Taylor is the George P. Schulz senior fellow in
    economics at the Hoover Institution, the Mary and Robert
    Raymond professor of economics at Stanford University, and also
    served as senior economist on President Ford's and President
    Carter's Council of Economic Advisors, as a member of President
    George H.W. Bush's Council of Economic Advisors, and as Under
    Secretary of the Treasury for International Affairs.
        And Dr. Josh Bivens is the director of research at the
    Economic Policy Institute.
        Each of you will be recognized for 5 minutes to give an
    oral presentation of your testimony. And without objection,
    each of your written statements will be made a part of the
    record.
        Mr. Allison, you are now recognized for 5 minutes.

    STATEMENT OF JOHN ALLISON, EXECUTIVE IN RESIDENCE, WAKE FOREST
         SCHOOL OF BUSINESS, AND FORMER CHAIRMAN AND CEO, BB&T
                              CORPORATION

        Mr. Allison. Thank you, Mr. Chairman. It is a pleasure to
    be here. Thank you, committee members. At the time of the most
    recent financial crisis, I was the longest serving CEO of a
    major financial institution in the United States. I went
    through three financial crises.
        In my opinion, as an inside observer, I think in all cases
    the Federal Reserve made the crises much worse than they needed
    to be. The Federal Reserve has a tendency to overreact in bad
    times, creating bubbles in the economy.
        And then as they realize they made bubbles, they try to
    correct, raising rates too rapidly, which leads to another
    correction. I think they significantly contributed to the
    magnitude of the corrections.
        In a free market, there would be economic corrections.
    However, markets would correct much more rapidly. The Fed tries
    to prevent those corrections and actually creates bigger
    problems in the long term.
        A classic example of this is what happened in the early
    2000s where we were having a minor correction. We needed one.
    Housing prices were already 10 percent too high, based on
    incomes. The Fed didn't want to have a correction. I think for
    political, or as I call it emotional reasons, so that they
    wanted to look good. And they created negative real interest
    rates.
        That actually sponsored and created bubbles in the housing
    market, along with Freddie Mac and Fannie Mae, but there were
    also bubbles in commodities. There were bubbles in the
    automobile market. There were bubbles in the stock market. You
    can't get all those bubbles without monetary policy because
    where is the money coming from? The Fed controls monetary
    policy and they control regulatory policy and the combination
    of the two led to those bubbles.
        It is not surprising that the Fed makes these mistakes
    because their job is, in fact, impossible. One of the few
    things that is agreed to in monetary economics is that price
    fixing does not work. And that is essentially what the Fed is
    doing, is price fixing of interest rates.
        And what makes this problem particularly difficult is that
    interest rates are one of the most complicated, integrated, and
    important prices in the world. In fact, you could argue that
    because the U.S. dollar is the world's reserve currency, its
    interest rate has a profound effect on the global economy.
        Interestingly enough, I have talked to a number of Fed
    Governors over the years and asked them if they thought price
    controls were good things, if price fixing was a good thing.
    And to a person, they have all said no. But somehow affixing
    interest rates, which is a price, makes sense.
        I asked them if a group of bureaucrats in Washington, D.C.,
    could determine the price of eggs or chickens or automobiles,
    and to a person, they all said no. And I would argue that any
    of those prices would be easier to figure out than the proper
    price of money, without the information that markets provide.
        Markets provide the information to drive prices. And when
    bureaucrats arbitrarily drive prices, there are many negative
    impacts. I do strongly believe that a rule-based system would
    improve the performance. It is not a perfect answer. I think
    the discretion of bureaucrats who have lots of different
    motivations, if you look at public choice theory leads to bad
    outcomes.
        I am a supporter of the Taylor Rule. I particularly like
    the nominal GNP rule. I think that discipline would be very
    important.
        I think it would be very important, by the way, to business
    decision-makers, to banks because we are worried about what
    Janet Yellen had for breakfast this morning when she meets
    because that might influence her policy.
        We don't know how to do a calculation when the Fed can
    arbitrarily set rates. If you had a formula, that piece of
    information would be very valuable to the marketplace.
        By the way, for those who support the Fed and yet claim to
    be supporters of the working class, they should look at the
    massive redistribution the Fed has achieved in this recent
    correction. By holding interest rates below what market rates
    would be, they penalize working-class savers.
        When you run a bank, the people who have money in the bank
    are not wealthy people. They are working-class people who buy
    CDs. They don't have stocks. They have CDs and the low interest
    rates have redistributed an estimate of $1 trillion from the
    working class to wealthy individuals who own stocks.
        I think that is a very destructive policy, and it probably
    has had an impact on politics and how people think about what
    is going on. There is a sense of injustice that comes from
    that. And I think people should recognize that the Fed has
    played a very significant role in that regard.
        During the recent financial crisis, they also accentuated
    by tightening lending standards, which has hurt small business
    lending. I started as a small business lender and up until very
    recently it was harder to make a small business loan today than
    it was over the last 40 years.
        And that has redistributed assets to large companies away
    from small business and innovation and jobs that they create.
    And that has been another very destructive policy. I don't
    think you can really be advocates to the working class and
    small business and be happy with the Federal Reserve's
    policies.
        [The prepared statement of Mr. Allison can be found on page
    50 of the appendix.]
        Chairman Barr. Thank you.
        Dr. Goodfriend, you are now recognized for 5 minutes.

       STATEMENT OF MARVIN GOODFRIEND, FRIENDS OF ALLAN MELTZER
      PROFESSOR OF ECONOMICS, TEPPER SCHOOL OF BUSINESS, CARNEGIE
    MELLON UNIVERSITY, AND FORMER SENIOR VICE PRESIDENT AND POLICY
               ADVISOR, FEDERAL RESERVE BANK OF RICHMOND

        Mr. Goodfriend. Thank you, Mr. Chairman, and Ranking Member
    Moore. I am pleased to testify today on sound monetary policy,
    but more specifically on why the Federal Reserve needs a
    credible commitment to price level stability. In January 2012,
    the Federal Open Market Committee released for the first time,
    the so-called, ``Statement of Longer Run Goals and Monetary
    Policy Strategy.''
        I want to talk about why that Statement is inadequate. It
    ``adopted'' a 2 percent inflation target based on an
    accompanying set of principles. At the end of my testimony, I
    will recommend improvements in this statement to lock down the
    public belief and confidence in the inflation target.
        But before doing so, I want to explain why the Fed's
    failure to secure the credibility of its inflation target
    creates three risks for the Fed and the economy going forward.
        First, weak inflation target credibility elevates risks
    inherent in the implementation of interest rate policy itself.
    Markets understand that the Fed's interest rate target changes
    are highly persistent and seldom quickly reversed, so that a
    change in the overnight interest rate carries expected future
    short-term rates with it and longer-term interest rates as
    well.
        And the Fed is able to exert considerable leverage over
    longer-term rates that matter for the economy. The Fed's
    inclination to delay Federal funds rate target changes until it
    is certain not to have to reverse field explains, in fact, why
    monetary policy has been behind the curve so many times in the
    past.
        But the point at issue today is that when the public is
    unsure of the Fed's commitment to the inflation target, the Fed
    is forced to move even more preemptively than otherwise against
    rising inflation to assure markets of its commitment to the
    target.
        And having to do that, having to move more preemptively, in
    turn increases the risk of moving prematurely, reversing field
    and undermining the Fed's leverage over longer-term interest
    rates entirely, thus weakening the power of monetary policy
    over the economy.
        Second, weak inflation target credibility invites a re-
    emergence of what I would call cyclical inflation fighting risk
    premia in bond rates. Let me explain. The problem for monetary
    policy today is that the credibility of the Fed's 2 percent
    inflation target is about to be tested for the first time.
        The last inflation-fighting scare occurred in 1993 and
    1994. The cyclical inflation-fighting risk premium in long bond
    rates then rose by around 2 full percentage points, without a
    prior increase in inflation or inflation expectations,
    reflecting a jump in bond investors' concern of a return to an
    era of cyclical inflation-fighting risk in bond rates, such as
    occurred during the Great Inflation period between 1965 and
    1985.
        At the time, that didn't happen. The jump in bond rates
    quickly reversed, and inflation remained low, in part because
    of a timely rise in productivity growth in the United States in
    the late 1990s.
        Today, a sudden sharp re-emergence of cyclical inflation-
    fighting risk premia in long-term bond rates would effectively
    tighten monetary policy, depress output in employment, and
    present monetary policy with an uncomfortable short run
    tradeoff between stabilizing inflation and employment. That is
    the second major risk of not tying down the Fed's commitment to
    long-run inflation stability.
        Third, weak inflation targeting credibility increases
    household financial insecurity. If in past years the Fed had
    been fully committed to price stability, as embodied in an
    inflation target, then retirees would be in a much better
    position today.
        Years ago, households would have been advised and willing
    to hold a significant share of their lifetime savings in long-
    term nominal bonds, paying a safe nominal interest rate.
        The promised nominal interest rate, having incorporated a 2
    percent inflation premium to offset the steadily depreciating
    purchasing power of money at the Fed's target, would have
    delivered a safe, long-term, real interest rate upwards of 3
    percentage points per year.
        Instead, the Great Inflation called the Fed's commitment to
    price stability into question, as it decimated the real return
    on long-term bonds. Responsible households have since shied
    away from saving in long-term nominal bonds to protect
    themselves from inflation risks.
        To avoid the inflation risk, however, households have
    shortened the maturity of their interest-earning savings and
    reached for more return in equity products, thereby forced to
    accept the risk of ultra-low short-term interest rates and
    volatile equity prices in the bargain.
        In conclusion, I recommend three improvements in the
    Federal Reserve's Statement of Longer Run Goals of Monetary
    Policy Strategy to help secure the credibility of the Fed's
    inflation target, so important for the future.
        First, the Statement should be modified to make clear that
    its roots lie in the mistakes and successes of past Fed policy.
    In particular, the Statement should be linked, in the modern
    way with technology, to those historical narratives that inform
    the principles underlying the inflation target.
        Second, as currently written, the Statement ends,
    remarkably to me, by saying, ``The Committee intends to
    reaffirm these principles and to make adjustments as
    appropriate at its annual organizational meeting each
    January.''
        The grounds for that revision should be circumscribed
    tightly, in my opinion, so as not to undermine the very
    credibility of the Statement itself, in general, and its
    inflation target, in particular, since there is virtually no
    reason to modify that commitment to price stability.
        And finally, the FOMC should declare its intention in the
    Statement to strengthen the legislative oversight process, to
    help enforce its inflation target, and the systematic pursuit
    of monetary policy.
        To do so, the Federal Open Market Committee should declare
    in the Statement its intention to present the Federal Open
    Market Committee's independently chosen monetary policy
    decisions, against a familiar Taylor-type reference rule for
    monetary policy, to improve the discipline of that monetary
    policy. Thank you so much.
        [The prepared statement of Dr. Goodfriend can be found on
    page 67 of the appendix.]
        Chairman Barr. Dr. Taylor, you are now recognized for 5
    minutes.

    STATEMENT OF JOHN B. TAYLOR, MARY AND ROBERT RAYMOND PROFESSOR
     OF ECONOMICS, STANFORD UNIVERSITY, AND FORMER UNDER SECRETARY
               OF THE TREASURY FOR INTERNATIONAL AFFAIRS

        Mr. Taylor. Thank you, Mr. Chairman, Ranking Member Moore,
    and members of the subcommittee, for inviting me to talk about
    sound monetary policy. In these opening remarks, I would like
    to focus on the three issues raised in the invitation letter.
        First, the Fed departed from conventional monetary policy a
    dozen years ago in 2003 to 2005, when it held the Federal funds
    rate well below what was indicated by experience of the
    previous 2 decades of good economic performance. I have been
    very critical of the Fed for this departure and that contrasts
    in my very positive support of the Fed during much of the 1980s
    and the 1990s.
        Though a dozen years ago may seem like a long time now, it
    is crucial to remember that these excessively low rates brought
    on risk-taking search for yields and excesses in the housing
    market. Along with a breakdown in the regulatory process, these
    policies were a factor in the financial crisis and in the
    terribly high unemployment we experienced.
        During the panic in the fall of 2008, the Fed did a good
    job in its lender-of-last-resort capacity, by providing
    liquidity to the financial markets and by cutting its policy
    interest rate.
        But then the Fed moved sharply in an unconventional
    direction. It purchased large amounts of U.S. Treasuries and
    mortgage-backed securities, and it held its policy interest
    rate near zero, when indicators used in the 1980s and 1990s
    would have suggested a higher rate.
        My research shows that these post-panic policies were not
    effective. Economic growth was consistently below the Fed's
    forecast and was much weaker than earlier U.S. recoveries from
    deep recessions.
        Second, the Fed should and can facilitate an orderly
    normalization of policy, which means a return to a rules-based
    policy with a conventional balance sheet.
        I have recently seen a more determined effort by the Fed to
    normalize policy. And that is a good thing. But normalization
    is difficult in practice and at times the pace has been slow
    and uncertain. With the policy interest rates still below
    appropriate levels, a key step is to raise the policy rate
    gradually and strategically.
        As part of this normalization process, the size of the
    Fed's balance sheet should be gradually reduced. As long as
    this normalization is strategic, it should not have negative
    effects.
        In my view, reserve balances should be reduced to the size
    where the interest rate is market determined, rather than
    administered by the Fed setting a rate on excess reserves. I
    know there is some disagreement about the eventual size of the
    balance sheet, and I consider these issues in my written
    testimony.
        Third, monetary policies can reliably support economic
    growth going forward by being more predictable, transparent,
    and accountable. It is very important to adopt and explain its
    monetary strategy for the Fed and the FOMC and then compare
    that strategy with monetary policy rules in a transparent way.
        In a recent speech, Fed Chair Yellen compared current
    monetary policy with the original Taylor Rule, with the Taylor
    Rule which is more reactive to the state of the economy, with
    the Taylor Rule with inertia. Similarly, Vice Chair Fisher gave
    two recent speeches which take a similar approach.
        All of these speeches, in my view, show progress toward the
    kind of policy transparency that is contained in the recent
    legislative proposals, including the Fed Oversight Reform and
    Modernization Act (FORM).
        Experience points to the need for some kind of monetary
    reform, such as the FORM Act. Some worry, of course, that this
    reform would lose independence of the Fed, but having a clear
    articulated strategy would improve independence.
        Empirical research shows that economic performance would
    improve if the Fed was accountable about the strategy for
    achieving its goals. And as you know, a number of Nobel prize
    winners, former Fed officials, and monetary experts have
    supported such an approach.
        Finally, let me note that monetary normalization and reform
    have important implications for the international monetary
    system. Unconventional monetary policies have spread
    internationally to the Bank of Japan, the European Central
    Bank, and other central banks.
        In my view, normalization by the Fed would lead other
    central banks to move away from such unconventional policies. I
    think that would be good for the international monetary system.
        Indeed, as the Federal Reserve has shown recently a more
    determined effort to normalize policy, there has been an
    increased understanding of a change at these other central
    banks. And that is also a good thing for the United States.
        Thank you. I would be happy to answer any questions.
        [The prepared statement of Dr. Taylor can be found on page
    75 of the appendix.]
        Chairman Barr. Thank you Dr. Taylor.
        And Dr. Bivens, you are now recognized for 5 minutes.

    STATEMENT OF JOSH BIVENS, DIRECTOR OF RESEARCH, ECONOMIC POLICY
                               INSTITUTE

        Mr. Bivens. Thank you, and I would like to thank the full
    Financial Services Committee for allowing me to testify here
    today on sound monetary policy. My written testimony makes the
    following broad points.
        One, the Fed's actions over the past decade, roughly,
    shortened the Great Recession and hastened the recovery. These
    actions demonstrated an admirable commitment to their statutory
    mandate to pursue maximum employment subject to inflation
    stability.
        Their actions, particularly expanding their balance sheet
    and purchasing assets besides Treasuries, were certainly
    unusual relative to historical experience, but they were in
    response to an absolutely extraordinary economic and financial
    crisis.
        Policymakers who maximize the authority they have under the
    law to make life better for working Americans should be
    applauded. I would say this is true even, or maybe especially,
    if this requires moving out of historic norms about what
    constitutes appropriate policy. And one cannot help but
    contrast the monetary policy response with the fiscal policy
    response to the Great Recession.
        Since the official end of the Great Recession in June 2009,
    when measured against all other postwar recoveries, fiscal
    policy has put a historically large drag on growth and
    recovery. We should be even happier that the Fed did not follow
    suit.
        That the Fed's actions were taken in response to a
    historically severe economic and financial crisis highlights
    that abstract criticisms to these actions based on claims that
    they did not act in a rules-based manners are worth
    discounting. There is simply no rule that would have reliably
    performed as well as the real world independent Federal Reserve
    did over this past decade.
        For example, it is well-known by now that economies
    suffering large and prolonged output gaps of the kind that were
    shown in the slide that began this hearing, can lead to large
    errors when you are trying to make rules-based policy.
        To make this really concrete, we just don't have a good
    sense at all even what potential output is in the United States
    today. Again, as your slide at the beginning showed, forecasts
    for a potential output in 2017 was going to be, made in 2007,
    said that it is $2 trillion higher than what the CBO says that
    it is today.
        Is that degradation of potential output something that was
    purely about supply side trends that would have happened
    regardless of the Great Recession or not? Or is it the result
    of the prolonged slump in aggregate demand that could be
    substantially cured with a period of above trend growth?
        I would say a goal of monetary policy should be precisely
    to probe this question. Assuming we absolutely know the answer
    with certainty, coming out of an economic crisis like this, I
    think that is hubris.
        One aspect of the Fed's actions over the past decade that
    has received particular criticism is their purchase of non-
    Treasury assets, mortgage-backed securities in particular. As a
    general matter, the purchase of non-Treasury assets can
    maximize the potential effectiveness of large-scale asset
    purchases.
        The point of these purchases is ultimately to reduce the
    long-term rates faced by households and businesses. And this
    clearly includes rates besides those paid on risk-free Treasury
    bonds. Buying assets like mortgage-backed securities both
    pushes down long rates generally, but can also produce spreads
    between these assets and risk-free benchmarks.
        That is certainly what happened during the first round of
    quantitative easing, and these lower rates helped households
    that wished to purchase or refinance home mortgages, both of
    which help support economic recovery.
        These Fed purchases also helped provide liquidity and
    confidence in overall financial markets. And this can be seen
    in the big reduction in interest rate spreads after these first
    round of purchases began.
        Some have claimed that purchasing anything that is not a
    Treasury asset, de facto, implies that the Fed is engaged in
    something that is not monetary policy and they have overstepped
    their agreement.
        This is not a valid critique. There is no monetary policy
    decision, indeed, no macroeconomic stabilization policy
    decision that is always distributionally neutral everywhere.
    That does not mean it is no longer monetary policy.
        In the end, complaints that the Fed were too ad hoc over
    the past decade privileged process over substance. The question
    about all Fed moves should simply be, are they consistent with
    the Fed's mandate to pursue maximum employment, subject to the
    constraint that stability and inflation be maintained? Over the
    past decade, their actions largely have done this.
        Finally, the Fed should be in no rush to return to pre-
    Great Recession status quo policy stance. The economy right now
    shows no sign of overheating and generating accelerated
    inflation. So even recent short-term interest rate increases
    were premature, in my view.
        When it does become time to moderate growth, rate hikes
    should go before any concerted balance sheet reduction. And a
    larger balance sheet with a more varied set of assets should
    not be seen as something that must be abandoned as quickly as
    possible. Instead, it should be seen as another potentially
    useful tool in the Fed arsenal.
        If the last decade has taught us anything, it is that the
    Fed and all other macroeconomic policymakers should have as
    many tools as possible on hand to boost growth and maintain
    maximum employment in the face of crises.
        Thank you for your time, and I am happy to answer any
    questions.
        [The prepared statement of Dr. Bivens can be found on page
    53 of the appendix.]
        Chairman Barr. Thank you, Dr. Bivens.
        And the Chair now recognizes himself for 5 minutes.
        Late last year, our committee received testimony from Dr.
    Mickey Levy, Berenberg Capital's chief economist. That
    testimony included the following observation: ``The Fed's fully
    discretionary approach to conducting policy, highlighted by its
    ever-changing explanations for delaying rate increases, adds
    confusion and has created an unhealthy relationship with
    financial markets.''
        Let me start by asking each of our witnesses a brief yes-
    or-no question about that observation.
        First, Mr. Allison, do you agree with Dr. Levy's argument
    that monetary policy uncertainty is undermining financial and
    economic performance? Yes or no?
        Mr. Allison. Yes.
        Chairman Barr. And Dr. Goodfriend, same question. Would a
    more firmly grounded and transparent monetary strategy help
    sweep away the policy fog that continues to undermine support
    for a dynamic economy? Yes or no?
        Mr. Goodfriend. Yes, absolutely.
        Chairman Barr. Dr. Taylor, doesn't monetary policy work
    best when it reliably produces clear price signals? That is,
    broadcasting loud and clear vital information for goods and
    services which include labor to find their most promising
    opportunities? In other words, couldn't the Fed lift this
    uncertainty and this policy fog of its own making by telling us
    in plain English what data matter and how they matter?
        Mr. Taylor. Yes.
        Chairman Barr. And finally, Dr. Bivens, do you agree with
    Dr. Levy that the Fed's improvisational monetary policy adds
    confusion and has undermined economic performance?
        Mr. Bivens. No.
        Chairman Barr. Okay.
        So, a follow-up question to Dr. Taylor. You heard Dr.
    Bivens' emphatic no there, and you heard his testimony where he
    has applauded the discretion of the Fed and giving the Fed as
    many tools as possible in exercising that discretion.
        The question for you is, and you can elaborate a little bit
    more than a yes or no on this one, why is a more transparent
    monetary policy strategy better than what Dr. Bivens is
    advocating, that is, the discretion to run a high-pressure
    economy?
        Mr. Taylor. I think we have lots of empirical evidence that
    a more predictable policy works. And in my testimony, I began
    with what happened in 2003, 2004, and 2005, not even mentioned
    as in any of the other statements.
        That was a period where there were excesses. There were
    many reasons for it, but monetary policy was part of it. It was
    a deviation, to be sure, of a policy that worked very well in
    the 1980s and 1990s. I think there are many other examples.
        If you look way back at the 1970s, it is the same thing. It
    was a mess. Inflation was rising and unemployment was rising.
    And again, the Fed was not predictable. It kept changing its
    policies. But it changed in the 1980s and 1990s.
        I think that historical record is very important. You see
    it with other central banks in other parts of the world. It is
    quite remarkable. And then we have economics that tells us the
    same thing. If people know what the policy is, they can plan
    better. Resources can be allocated more efficiently and the
    economy will work better.
        Chairman Barr. Thank you.
        And Mr. Allison, the narrative we so often hear, either in
    the media or up here in Washington, and especially from our
    colleagues on the other side of the aisle, about the financial
    crisis was that it was the absence of sufficient regulation
    that caused the crisis.
        However, in your testimony, Mr. Allison, you wrote that the
    Federal Reserve policies themselves were the primary cause of
    the financial crisis. Can you explain further why you believe
    that to be the case?
        Mr. Allison. Yes, sir. First, the banking industry was not
    deregulated. There was a massive increase in regulation during
    this period of time. It was focused on things like the Patriot
    Act, et cetera.
        But there was a huge amount of pressure on affordable
    housing on what is now called subprime lending. And that, of
    course, incented activity in bond markets and other areas. In
    addition, monetary policy, those of us who were more
    conservative--my bank went through the financial crisis without
    a single quarterly loss.
        But it was very hard when you had these asset prices going
    up very rapidly and not knowing where the Fed was going to be
    conservative because you were punished in the stock market. The
    people who were taking the highest risks were being rewarded
    because monetary policy was pushing up asset prices, and that
    looks good to banks until the bubble ends.
        And so it made it much more difficult to actually run a
    healthy bank. And I think this is very hard for community banks
    because all the economic short-term incentives coming out of
    the Fed, they wanted you to make high-risk loans. And monetary
    policy itself was blowing up asset bubbles were such that being
    disciplined was very difficult.
        Chairman Barr. Thank you.
        My time has expired.
        The Chair now recognizea the distinguished ranking member,
    Congresswoman Moore, for 5 minutes.
        Ms. Moore. And thank you so much, Mr. Chairman.
        I did enjoy your testimony, and I was able to very quickly
    sort of track along and peruse some of your testimony. And
    again, this is part of my free MBA program to sit here at these
    hearings.
        [laughter]
        Dr. Taylor, we have had an opportunity to hear from you
    before. And I wanted to quickly follow up on some exchanges
    that we had the last time you here regarding government
    interventions in the market.
        You have said, and you are sticking with it, that you don't
    believe that government intervention is appropriate. And I
    asked your opinion on whether you felt it was appropriate for
    Trump, our President Trump now, to do these kind of ad hoc
    interventions, like he did for Carrier and his various Tweets
    about companies like Boeing.
        If we are critical of the Fed for its QE interventions, I
    am wondering what you think about the President now, not only
    sort of intervening in the markets but being kind of an active
    participant?
        Mr. Taylor. So what I see now happening, with respect to
    things that affect firms, is a focus on possible changes in
    regulations and in tax policy. It seems to me, to the extent
    that firms can be signaled there is a change in policy, that
    seems to me a good thing.
        There seems to be also a lot of evidence that firms are
    beginning to think there is going to be a change in tax policy
    and in regulatory policy.
        Ms. Moore. So how does that--
        Mr. Taylor. See, that should be the emphasis in
    conversations, we hope to have a more cost-benefit approach to
    regulations. So the regulations are necessary--
        Ms. Moore. So you--
        Mr. Taylor. --as it applies to the banks. This is the
    wealth of the manufacturing firm.
        Ms. Moore. I am reclaiming my time. So you see that the
    President's intervention, like when his dear daughter Ivanka
    saw that her line was not going to be carried by Nordstrom, he
    attacked the company.
        How does this fit in with your notion that we need to have
    a strategic rule base, whatever distinction you make between
    rule base and strategic, with him doing things like that? How
    do you distinguish between what the Fed did on a larger scale,
    QE, and what the President is doing?
        Mr. Taylor. I don't know that particular case, but I am
    definitely--
        Ms. Moore. Everybody knows about that.
        Mr. Taylor. --of the view that more strategic, if you like,
    rules-based policies are good. And more transparency about
    policy is good. More emphasis on predictable policy, more
    generally, rule of law, use of markets and a cost-benefit
    analysis to all government activity--
        Ms. Moore. So is the President--do you see this as rules-
    based for him to Tweet out stuff about companies, Boeing,
    Nordstrom, Carrier? Is that strategic or rule-based, in your
    opinion?
        Mr. Taylor. What is important to me, and I don't read all
    the Tweets. To be sure, I do Tweet myself. I like Tweeting, but
    I am not reading all the Tweets.
        What is important to me is the Executive Orders on
    regulations, passing the REINS Act, using the Congressional
    Review Act to take actions. That is what I see. That is what I
    look at.
        Ms. Moore. Okay. So okay, reclaiming my time. So you don't
    have any problem with the President intervening in the markets.
    You just have a problem with the Fed doing it.
        Dr. Bivens, there is a lot of criticism here about what the
    Fed did under extraordinary circumstances, as you have
    described. Can you just talk to us a little bit about the
    impact of austerity, given the new budget that we are seeing
    coming out of the new Administration and what impact that will
    have on our ability to grow?
        Mr. Bivens. Yes. I think that is a really good point
    because someone, one of the other witnesses, mentioned that
    this recovery has been the slowest on record in terms of GDP
    growth. And that is true. And if the Fed was sort of the only
    game in town, then maybe you could say that means their actions
    have failed.
        But the Fed is absolutely not the only game in town. Over
    the course of this recovery, we have seen historically
    contractionary fiscal policy. That is austerity on the spending
    side, mostly starting from the 2011 Budget Control Act on.
        And it is that fiscal drag on growth that entirely explains
    the gap in performance between this recovery and previous ones.
    And if the Fed had joined fiscal policy in that drag, we would
    have been much worse off than we are today.
        Ms. Moore. Thank you, and my time has expired.
        Thank you all.
        Chairman Barr. The gentlelady yields back.
        And the Chair now recognizes the vice chairman of the
    subcommittee, the gentleman from Texas, Mr. Williams, for 5
    minutes.
        Mr. Williams. Thank you, Mr. Chairman.
        And again, thanks to all of you witnesses for being here
    today. Last month at our hearing with Chair Yellen, I shared
    with her my concerns about the Fed's large $4.5 trillion
    balance sheet. As Chair Yellen has stated in the past and
    confirmed at our hearing, she is in no hurry to unwind or sell
    off these assets.
        She stated that the economic crisis has required the Fed to
    take a highly accommodative strategy and that she would like to
    wait until normalization is well under way before the Fed
    begins running off its balance sheet, in case maybe there is
    some sort of shock to our economy, which she doesn't expect,
    she added. Because of all this risk, she believes that the Fed
    needs to be able to respond and support the economy.
        So my first question to you, Mr. Allison is, what risk does
    maintaining the current balance sheet size and composition
    create for our economy?
        Mr. Allison. Yes. Let me give you a little context. People
    get confused. They think monetary and regulatory policy don't
    work together. But actually, the Fed provides 10 percent of the
    base. But banks and other financial institutions provide 90
    percent of the money.
        What has happened in this case, and why they had to do all
    these QEs, is they were pumping out money in one hand but they
    were tightening lending standards so the multipliers dropped
    exponentially. And so they didn't really need to buy all that
    if they just hadn't irrationally tightened the lending
    standards.
        And having been in the business, as I said, these standards
    are crazy.
        So they have a big problem, in my opinion. I don't know
    exactly how they ought to unwind it, but I am clear they ought
    to unwind it, and it needs to be done. I don't think of the
    problems with the Fed, it is not the one that bothers me the
    most, but it bothers me.
        Mr. Williams. Okay. Let me follow up on that. Do those
    risks affect the Federal Reserve's independence, do you think?
        Mr. Allison. I do. I don't think the Fed is independent. I
    think that is a naive point of view. Let's face it. They are
    recommended by the President. They are approved by Congress,
    and they are human beings.
        And so they hear political effects. And when I talk to
    them, it is obvious that they are thinking about things that
    aren't just purely in their realm of being.
        Mr. Williams. Okay.
        Mr. Allison. But I think having this problem makes it
    harder for them to be objective. Because if they really rise
    the interest rates rapidly and they don't deal with this bond
    portfolio, they are going to have massive losses.
        The Fed will be in default. It will have more liabilities
    than it has assets. So that is going to make it harder for them
    to be objective in the decision process in terms of how fast
    they raise rates.
        Mr. Williams. Okay. Thank you.
        Mr. Taylor, to what extent did the Fed's remarkable balance
    sheet expansion lessen the financial crisis, in your opinion?
        Mr. Taylor. I think during the panic in 2008 the Fed took
    some actions which did expand its balance sheet, liquidity
    operations. Most of those expired automatically and were
    drawing down, would have drawn down.
        It is the other ones that I think are problematic. It is
    the ones, really, beginning in earnest in 2009. I have studied
    those, the mortgage-backed security purchases. I don't think
    they had impact other than perhaps some short-run impact, which
    was quickly run off.
        And so in the meantime, this large balance sheet has
    accumulated. And the question is what to do with it. And I
    think it is a problem.
        If it is just sitting there, it means that monetary policy
    is run with interest on excess reserves, not through supply and
    demand for reserves. And I think that continues to be a problem
    caused by those original actions.
        Mr. Williams. With that in mind, to what extent did the
    balance sheet--we are talking about expansion--prolong the
    financial crisis and discourage a more robust recovery, in your
    opinion?
        Mr. Taylor. I think you could argue it was a negative. And
    what I would add to that is the very low rates all that period
    of time. The interest rate has actually gone negative in other
    countries, and a very low interest rate makes it harder for
    banks to operate. It is less incentive to make loans. And I
    think it has been a drag.
        But the main thing is to get back to a normal policy at
    this point. And I think the Fed is going in that direction. And
    actually, since there has been some notice of the change, you
    can see quite a bit of difference in the economy, quite a bit
    of difference in the financial sector. I think that indicates
    that a move towards a more normal policy is actually beneficial
    to the economy.
        Mr. Williams. All right, switching topics really quickly, I
    want to take a second and ask about monetary policy and the
    economy created under President Obama. The former President can
    boast that the economy was recession-free for 30 quarters under
    his watch, yet far too many Americans continue to struggle in
    this economy, particularly those living at the margins.
        Mr. Allison, why didn't this work?
        Mr. Allison. Say that again?
        Mr. Williams. We talked about the former President, we
    talked about the economy being recession-free for 30 quarters,
    yet we still have mainstream America hurting. Why didn't his
    policies work? Why, in year after year of the lackluster
    recovery, has the Fed looked at variables like oil prices,
    promised robust growth, but we never saw it happen?
        Mr. Allison. Yes. The fundamental reason is that we haven't
    had an increase in productivity, as the chairman started
    talking about. And at the end of the day, you can't raise real
    incomes long term without it raising productivity.
        The combination of a regulatory influence on the market has
    been very destructive for economic investment, along with Fed
    policy's uncertainty.
        Chairman Barr. And the gentleman's time has expired.
        The Chair now recognizes the gentleman from California, Mr.
    Sherman.
        Mr. Sherman. Thank you, Mr. Chairman.
        We have the national debt chart. We have now shifted to the
    trade deficit chart. Both of these charts show a huge problem
    for our country. The Federal deficit is important and the trade
    deficit symbolizes and causes lost jobs and a loss of national
    power.
        Monetary policy arguments about the tertiary, possible
    effects of monetary policy are kind of ephemeral. So I focus on
    the direct policy effects. Lower interest rates mean a lower
    national debt and a lower trade deficit.
        The Federal Government is the largest borrower in the world
    and higher interest rates lead to a stronger dollar which hurts
    our manufacturers.
        That big balance sheet that we have means big profits for
    the Fed and the Government as well. If those profits had been
    dedicated to building a particular new aircraft carrier, then
    that big balance sheet would probably be more popular on the
    other side of the aisle.
        Mr. Goodfriend talks about savers who can't live on their
    savings without invading principal or risking principal.
    Treasury Inflation-Protected Securities (TIPS) are yielding
    about three-eighths of a percent over the inflation rate. So
    you really can't live on your savings without risking principal
    because real interest rates are three-eighths of a percent.
        We almost never have had a real interest rates high enough
    to allow people to retire without either consuming their
    principal or risking their principal. But in the past we have
    had inflation.
        So the fact that you were invading your principal was
    disguised, because you would have a nice nominal interest rate
    and you would preserve your nominal capital.
        This made retirees happy. Happiness is important. And that
    is one more reason why we would be happier with a 2\1/2\
    percent target inflation rate so that retirees could at least
    appear to be preserving their principal, not its buying power,
    but its nominal amount, while being able to supplement their
    Social Security with retirement income.
        Mr. Allison, you talk about how higher rates would help the
    working class. I think in this room we are so close to Wall
    Street, we get cut off from the working class. Working-class
    people are not lenders. They are borrowers. The average amount
    of assets available in a working-class family might be a few
    thousand dollars in the bank.
        Most have credit card debt, even a larger--or not most, a
    huge percentage of credit card debt. Most have mortgage debt
    not--high interest rates hurt the working class unless you
    define the working class as the hard-working people who make
    over a quarter million dollars a year.
        What we need to help the working class is a labor shortage
    so that workers don't just participate in productivity
    increases, but that we shift national income from capital to
    labor. And that is why we need lower interest rates, to create
    that labor shortage.
        The first two or three witnesses talked about normalizing
    monetary policy as if there was some great Golden Age of
    monetary policy where we all knew what the interest rate would
    be and nobody had to figure out what Greenspan had for
    breakfast. Everybody knew what the rule would be.
        I don't think we can make monetary policy great again
    because I don't think there was a Golden Age of monetary
    policy. And it is true that this is a weak recovery, the
    weakest. It is also the third longest recovery. It may turn out
    to be the longest recovery.
        Mr. Allison, I agree with you that the lending standards
    being imposed on banks basically make it impossible for them to
    make small business loans to expanding small businesses. There
    is no such thing as a prime-plus-five loan. What can we do to
    encourage banks to lend to small businesses?
        Mr. Allison. The main thing you need to do is get the
    regulators off the banks' backs. Going through the financial
    crisis, the Federal Reserve and the FDIC forced my company to
    put a lot of people out of business that didn't need to go out
    of business.
        I went through the financial crisis in the 1980s and the
    1990s. The FDIC actually worked with healthy banks, and we kept
    those people in business. And if they were still in business,
    they would be creating jobs.
        And the Fed has tightened the lending standards. That is
    why the money multiplier is not working. And it has reallocated
    the assets--
        Mr. Sherman. And instead of just requiring a slightly
    higher reserve on that small business loan they are, in effect,
    prohibiting it.
        Mr. Allison. They basically can't do it.
        Mr. Sherman. I yield back.
        Mr. Allison. They can't do it.
        Chairman Barr. The gentleman's time has expired.
        The Chair now recognizes the chairman of our Capital
    Markets Subcommittee, Mr. Huizenga, for 5 minutes.
        Mr. Huizenga. Thank you, Mr. Chairman, and congratulations
    on your chairmanship. This is a great subcommittee. And I am
    glad to be continuing to serve on it.
        Moving kind of quickly, it struck me, Mr. Allison, when you
    talked about--your quote was, ``the price fixing of interest
    rates,'' and Dr. Taylor kind of talked a little bit about that.
    And you heard the assertion on the other side of the aisle that
    it was austerity measures that have actually caused the income
    gap to widen over recent years and over the last decade.
        And it seems to me that rather it is sort of an artificial
    market manipulation that has really happened that has not
    allowed those who have disposable income to catch the upside of
    what we have been going through. And I just wanted to see if
    you very briefly maybe wanted to comment on that?
        Mr. Allison. Yes. I would say two things. I think that the
    regulatory environment has made businesses less willing to
    invest and then banks haven't been able to make loans.
        And then this issue about the interest rates, remember, the
    U.S. Government is the largest debtor in the world. But when
    you help debtors, you hurt creditors.
        And who are the creditors? Individuals. You took assets out
    of individual hands and put them into the Government's hand and
    there is lots of economic evidence that private markets are
    more productive than Government activity is.
        So you have had a redistribution to high-income people, but
    you have simultaneously had a redistribution of assets to the
    Government. And it is really Government spending that matters.
    And when you have kind of a fake low interest rate it
    encourages even more Government spending, which is actually
    economically negative.
        Mr. Huizenga. All right. I appreciate the clarification on
    that.
        And Dr. Taylor, according to Mr. Allison's testimony
    earlier, he and a number of other respected economists have
    really talked about monetary policy playing a prominent role in
    the economic downturn. And obviously we heard Dr. Bivens talk
    about that we need to have the monetary engine run even hotter.
        It seems to me--being a Michigan guy, I use car analogies a
    lot--like breaking the speed limit isn't really a remedy for
    the aftermath of a crash on the highway.
        And yesterday's Fed changing its policy statement to say
    that the target inflation is now symmetric, that is the Fed's 2
    percent inflation target is no longer a ceiling but rather a
    target that should be met on average allowing inflation to
    overshoot 2 percent for considerable amounts of time.
        I am curious, especially as we have seen it at well below 2
    percent over the last decade, I am curious for you to comment
    on that.
        It just seems to me as a father of five with kids
    approaching college, that for every dollar I am putting away
    for them, we are really only realizing about 70 cents on that
    or they might be. And it doesn't seem to me that that is price
    stability. So I would love for you to comment on that, please?
        Mr. Taylor. I think during the period where the inflation
    rate had fallen below two that doesn't mean you have your foot
    on the floor completely, which I think the argument is the
    inflation rate is a little bit below two and therefore we have
    to do these extraordinary policies. And I don't think that
    follows at all.
        I think in many respects they could have moved towards a
    more normal policy during that period of time. And similarly,
    this is a situation where inflation does go above the target
    the actions should be taken.
        It shouldn't be taken lightly, if that is the impression
    that is being given. It is very important to maintain that
    credibility.
        And also if I could add, I think to me the policy problems,
    in addition to monetary policy during this slow recovery and
    they are related to productivity, are the regulations, are the
    tax policies, and are the things that have not really been
    changed. And that is what you are focused in on now. And it is
    very important.
        Mr. Huizenga. And I would love to hear your comment about
    what happened when Chair Yellen was here last year. I asked her
    the question about whether we would have seen a more rapid
    recovery, rather than this 30-plus quarters that we have been
    sort of dragging this along here.
        And after a good 3 or 4 seconds of stammering, not knowing
    how to answer, she actually said, well, she wouldn't agree with
    that characterization, which seemed to contradict actually what
    she had said in the Senate the day before and what she had said
    before this committee previously.
        But Dr. Goodfriend or Dr. Taylor, if you would care to
    comment on that?
        Mr. Taylor. Okay. So I think that right now productivity
    growth is so low and it is we have had our ups and downs. This
    is a down period.
        I think there is a great opportunity for a revival of
    productivity growth and labor force participation. That is why
    I am more optimistic about growth picking up. But it does
    require these other policies.
        I think monetary policy and reform is part of that. My
    observation is that over time, good policies go together: good
    monetary policy; good fiscal policy; and good regulatory
    policy. And so it should be very much a part of that.
        I think we can get a pickup of growth. It is going to come
    from productivity, and it is going to come from increased labor
    force participation. Both are very possible.
        Mr. Huizenga. Thank you.
        And I yield back.
        Chairman Barr. The gentleman yields back.
        The Chair now recognizes the gentleman from Michigan, Mr.
    Kildee.
        Mr. Kildee. Thank you, and congratulations, Mr. Chairman,
    my classmate. So we are at that point where we are--oh, I guess
    I am not.
        [laughter]
        That is all right. Well, first of all, I thank the panel
    for your testimony, and if any of my questions are redundant, I
    came in and some of this might have been answered, but I
    wondered, Mr. Bivens, if you first, and then perhaps others
    might comment on the following.
        You come to us at an interesting time. That is probably an
    understatement. But particularly today as we see a budget
    proposal that could have some impact on an aspect of the Fed's
    responsibilities. And I speak specifically to the Fed's dual
    mandate, and particularly the mandate on full employment.
        I am curious, first of all, Mr. Bivens, if you might
    comment since the Fed does not operate in a vacuum, and
    particularly in the context of that responsibility, even less
    direct control is exercised by the Fed when it comes to that
    particular responsibility.
        If you might comment on the impact on the Fed's
    responsibility for full employment of, let's just pick a few,
    the dramatic reduction in access to higher education through
    the reduction of Pell Grants, or the dramatic reduction in
    worker retraining programs to prepare the workforce for the
    emerging sectors of the economy that might need a trained
    workforce in order for those sectors to be fully realized.
        Or, for example, a significant reduction in Federal support
    for scientific research that might on one hand fuel new sectors
    of the economy and new exploding markets, but also potentially
    unlock the questions that we face regarding really difficult
    disease that has a huge impact on our economy and a negative
    impact on productivity.
        If you just might comment on how those sorts of decisions
    in that direction could have an effect on the Fed's
    responsibilities around full employment?
        Mr. Bivens. I think there are two aspects to that. One is
    sort of near term, and one is longer term. In the near term, as
    I mentioned before, the primary reason why recovery since the
    Great Recession has been so slow relative to historical
    averages is the fiscal austerity that has been undertaken
    during that time.
        And so to the degree that these spending cuts continue that
    austerity, that is going to be a drag on growth. That is going
    to make the Fed's job to try to maintain full employment much
    harder.
        The long-term angle that has been mentioned many times here
    is that one of the troubling features in the economy over the
    past 4 or 5 years is a slowdown in productivity growth.
        Mr. Kildee. Right.
        Mr. Bivens. The biggest reason why that productivity growth
    has slowed down is because private investment has been so weak.
    There is a pretty simple answer to that, which is to do more
    public investment, or at least not cut the public investment
    that we already do.
        Most of the programs you just mentioned, Pell Grants,
    workforce training, research, these are all things that boost
    productivity in the economy. And if you think we have a
    productivity crisis it seems an odd time to start cutting
    those.
        Mr. Kildee. I wonder if the other panelists might offer
    their thoughts on that question?
        Mr. Taylor. There is no question that capital growth and
    investment is low, and that is a problem for productivity. It
    is one of the key things. Actually, the capital accumulation
    for workers is actually negative in the last 5 years. It has
    never been quite that bad.
        I don't think the answer is more public sector investment.
    The problem is the low private sector and that has to be
    encouraged. That is where the tax reform, regulatory reform, I
    think, can really make a big difference.
        And the other part of productivity, just bringing new ideas
    into the market with new firms, new expansion of firms, I think
    that also can be encouraged by, again, these tax reforms or
    regulatory reforms. I don't see fiscal austerity as a problem
    in this recovery.
        In fact early on, I had written, and I think the evidence
    is clear that the big stimulus packages were not very
    effective. And so if anything, getting back to a fiscal policy
    like we had before where you saw the debt explosion recently?
    That is with us right now.
        Mr. Kildee. I wonder if I could follow up on that because
    it seems to me I have heard in the past you comment on the fact
    that growth does not meet the projected targets that the Fed
    has set.
        And we have been in a period of relative austerity in terms
    of our domestic discretionary agenda on the programs that I
    just mentioned. The cuts that are being proposed are cuts from
    an already relatively low level of expenditure.
        So what form do you think austerity ought to take? Where
    would the priorities be? For example, would it be significant
    buildup of defense spending or would it be, perhaps, investing
    in those areas of retraining and access to higher education
    that might not be fueled by private sector investment?
        And I know my time has expired.
        Mr. Taylor. I would just briefly emphasize the K-12 part of
    that equation, which you didn't mention, seeing that is really
    where we have fallen very far behind in many parts of our
    country.
        Chairman Barr. The gentleman's time has expired.
        And now, the Chair recognizes the gentleman from North
    Carolina, Mr. Pittenger.
        Mr. Pittenger. Thank you, Mr. Chairman, and thank you for
    your good leadership on this subcommittee.
        I thank each of you for being with us today. I am struck as
    I read the debt clock that the former President has the legacy
    of extending the debt greater than all of the other Presidents
    combined. And I also recognize that Chair Yellen intends to
    raise the interest rates and the impact that has on our debt
    payment.
        And the timing of it just seems interesting to me, that all
    of a sudden we have this robust economy. Could you comment on
    that?
        I know she was with us maybe a handful of times in the
    entire Congress, and until last year she had perhaps 75
    meetings with the Administration. There seems to be a
    considerable amount of cooperation or collusion or whatever,
    but I would like for you to comment on that reality?
        Mr. Allison. Yes. It is hard to know what people's
    motivations are, but definitely raising interest rates will
    increase the deficits. Now, I actually believe that is good
    because it will cause more discipline.
        I don't think deficits are as big an issue as government
    spending, but they are a significant issue. It is allocation of
    resources between the private economy and the government that
    determines productivity.
        And what has happened because of the lack of private
    investment, is that the distribution has shifted to the
    government economy. And that has reduced our productivity.
        In fact, if you look at where our productivity has been
    falling, it is not manufacturing. It is not things that are
    private. It is schools and hospitals that government has a huge
    influence in.
        And I think the attitude of business, and I know you are a
    business person, I can see it like night and day because they
    were not only over-regulated, they were not only overly taxed,
    but they were also made to be evil.
        And for whatever foibles the current Administration has
    had, at least they are not saying that business is bad. And
    that has a huge effect on people's actual actions.
        Mr. Pittenger. Sure.
        Mr. Goodfriend, do you have a comment?
        Mr. Goodfriend. Yes. I think that one of the reasons the
    recovery was so slow is that because of the deficits, taxes
    would have to go up in the future.
        When you make investments there is a hurdle rate. Why
    invest in the future if you are going to be in the crosshairs
    of higher future taxes because you made a successful investment
    and made a lot of money? So people are just waiting and seeing.
        And I think the sluggishness of the recovery was largely
    due to that kind of assessment in years past before the new
    Administration, which reflects the idea that in an environment
    unfriendly to business, business just said, well, let's wait,
    let's see, let's have some optionality about this. And I think
    there is every reason to think that is about to change.
        Mr. Pittenger. It just appeared to me to be to provide the
    opportunity for the proclivity of the President's spending to--
    since that in terms of interest rates, keeping them so low.
        Mr. Goodfriend. I'm sorry. I couldn't quite hear what you
    said.
        Mr. Pittenger. The fact that the interest rates were that
    low for so long allowed the President's spending proclivity to
    continue.
        Mr. Goodfriend. Oh, I think that is true. There was a sense
    that debt is a freebie.
        Mr. Pittenger. Yes.
        Mr. Goodfriend. That you could spend money you didn't have
    and defer the taxes to the future and people wouldn't care. But
    the irony is, I think, businessmen were aware that those taxes
    were out there in the future. And so they were saying, well,
    why should we invest--
        Mr. Pittenger. Exactly.
        Mr. Goodfriend. --even at a low interest rate if we have to
    pay much higher taxes against our profits in the future? So the
    whole thing kind of, I think, got stuck and boomeranged.
        Mr. Pittenger. Dr. Taylor, do you have any comment on this?
        Mr. Taylor. The issue of low growth, disappointing growth,
    to me, has largely been a policy problem. I have been writing
    about that for a long, long time. Other people gave other
    reasons. It is just secular. That is the way it is. I think
    that is wrong.
        And I think we are now going to see that there will be a
    change in policy and it will deliver. It will be a huge test. I
    think the test is--we are going to pass it with flying colors,
    but the test is going to come, and that is the good news.
        Mr. Pittenger. Just quickly, whomever would like to
    comment, what risk does maintaining the current balance sheet
    size and composition create for our economy?
        Mr. Allison. I would say the real risk is entitlement
    programs. And if you look at the present value of the
    entitlement programs, Cato did some research for that and it is
    over $100 billion, the liability.
        And so current expenditures matter, but at some point we
    are going to have to face the issue of what do we do about
    entitlements, which I know politicians don't like to talk
    about, and I understand that.
        But that is the real risk. And if you are running a
    business you are thinking, well, how do we pay for this in the
    long term and what does that do to my long-term investments?
        Mr. Pittenger. Okay. My time has expired. Thank you.
        Chairman Barr. The gentleman's time has expired.
        The Chair now recognizes the gentleman from Texas, Mr.
    Green.
        Mr. Green. Thank you, Mr. Chairman, and congratulations on
    becoming Chair.
        Chairman Barr. Thank you.
        Mr. Green. I would also like to thank the ranking member
    for her service on this subcommittee and committee. And I thank
    the witnesses for appearing today as well.
        Mr. Chairman, while there may be many people in this room
    who are of the opinion that America is not great, it seems that
    the world views America as great. People trust America. People
    trust the American currency.
        The dollar is the currency of choice the world over. It is
    the reserve currency. It is the currency that is redeemable. It
    is far out in front of other world currencies. There are others
    that are vying for currency supremacy, but the dollar is
    supreme.
        And one of the ways that you can measure the prowess of any
    country is, how do other countries respond to their currency?
    In my travels around the world, when I have had dollars I have
    always been able to transact business.
        So let me just ask, can you give me three major world
    powers that are currently using a formula-based method to
    determine monetary policy? Three major world powers, Mr.
    Allison?
        Mr. Allison. I cannot give you three major world powers.
        Mr. Green. Yes. I take it you cannot, and I will accept
    that as your answer.
        Can anyone give me three major world powers that are using
    a formula methodology to determine monetary policy? Anyone?
        Mr. Taylor. So I could say they all--
        Mr. Green. No, no, no, no, no. Formula-based such that that
    is the means by which you determine your policy? There are
    none. And to put the United States of America in a position
    such that it is using a formula to determine monetary policy
    would make it an outlier. It could have an impact on the dollar
    unlike we can imagine.
        The dollar is, remember now, the currency of choice. It is
    the reserve currency of choice. To make such a bold move
    without any other countries having taken up this process, could
    put us at risk of becoming the country that must be made great
    again. It is already great.
        So my question to you is, and I will go to Mr. Bivens, sir,
    could we have an adverse impact upon the dollar if we employ a
    formula for determining our monetary policy?
        Mr. Bivens. I think we could. I think it could go in many
    different directions. Personally, my fear is that many rules-
    based policies would lead to excess increases in interest rates
    prematurely.
        If that happened in the current moment, I think one risk
    about raising interest rates in the U.S. in the current moment
    is that other countries that are mired in sort of economic
    slumps, they are not going to raise rates. There is going to be
    decoupling. The dollar is actually going to get excessively
    strong and lead to large trade deficits.
        And so I definitely think that the dollar, the effect of
    poor interest rate decisions on the value of the dollar could
    be bad, I think, over the next year. The primary worry I have
    is an excessively strong dollar leading to big trade deficits.
        Mr. Green. And do you also agree, Mr. Bivens, that it is
    trust and confidence in the United States that makes the dollar
    strong, the belief that we will pay our debts? This is why we
    have debt because people believe that we are going to repay it.
    They will get their money and they will get more. They will get
    some interest on their money.
        So if we employ this formula does that automatically
    instill confidence in people that the American economy is going
    to be able to have enough discretion to deal with crises that
    cannot be anticipated by a formula?
        Mr. Bivens. Yes, it is a good question. And I would say
    given that I think a strict rules-based policy would make us
    less able to respond to deep economic crises and hence would
    have a bad impact on potential future growth, I think perhaps
    people around the world would think the same thing.
        It would certainly, as you note, make us an outlier and
    would lead to uncertainty in outlook for sure.
        Mr. Green. Thank you.
        I will close with this comment. I think that, ``Make
    America Great Again'' is a political slogan, and it should not
    become a part of monetary policy. I think we have to be very
    careful about how we manipulate monetary policy and have an
    impact on the Fed because of the impact that it can have on the
    dollar.
        Thank you, Mr. Chairman. I yield back.
        Chairman Barr. The gentleman yields back.
        The gentlelady from Utah, Mrs. Love, is now recognized.
        Mrs. Love. Thank you. Thank you, Mr. Chairman and I thank
    the subcommittee ranking member, Congresswoman Moore.
        I have to tell you, it has been really interesting for me
    to listen to the testimony here today. I have a couple of
    questions in regards to monetary policy.
        The Federal Reserve Act of 1913 set price stability for the
    Fed's principal objective with regards to monetary policy. It
    wasn't until 65 years later, in 1975, that Congress amended the
    Act to redefine the goals of monetary policy to include maximum
    employment.
        In the late 1970s, of course, there was a period of slow
    economic growth and high inflation, the phenomenon that was
    dubbed ``stagflation.'' Is it reasonable to assert that in
    altering the Fed's mandate at a time where Congress was
    reacting to a serious but ultimately temporary circumstances,
    was not in the best interests of the economy or the American
    people for the long term?
        And I am interested in your thoughts about that, Mr.
    Allison?
        Mr. Allison. I definitely think so. I think that you have
    given the Fed somewhat conflicting goals, and I think that the
    belief that the Fed can solve unemployment problems leads to
    misinvestment.
        I think that it is the private economy that is going to
    solve that because of a good regulatory environment, a good tax
    environment. The Fed is about price stability because money is
    about a medium of exchange that we can have confidence in.
        If we start giving the Fed multiple objectives, I think it
    creates unsatisfactory outcomes. And I would argue we have had
    a long period of unsatisfactory. We have had much more
    volatility than we needed to have.
        I think it is wrong. It is strange to me that people don't
    think that we could have done better. And that they would
    always go back to well, how did we compare to the 1800s? We
    don't compare buggy whips and airplanes.
        Is there a better solution? Is there a market-based
    solution that would have produced less volatility? And I think
    that the answer is yes. But I do think giving the Fed two goals
    that potentially are in conflicting makes it hard to optimize
    results.
        Mrs. Love. You did mention in your testimony earlier today
    that it is not surprising that the Fed makes so many mistakes
    because their job is literally impossible.
        Mr. Allison. It is. Economists, including liberal
    economists, agree that price fixing doesn't work. And that is
    what they are doing when they set interest rates. They are
    fixing prices. And therefore, they are almost always wrong.
    They might be a little bit wrong or they might be a lot wrong,
    but they can't do that job. It can't be done.
        Mrs. Love. And I guess this would be a follow up, would you
    agree that the economy's overall performance is most optimal,
    and therefore its job creating capacity maximized under the
    circumstance of price stability? Do you think that the
    economy's overall performance is better placed in the hands of
    a stable market instead of just fixing?
        And I guess I want to hear what your thoughts, everyone's
    thoughts are on this issue in terms of what our job is in
    Congress and what the market job is versus what the Federal
    Reserve is involved in doing.
        Mr. Allison. It is interesting to me that the Federal
    Reserve has chosen a 2 percent inflation target. You know, 2
    percent over 10 years is 20 percent. It is a pretty rapid
    inflation rate.
        And if they are having a problem when inflation is less
    than that is an interesting--to me it is not, there is not a
    monetary problem there.
        It is a different problem. We went for long periods of time
    with flat or low inflation and had great economic results back
    in U.S. history. So, I think that the Fed price stability helps
    people make better decisions.
        It is price uncertainty, worries about inflation, which Dr.
    Goodfriend mentioned earlier, make people less willing to make
    investments, and worry about increased taxes to pay for
    expenses, makes people less willing to make investments.
        Mrs. Love. Dr. Goodfriend, I know you haven't been asked
    very many questions. Do you want to chime in on this?
        Mr. Goodfriend. I agree with the last comment completely. I
    would like to point out that the one thing the Federal Reserve
    can control, the only thing the Federal Reserve can control
    over the longer run, is the rate of inflation or the purchasing
    power of the currency. And I wish there was more discussion of
    that at this hearing.
        That is exactly what we need to talk about. That is why my
    statement focused entirely on that subject, and I would be
    happy to go back to that subject if you want to.
        Mrs. Love. So quickly, yes or no, dual mandate?
        Mr. Goodfriend. There is no dual mandate in the sense that
    the only thing that Federal Reserve monetary policy has power
    over, over the long run, is one thing and that is the
    purchasing power of money. So in that sense, yes, the dual
    mandate is in a sense incoherent.
        Mrs. Love. Okay. Thank you.
        Chairman Barr. The gentlelady's time has expired.
        And I will just remind the witnesses to pull your
    microphone towards you so we can hear you just a little bit
    better. Thank you.
        The Chair now recognizes the gentleman from Arkansas, Mr.
    Hill.
        Mr. Hill. Thank you, Mr. Chairman, and congratulations on
    your leadership of our subcommittee. I appreciate you convening
    this hearing and I also thank the ranking member for her
    opening remarks.
        Mr. Allison, as a former banker, you know the CAMEL rating
    process added an ``S,'' which was for interest rate
    sensitivity. And I am curious, as a former bank CEO with a $4.5
    trillion balance sheet at the Fed, owning 40 percent of the
    mortgage-backed securities in the country, 15 percent of the
    new interest Treasuries and a duration that is between 5 and 6
    years, would the Fed get a satisfactory rating on interest rate
    sensitivity?
        Mr. Allison. They would flunk miserably. They would also
    flunk on capital. They would not meet their own standard, not
    even close.
        Mr. Hill. Thank you for that. I am concerned about how this
    balance sheet gets unwound. And one of those reasons is the
    composition of that balance sheet is important to the
    government markets, and it leads me to ask, should the FSOC
    review the Fed for its systemic risk to the economy?
        Mr. Allison. If we are going to have that kind of review,
    yes, because I actually think that the Fed is literally the
    biggest risk to the economy. Their errors in monetary policy
    create enormous risk in the economy, and I think they created
    the last bubbles.
        And by the way, going back to the dollar, the United States
    probably created the global recession because of everybody
    relying on the dollar, and that has actually spread to other
    countries.
        Mr. Hill. Thank you.
        Dr. Goodfriend and Dr. Taylor, on this issue of what the
    Fed owns, I have been concerned by some of the other central
    banks in the world moving beyond sort of a core open market
    operations in government securities and in some cases buying
    equities and corporate debt. I find that very concerning.
        And I am discussing legislation with my colleagues to limit
    the Fed strictly to purchases of U.S. Treasuries. But with my
    previous statement that we own 40 percent of the government
    agency market, do you have concerns about my idea that we limit
    open market operations strictly to U.S. Treasuries?
        Dr. Goodfriend, let's start with you.
        Mr. Goodfriend. Yes. I completely agree with the idea, with
    your idea, that the Federal Reserve should limit its purchases
    of assets to U.S. Treasuries. To buy anything other than
    Treasuries, even agencies, is what I have called in the past a
    credit policy, in the sense that it is essentially allocating
    credit, in this case, Federal Reserve reserves, to certain
    portions of the economy.
        That is the business of the private economy. And massive
    Fed purchases of anything but Treasuries is essentially a
    credit allocation policy that in our free market economy should
    not be undertaken by the central bank. So I completely endorse
    that view of yours.
        Mr. Hill. Thank you.
        Dr. Taylor?
        Mr. Taylor. I completely agree with that. I agree with your
    proposals. I also think that the other central banks to some
    extent is caused by the Fed. This very aggressive thing affects
    exchange rates and sort of it is QEB gets QE is what you
    observe. And I think the Fed normalizing and following the kind
    of policy you are suggesting would affect the whole global
    economy.
        Mr. Hill. In shrinking the balance sheet, following up on
    Mr. Williams' question, Chair Yellen said, regarding winding
    down the balance sheet that, ``the Fed target range was between
    50 and 75 basis points.''
        And that she wanted ``a bit more buffer'' in order to reach
    normalization before she contracted the size of the balance
    sheet. I have submitted a question for the record to her on
    what in the heck is a bit more buffer? But my question would
    be, what if they began shrinking the balance sheet first?
        Let that adjust rates obviously out in the marketplace and
    then allowed short-term rates to follow. Could you reflect on
    that?
        Maybe start with you Dr. Taylor, and then we will hear
    others.
        Mr. Taylor. I think it would make sense to work on the
    balance sheet now, as long as it is strategic. As long as it is
    understood. It shouldn't have an impact which is negative. I
    think it would be positive.
        My analogy sometimes is what happened with the so-called
    taper tantrum, when the former Chair said, we are going to do
    some adjustments in the next few meetings. Very sudden, the
    shock, and there was a lot of turbulence caused by that.
        But when they were more strategic, I will put it that way,
    about the tapering, there was almost no impact. It is just a
    world of difference, and I think that is how to approach this
    problem.
        Mr. Hill. Dr. Goodfriend?
        Mr. Goodfriend. Yes. I agree with John. And I would point
    out that the taper tantrum was a different circumstance.
        What people forget about the taper tantrum was that only 6
    months or 7 months before that, the Fed embarked on what they
    called QE3, a massive, unprecedented, open-ended purchase of
    U.S. Treasury securities and mortgage-backed securities that
    they then reversed field on only 6 or 7 months later by musing
    that maybe this was too much.
        We call that, where I come from originally, ``whipsawing''
    markets. That was the mistake. What we are talking about here
    is something quite different.
        We are talking about, as John was saying, setting up a rule
    by which the Fed would slowly and gradually let those assets
    run off.
        Mr. Hill. Thank you.
        I am afraid my time has expired. Thank you.
        Chairman Barr. The gentleman's time has expired.
        The gentleman from Ohio, Mr. Davidson, a new member of the
    committee, is recognized.
        Mr. Davidson. Thank you, Mr. Chairman. Thank you colleagues
    and thank you all for your testimony. It is an honor to be here
    and serve on this committee. And I just wanted to ask if we
    could pull up a slide that shows Federal debt as a percent of
    GDP?
        I came into this meeting with a few different questions,
    but as I have listened to some of my colleagues on the other
    side of the aisle, I was surprised to learn that we have been
    in a period of austere fiscal policy.
        [laughter]
        And I would ask each of you to answer, does this chart
    reflect austere fiscal policy, yes or no?
        Mr. Allison. Absolutely not.
        Mr. Goodfriend. Of course not.
        Mr. Taylor. No.
        Mr. Bivens. Yes.
        [laughter]
        Austerity has pulled down the growth rate of GDP. That is
    the denominator there.
        Mr. Davidson. Okay. Well, thanks for your opinion, it seems
    to defy facts. Do deficits matter? Yes or no?
        Mr. Allison. Yes. Yes, they matter. I think spending
    matters more, but deficits do matter. Yes.
        Mr. Goodfriend. Deficits matter because they represent
    simply taxing in the future rather than the present. And taxing
    in the future rather than the present is just as deleterious as
    taxing in the present, in a sense that it causes a great hurdle
    rate for investments which bear fruit in the future.
        And that hurdle rate being higher causes current investment
    to be low, which has been one of the biggest problems of this
    recovery.
        Mr. Davidson. Thank you.
        Mr. Taylor. Yes, it certainly matters. And in fact if you
    extend your chart according to most forecasts, it keeps going
    unless there is a change. And that is really be going--that
    gets a concern. So there needs to be some fiscal consolidation
    for this.
        Mr. Davidson. Thank you.
        Mr. Bivens. Deficits absolutely matter. Sometimes they
    should get smaller. Sometimes they should get bigger to support
    growth. You would never know ahead of time whether a larger or
    a smaller deficit is good for the economy or not.
        Nobody thinks that the deficit should have been held at
    zero in 2009 and 2010. Ask any witness here whether or not the
    deficit should have been held at zero in 2009 and 2010 with
    this--
        Mr. Davidson. Right. I am not saying zero, but the question
    is, did you look at what is sustainable?
        Mr. Bivens. Whether or not it should get bigger or larger
    depends on context.
        Mr. Davidson. Thank you.
        Mr. Allison, you had spoken earlier about how distortionary
    monetary policy and fiscal policies coincide with the slowest
    recovery since at least World War II.
        What does this tell you about monetary policy in relation
    to fiscal? Has fiscal policy really been a brake and we have
    only been saved by the Fed's sound monetary policy?
        Mr. Allison. I don't think fiscal policy has been a brake.
    I think you can look at these deficits, and I wouldn't call
    this being frugal. I don't think monetary policy has help--I
    think handling the correction, that they did a good job.
        But to me, it is like firemen putting out the fire after
    they started the fire. I think the Fed started the fire then
    they did a pretty good job putting the fire out.
        I think monetary policy net-net has been negative, and
    particularly combined with regulatory policy. And I don't think
    you can disconnect the two because they have made it harder for
    people to make investments to small businesses that, you know,
    entrepreneurs, innovation.
        And I think the combination of the two has actually been
    one of the most negative forces in the economy.
        Mr. Davidson. Thank you.
        And I want to ask you a broader question, then ask a few of
    you to answer it.
        So as we look at fiscal policy in an era that would be more
    stimulative, fiscal policy that deals with the regulatory
    environment and fiscal policy that deals with our tax situation
    and particularly corporate and the amount of assets that we are
    holding outside the United States by U.S. entities.
        In the investment, fundamentally capital is going to find a
    return and far too often over this century so far, we have seen
    capital finding a return outside our markets, when we could
    easily continue America's trend as the world's land of
    opportunity.
        What kinds of things are at risk in monetary policy? The
    price signals that are out there, the role that only monetary
    policy can play, how is that at work?
        And I guess I would just start with Dr. Taylor and work
    left please?
        Mr. Taylor. The risk with monetary policy, as it continues
    in this unorthodox vein, is that it's hard to predict what is
    happening. It hasn't been effective. If you go back to the 12-
    year period, it is pretty abysmal what has happened. And the
    risk is that continues.
        And I think there is an international risk of that, too,
    because as I mentioned, there is a global contagion of policies
    out there. So I hope that is fixed. It is on the way to fixing
    it. Some of the legislation that you are working on here will
    improve that greatly.
        It is very important to get that done, and I worry because
    there is so much history that when there is a more predictable
    policy in the United States or in other countries, it works so
    much better. It is just a better kind of policy to have.
        Mr. Davidson. Thank you. I wish I had more time and I could
    sit and talk to you. I have about 10 more questions, but thank
    you all for your expertise. Thanks for your testimony, and I
    look forward to working with you in the future.
        Chairman Barr. The gentleman yields back the balance of his
    time.
        And now the Chair recognizes another new member of the
    subcommittee. We welcome the gentleman from Indiana, Mr.
    Hollingsworth, for 5 minutes.
        Mr. Hollingsworth. Good morning. Thank you, Mr. Chairman.
        My question is for you, Dr. Taylor. I am a big fan of the
    Rule, by the way, but I wanted to really understand--when I
    think about the Taylor Rule, it really decomposes nominal GDP
    into two separate components, right, output and price?
        And some of those inputs are inherently unobservable or
    unknowable. Are we better off targeting nominal GDP itself and
    going after something that we have a lot more knowledge and
    observation of rather than the rule? Or what are the advantages
    and disadvantages of focusing on the rule versus the other--
        Mr. Taylor. I think a rule like that has an advantage. It
    stabilizes nominal GDP so then the objective is no different.
    Moreover, people who have tried to implement a nominal GDP
    approach, they basically have a rule or a strategy. It is very
    much like that.
        They are responding to different things in the economy. It
    is hard to measure everything. But some measure of the state of
    the economy, GDP, where we are relative to normal is very hard
    to measure.
        But it is just as hard for a discretionary policy. It is
    hard to measure what the so-called neutral rate is that Chair
    Yellen referred to a lot yesterday.
        Mr. Hollingsworth. Right.
        Mr. Taylor. But it is even worse when you are kind of in a
    discretionary mode because anything goes. So I think a lot of
    the things that sometimes people raise with respect to rule-
    like or strategic kind of policy are even worse with respect to
    that.
        And if I could just add on this question, I don't think
    anyone is saying that the Fed should follow a strict formula
    mechanically. That is certainly not--I have never said that.
        Mr. Hollingsworth. Right. No, I agree.
        Mr. Taylor. It is not in the legislation. People keep
    repeating it. It is not the policy and no one even thinks of it
    that way.
        Mr. Hollingsworth. Do you think that because of the
    financial crisis, some of the inputs or the natural rate or
    others have been permanently affected in the U.S. economy and
    permanently lowered as some evidence suggests or others
    disagree with?
        Mr. Taylor. So what I think with respect to this is the
    interest rate, right?
        Mr. Hollingsworth. Right.
        Mr. Taylor. Yes. I think there has very quickly been a view
    established, and this is at the Fed, that the so-called neutral
    rate has come down, say from four nominal to three. And it
    shows that by their dots.
        Mr. Hollingsworth. Yes.
        Mr. Taylor. I really question whether there is that much
    evidence for it. I have done research on it. It is masked by
    many other factors including the regulatory and tax policy. So
    I think ultimately they think it is going to three now. That is
    their projections.
        When they get there, and I hope they do, then the question
    is if that is enough? And I think it is an open question. I
    would say it is probably not going to be enough, but we can
    wait until we get there to determine it.
        Mr. Hollingsworth. Dr. Bivens, I heard what you said
    earlier, and I was a little bit confused by it. So the offset
    of private investment has certainly been reduced. Right? So
    your assertion that we need to increase public investment to
    offset that.
        I guess do both have the same exact effect on long-term
    productivity? It doesn't appear to be the same in a marginal
    investment that public investment gets the same effect on the
    magnitude of productivity that private investment does.
        Mr. Bivens. Definitely not the exact same marginal effect.
        Mr. Hollingsworth. Yes.
        Mr. Bivens. There is lots of evidence that there is a
    higher marginal effect on public investment, especially given
    the very slow rate of public investment growth over the past 10
    or 20 years.
        Mr. Hollingsworth. Right.
        Mr. Bivens. They both definitely increase capital deepening
    and increase productivity.
        Mr. Hollingsworth. To what extent do you think that public
    investment ultimately has that deleterious effect, I think was
    the word, Dr. Goodfriend used, on private investment on account
    of ultimately its tax burden in the future discounted by
    whatever the rate is between that future and today?
        Mr. Bivens. I think if it is done well and it doesn't crowd
    out private sector investment, so essentially it should be in
    things that the private sector tends to not want to do, sort of
    public goods--
        Mr. Hollingsworth. Right.
        Mr. Bivens. --goods with a lot of externalities, then it is
    as likely to crowd in more private investment as crowd any out.
        Mr. Hollingsworth. I know there has been a lot of
    discussion and the focus obviously today is on monetary policy.
    Tell me a little bit about, maybe as quickly as possible for
    each of you, what is the most important lesson to learn from
    the long-term economic malaise that Japan has suffered on
    account of their own asset bubble popping?
        What is the most instructive piece that we should take away
    from that for us thinking about going forward? Start at the
    left and go right.
        Mr. Allison. I think they made a lot of mistakes. They have
    a really interesting problem that is not fiscal policy or
    monetary policy. They don't have any population growth. And
    actually that is a challenge for us because young people
    eventually become productive.
        You can raise your standard of living in the short term by
    not having children.
        Mr. Hollingsworth. Okay.
        Mr. Allison. But if you don't have children--and I think
    that has overwhelmed and they have tried to fix a deeper
    problem--
        Mr. Hollingsworth. Yes. Yes. I totally get it.
        Dr. Goodfriend. I just want to make sure that we have time.
        Mr. Goodfriend. In Japan they have tried to overcome the
    deflation problem with tremendous government spending, blowing
    up their deficit, blowing up the debt and doing lots of public
    infrastructure spending.
        Mr. Hollingsworth. Right.
        Mr. Goodfriend. And it hasn't worked.
        Mr. Hollingsworth. Yes.
        Mr. Goodfriend. And I think that is a good cautionary tale
    about the United States trying to substitute private investment
    with public investment.
        Mr. Hollingsworth. Dr. Taylor?
        Mr. Taylor. I think there is a third arrow that Abe used to
    talk about, that structurally formed tax reform. They have
    forgotten that. The lesson should be, let's not forget it.
        Mr. Hollingsworth. Yes, that there are limits to monetary
    policy especially in zero bound, and that we need to focus on
    some of the other aspects in terms of fiscal discipline,
    regulatory discipline ensuring the economy functions. Long-
    term, it is going to be growth, not monetary policy that
    determines standard of living in the distant future. Thank you.
        Chairman Barr. The gentleman yields back.
        And as a courtesy to the witnesses, we have finished our
    first round of questioning. The Members have expressed an
    interest in a second round of questioning, although not all
    Members. So this would be a little bit of a brief round.
        So with the witnesses' consent, we will do a brief second
    round of questioning. Is that okay with you all? Okay, very
    good. So without objection, Members on both sides will be given
    an additional round of questions, and I will recognize myself
    for an additional 5 minutes at this time.
        Dr. Taylor, Dr. Bivens made the argument that a strict
    rules-based policy would prevent the Fed from being able to
    react or respond to certain sudden economic events or
    developments.
        What would be your response to that in terms of if Congress
    were to amend the Federal Reserve Act to impose a strategy-
    based or rules-based policy, a format kind of reform, do you
    share Dr. Bivens' concern about that, and if you do not, why
    not?
        Mr. Taylor. No, I don't share the concern, especially the
    way the reform act was written. First of all, the Federal
    Reserve could deviate from whatever strategy it chose. The Fed
    would choose its own strategy. It would just have to inform the
    Congress why.
        There is nothing in the major lender-of-last-resort actions
    that is precluded in any way, shape or form by that Act. That
    is a very important part of monetary policy. It could be more
    rules-based, but that is another thing completely. So I don't
    think there is any tension.
        Sometimes people say, again, it is a strict formula. That
    is not true. That is not what is in the Act. It is not what
    people are suggesting. It is kind of something that has been
    thrown out there to criticize. It is not true at all. But I
    think that the history of this is so informative.
        I think the 1960s or in the 1970s were a period which was
    very unsystematic; policy changed all the time. It was a mess,
    and starting with Volcker and through much of Greenspan's term,
    it was different.
        And so we have that evidence of that is the kind of
    strategy, rules-based policy that we are talking about. Of
    course, it is a new world. Things are different. It could be
    made better than that. But I think it is there are some great
    opportunities if we just learn from history.
        Chairman Barr. Thank you.
        And Mr. Goodfriend, I know you want to elaborate a little
    bit on the inflation-fighting risk premia, and I will invite
    you to do that, but I also want you to maybe take some time
    here and address what you perceive as the danger of a bloated
    balance sheet.
        And in particular the FORM Act or moving to a more rules-
    based policy has been criticized for potentially compromising
    Fed independence. How does unconventional policy or a large
    balance sheet compromise Fed independence? And does the large
    balance sheet itself invite political interference?
        Mr. Goodfriend. The large balance sheet works in two ways.
    There is an aspect where the Federal Reserve is buying not
    Treasury, but non-Treasury assets which, as I mentioned
    earlier, is a kind of credit allocation policy, which I think
    compromises the Fed's independence because credit policy is a
    kind of a fiscal policy that invariably has political
    consequences and creates controversy among those who would like
    to get more credit for themselves directed by the Fed.
        So you want to keep the Fed out of credit policy and
    therefore not have a big balance sheet on that account.
        The other aspect of the big balance sheet is that it is a
    maturity transformation policy, a kind of a government hedge
    fund, which involves the Fed necessarily making bets buying
    long-term assets funded by overnight reserves that are borrowed
    from banks.
        And that, that maturity transformation, hedge fund aspect
    of monetary policy, is also controversial because it is costly
    potentially for taxpayers.
        And on that second count, there is no reason for the Fed to
    get in that business at all. We can do monetary policy in a
    rules-based way, as John has been talking about, without a big
    balance sheet.
        Chairman Barr. I know you want to elaborate more on
    inflation but in the remaining 1 minute that I have to any of
    the witnesses here, I want to further explore this topic of
    productivity. And in my opening statement I talked about the
    Fed's unconventional policies as itself a potential contributor
    to low productivity.
        Can any of you speak to that? Obviously my colleague, Mr.
    Kildee, talked about education and skills and technological
    innovation as a potential boost to productivity, but how is
    monetary policy, and especially improvisational monetary
    policy, an impediment to productivity?
        Mr. Allison. It creates uncertainty. And uncertainty makes
    people less willing to invest. And what you need is more
    capital investment because the more bulldozers people have to
    work with, the more productive they are.
        And we have had way too low a capital investment, and one
    component has been the uncertainty of monetary policy and its
    long-term consequences, along with regulatory policy and the
    debt level, all together have reduced investment.
        Chairman Barr. So your testimony is that monetary policy is
    not alone in contributing to low productivity, and there could
    be other factors. But if you don't have a stable, predictable,
    transparent, accountable, strategy-based monetary policy, that
    can undermine productivity?
        Mr. Allison. No question.
        Chairman Barr. Okay. My time has expired.
        The ranking member, the gentlelady from Wisconsin, is now
    recognized for an additional round of questioning.
        Ms. Moore. Thank you so much, and thank you witnesses for
    bearing with us for this second round. I have so many
    questions. I hope I will be able to squeeze them all in in 5
    minutes.
        As I have listened to the testimony, it seems to me that
    many of you agree with Dr. Taylor in advocating for a sort of
    supply side economy. We have heard this trickle down argument
    for a really long time. Right now we have record stock market
    activity, but we also have record inequality.
        The last time we saw this kind of inequality was, like,
    1929, 1930, when we had the Great Depression. It is really
    interesting that the greater the inequality--like I said, the
    Great Recession and the Great Depression are times in our
    American history where we have seen the greatest inequality.
        So what I want to know now as I try to take a deep dive
    into the blueprint here, when we see $800 billion being cut out
    of Medicaid, State Department 28 percent, EPA, Commerce, Ag,
    Energy, Transportation, HUD, I guess I am wondering from the
    supply siders, at what point will we see the trickle start?
        Maybe I will ask Dr. Bivens. When is the trickle going to
    start, because we are waiting? I will be 66 in April, and I
    have been waiting on the trickle for a while.
        Mr. Bivens. Yes. I would not expect that strategy to lead
    to higher living standards for low- and moderate-income
    Americans anytime. I would say, I think the primary way the Fed
    affects inequality is by actually trying to generate full
    employment in the economy, the way they have been for the past
    10 years.
        Like, a big contributor to inequality over the past 30
    years, is that we have tolerated excessively high unemployment
    in the name of fighting phantom inflation. And I think if we
    can reverse that, we can make a lot of headway.
        Ms. Moore. Okay. Another question I have is, and I think
    Mrs. Love said that, Dr. Goodfriend didn't have a chance to
    answer many questions. So I just wanted to ask him about his
    criticism of the dual mandate as incoherent.
        And I am just wondering, if unemployment were 1 percent,
    would you expect inflation? And if unemployment were 15
    percent, would you expect deflation?
        Mr. Goodfriend. What I meant to say was that in the very
    long run, the only thing that monetary policy can control is
    the purchasing power of money, because the only thing that
    monetary policy does is control the quantity of money.
        Ms. Moore. You didn't mean to say that this was incoherent
    then?
        Mr. Goodfriend. It would be incoherent for the Federal
    Reserve to adopt a target for employment over the long run. And
    in fact the Fed has not done that. Over the short run, there is
    the possibility of using monetary policy to smooth or to
    mitigate fluctuations in employment around what we call the
    natural rate, which is where employment is going over the long
    run.
        And that is fine. But whether employment is 1 percent or 20
    percent over any sustained period of time is largely due to
    factors beyond monetary policy's control.
        Ms. Moore. So Dr. Bivens, what would create more job
    opportunities? If, in fact, the Fed is going to adhere to its
    dual mandate, what would contribute to increased employment
    opportunities? You say austerity is not it. You get the
    question.
        Mr. Bivens. Yes. I think in the short run, we still have
    productive slack in the U.S. economy that needs to be taken up,
    which is why I don't think the Fed should be raising rates. But
    the economy is healing pretty steadily. We should let that
    continue. We shouldn't short-circuit it with premature rate
    increases or shrinking of the balance sheet.
        And if then if we wanted to really accelerate that final
    push to genuine full employment, we could reverse some of the
    fiscal austerity we have seen, do more public investment.
        Ms. Moore. All right.
        And Mr. Allison, quickly, I just read an article from the
    American Banker that talked about how robust things are, and
    Dodd-Frank has not harmed banks. How would you suggest that we
    deal with the Wells Fargo, Credit Suisse, HSBC, Deutsche Bank
    conflicts with less regulations? How do we rein in these
    institutions?
        Mr. Allison. I think we ought to quit bailing a lot of
    those institutions out. They wouldn't be here. That is not true
    of Wells Fargo, but the other institutions have been bailed
    out.
        Ms. Moore. I know. But no, they poison our economy. It is
    not just those institutions.
        Mr. Allison. I think the world would be better if some of
    them had gone out of business during the financial crisis.
    Citigroup has gone broke 3 times in my career. It has been
    bailed out by the Government, not by markets. Markets would
    have disciplined Citigroup.
        Ms. Moore. Thank you.
        I yield back.
        Chairman Barr. The gentlelady yields back.
        The Chair now recognizes the gentlelady from Utah, Mrs.
    Love.
        Mrs. Love. Thank you, Mr. Chairman. I wanted to continue to
    focus on the dual mandate a little bit. And I wanted to see if
    we can get a consensus on something. And I just want to go
    quickly across the board and see if everyone agrees with this
    comment.
        Can we all agree that price instability in the form of
    either deflation or rapid inflation can have drastic
    consequences on economic decision-making, and therefore,
    economic growth and job creation?
        Mr. Allison. Yes.
        Mrs. Love. Can we agree with that? Okay. So wouldn't the
    Fed be pursuing maximum employment most effectively if it
    actually exclusively focused on ensuring price stability? If
    you think about just that and ensuring price stability,
    wouldn't they be in essence pursing maximum employment most
    effectively that way?
        Mr. Allison. I think they would, myself, yes.
        Mr. Goodfriend. I think that would be the right thing to
    do.
        Mr. Bivens. Yes.
        Mr. Taylor. So I think you need a little more elaboration
    here. I think in the periods of the 1980s and 1990s there was a
    dual mandate. You say it was put in the late 1970s. So neither
    of the, at this point--
        Mrs. Love. I'm sorry. I can barely hear you.
        Mr. Taylor. During this period--
        Mrs. Love. Thank you.
        Mr. Taylor. --neither of the Chairs Volcker or Greenspan--
    they almost never referred to the dual mandate. It was get
    inflation down, stabilize your price level, and we will have a
    good employment performance.
        Mrs. Love. Right.
        Mr. Taylor. And in fact that is what happened. Because
    unemployment was so high in the 1970s and got higher and
    higher, and that is what bad monetary policy can do. And
    monetary policy in this Great Recession recently, unemployment
    got very high again. That is what bad monetary policy can do.
        So it is very important, when you think about this dual
    mandate, to recognize that a policy which is erratic or too
    discretionary can cause a lot of harm to the economy.
        So that is why, I think, this strategy of having the Fed
    discuss what its strategy is, is the most effective way to deal
    with this problem, which is there in any case.
        Mrs. Love. Okay.
        I wanted to give you an answer, Dr. Bivens, to--
        Mr. Bivens. Yes, your question is interesting. I think if
    we had perfect foresight and there was a totally predictable
    relationship between unemployment and inflation, then you would
    be right. You just pick price stability and that is the best we
    can do, and that will maximize employment.
        We live in a really uncertain world and, to me, the job of
    the Fed is to probe exactly what maximum employment is. And the
    way they probe it is if they spark accelerated inflation, they
    have overshot. If they haven't, they have undershot. And so I
    think it is that uncertainty that makes you need to have that
    dual mandate.
        Mrs. Love. Okay. Oh, gosh, time goes by so quickly. Do you
    think it is widely accepted that the Fed's monetary policy
    changes impact the economy with substantial lag, perhaps as
    much as several quarters or even more than a year after the
    changes in policies are announced?
        I want to make sure that I just want to get to the support
    for the formula that Mr. Taylor has.
        Mr. Allison. I think there is a long lag time. Sometimes it
    can be longer than a few quarters. And in fact, that is one of
    the problems we have, because a lot of times the Fed gets away
    with making mistakes because we can't connect the mistake to
    the time when they made it.
        Mrs. Love. Okay. Yes.
        Mr. Allison. And I think that is a big problem.
        Mrs. Love. And given that reality, isn't it reasonable to
    argue that, in trying to meet the mandate of maximum
    employment, the Fed might, and even perhaps more often than
    not, do more harm than good without focusing on just making
    sure that we have strategies in place?
        Mr. Goodfriend. I think that has been the case in the past.
    And that is why in my testimony I emphasized how important it
    is for the Fed to commit to the inflation target, to commit
    really seriously in a way that it hasn't done in the past.
        And that would help pin down the public's confidence in the
    Fed's commitment to maintain some degree of price stability
    above all.
        Mrs. Love. And I wanted, Dr. Taylor, to give you a final
    word on that.
        Mr. Taylor. So one of the reasons why it is important to
    have the strategy in terms of the policy instruments is there
    is this lag you mention. It is hard to hold the central bank
    accountable, which you should do, based on just these targets,
    because they come much later.
        I think that is why some focus on the instruments, Federal
    funds rate, money supply reserves, balance sheet is a very
    important part of the discussion.
        Mrs. Love. And I also wanted to just finish up by saying
    that the United States of America is the leader, I believe, in
    this world. And just because other countries aren't doing it,
    doesn't mean that we shouldn't be doing it. We should be the
    leaders, especially when it comes to strategies and monetary
    policy. Thank you.
        Mr. Allison. Absolutely.
        Chairman Barr. The gentlelady yields back her time.
        And we now welcome another new member to the subcommittee.
    The gentlelady from New York, Ms. Tenney, is recognized for 5
    minutes.
        Ms. Tenney. Thank you, Mr. Barr.
        I just want to thank the panel for being here today. I am
    from rural upstate New York, in District NY22, and we have an
    unemployment rate that is well above the national average. In
    fact, 2 of the largest counties in my district have over a 7
    percent unemployment rate.
        With the job conditions in this country obviously still
    sluggish, and a consistent downward trend with labor
    participation rates, the Federal Reserve must be promoting
    economic growth and job creation. Personally, I don't believe
    this is being done.
        My district used to flourish with opportunities in
    manufacturing from sectors across the world. Indeed, I own, or
    co-own, a manufacturing business right in the heart of the
    district and in central New York that was started over 70 years
    ago by my grandfather. But we are still struggling in this
    economy.
        However, over 5 million manufacturing jobs have disappeared
    nationwide in the last decade. Two weeks ago in my district,
    Remington Arms, which is the largest private employer in
    Herkimer County, laid off 122 workers in the district.
        Remington Arms is an iconic manufacturing company. In fact,
    it is reputed to be the oldest manufacturing firm consistently
    running in the country, for over 200 years.
        This is actually the norm in my community, and
    manufacturing companies are usually the headliner in our media.
    They are moving out of either New York or out of our country.
    And we hear about that every week.
        Herkimer County, where Remington is based, has an
    unemployment rate of 6.6 percent right now, which is actually
    one of the lower rates in my district. And it is likely to
    increase if we do nothing about what is happening now with
    monetary policy.
        Our economy, as you know, grew at a lethargic annualized
    rate of about 1.9 percent in the last quarter. For 2016, the
    economy grew only 1.6 percent. During the Obama Presidency,
    quarterly GDP growth has been 1.8 percent, and that reflects my
    district as well.
        My question is, and I would like to address this to Mr.
    Allison, in your opinion, hasn't the Fed's so-called
    extraordinary policy stance, which has been in place for over a
    decade now, has it produced the kind of robust economic growth
    that has been the post-World War II norm in this country? And I
    would love to hear your comments on that in light of my
    situation.
        Mr. Allison. It has not.
        Ms. Tenney. Okay.
        Mr. Allison. I think the evidence--I am from North
    Carolina, and it has had a lot of those same kinds of problems.
        I think there has been more damage actually done by the
    regulatory side of the Fed than has been done by monetary
    policy, because the Fed has kept traditional banks that were in
    healthy shape, like BB&T, from doing their traditional lending,
    which is what creates the replacement jobs for what is
    happening with manufacturing, along with the Federal-level high
    tax rates and general regulation.
        So I think favorable regulatory--the monetary policy hasn't
    helped and it hasn't caused the problem, but the regulatory
    side of the Fed has done more damage than the monetary side.
        Ms. Tenney. Mr. Goodfriend, do you have a comment on that?
        Mr. Goodfriend. Yes. I agree with that. I really like the
    point that when industries leave a locality, labor markets are
    freed up.
        And what makes an economy like ours healthy is a dynamism,
    the ability of people with ideas to reemploy those workers
    productively.
        And that capacity depends entirely on the ability to get
    loans, usually from bankers, to finance small businesses. And
    that is really where the problem has been over the last few
    years.
        Ms. Tenney. Thank you. I appreciate your input today.
        And I yield back. Thank you, Mr. Chairman.
        Chairman Barr. Thank you. The gentlelady yields back.
        And now the gentleman from Texas, Mr. Green, is recognized
    for an additional round of questioning.
        Mr. Green. Thank you, Mr. Chairman. Let us talk for just a
    moment about the circumstance that we have with reference to
    witnesses today. I think it is important for people to know
    that there is but one witness here from the Democratic side,
    and there are three from the Republican side.
        I think it is important to know this, because I think
    people who may be viewing this might assume that the ratio in
    the country of persons who could testify and give expert
    testimony would be three-to-one.
        Probably not three-to-one. In fact, most independent
    thinkers in this country want to see an independent Fed. Is
    that a fair statement, Mr. Bivens?
        Mr. Bivens. Yes. I think that independence of the Fed is a
    widely held value among economists.
        Mr. Green. And do you agree, Mr. Bivens, that if the GAO
    has oversight of the Fed, that that diminishes the independence
    of the Fed?
        Mr. Bivens. Oversight, yes. I think they should all be--
        Mr. Green. And the--
        Mr. Bivens. --all government agencies should be evaluated
    at times.
        Mr. Green. If the Fed, in using a formula-based method for
    determining policy, is audited by GAO, if it deviates from that
    formula and if GAO reports to Congress what the deviation is,
    are we not now encroaching upon the Fed's independence to the
    extent that there is additional oversight from GAO that it
    brings to the attention of Congress?
        Mr. Bivens. It certainly could be. If it is purely an
    informational request or addition to Congress, maybe not. But
    it is hard to not see that as providing pressure for Congress
    to start micromanaging the Fed, and I think everyone thinks
    that would be a bad idea.
        Mr. Green. That is the operative phrase, ``micromanage,''
    because that is what we are getting to. That is where we would
    be headed. That is the direction we would be headed in.
        And once that report gets to Congress from the GAO, that
    then opens the floodgates for Congress to now invade, encroach
    upon, if you would, the independence of the Fed. Are most
    central banks, generally speaking, independent? Or don't they
    seek independence, Mr. Bivens?
        Mr. Bivens. Yes, and that has been the strong trend in
    recent decades as well.
        Mr. Green. And is the United States considered the
    premiere, the preeminent, the supreme, superb central bank of
    the world?
        Mr. Bivens. I think that is fair to say. There are probably
    other contenders, but yes, that's fair to say.
        Mr. Green. So there are other contenders, but the yen is
    not as strong as the dollar. The euro is not as strong as the
    dollar. The pound is not as strong as the dollar.
        The dollar is the preeminent currency in the world, and it
    is such because everybody knows that the United States of
    America pays its bills. We pay our bills. That makes the dollar
    strong. Do you agree, sir?
        Mr. Bivens. Yes. I would say that the evidence that we have
    of the highest functioning central bank is actually our
    performance during this recent 10 years.
        Even more than the strength of the currency, I think when
    you compare us to the ECB, people say, ``I am really happy we
    have the Fed rather than the ECB running things in the United
    States.'' So I think it is their performance over the past 10
    years that really sets them apart, generally.
        Mr. Green. Not only over the past 10 years, but when we
    have times of inflation, we pay our bills. Recession? We pay
    our bills. Stagnation? Stagflation? We pay our bills. We
    consistently pay our bills. That gives confidence. That
    confidence is what causes the dollar to have its preeminence.
        Without continuing along this line, I need to get to
    something else rather quickly. But thank you for your input.
        Let us talk for just a moment about monetary policy and
    high unemployment. At what point do we get to high
    unemployment? Right now, unemployment is under 5 percent. When
    does it become high, generally speaking?
        Mr. Taylor, when does it become high?
        Mr. Taylor. It has been high many times, and we have--
        Mr. Green. I understand it has been high many times. I hate
    to intrude, and I don't mean to be rude, crude, and unrefined,
    but I do have to ask you to answer. At what point? At 5
    percent? Is that considered high?
        Mr. Taylor. Yes.
        Mr. Green. Five percent is high. Six percent is high.
        Mr. Taylor. Yes, of course.
        Mr. Green. So if 6 percent is high, and African-American
    unemployment is 7.7 percent currently, would that be high?
        Mr. Taylor. Absolutely.
        Mr. Green. And is it true that African-American
    unemployment is always, usually, generally speaking, twice that
    of white unemployment? Is this true?
        Mr. Taylor. Unfortunately.
        Mr. Green. Unfortunately, it is. And it is a wonderful
    thing to know that the current Chair of the Fed has agreed to
    examine why African-American unemployment is usually twice that
    of white unemployment.
        That is one of the functions of the Fed. The Fed looks at
    subsets of society to ascertain whether or not these subsets
    are in some way not benefiting from the policies of the Fed so
    that they can tweak the policies of the Fed.
        I wish I had more time, but I will yield back.
        Chairman Barr. The gentleman's time has expired.
        Now the gentleman from Minnesota, Mr. Emmer, is recognized.
        Mr. Emmer. Thank you, Mr. Chairman, and thanks to the
    witnesses for being here today and for sharing your expertise,
    all of you.
        First, Dr. Bivens, the term ``independent'' that we were
    just talking about--independent means free from political
    pressure and free from emotionally based decision-making.
    Wouldn't you agree?
        Mr. Bivens. More in the former than--I am not sure what
    emotionally based means, but yes, free from political pressure,
    from--
        Mr. Emmer. Sure.
        Mr. Bivens. Yes.
        Mr. Emmer. And you would understand, there is a difference
    between micromanagement of an agency versus holding an agency
    accountable for its actions.
        Mr. Bivens. Yes.
        Mr. Emmer. All right. And you wouldn't be here today
    suggesting that we shouldn't hold every agency of this Federal
    Government accountable for its actions?
        Mr. Bivens. That is correct. Yes.
        Mr. Emmer. All right. Mr. Allison, I was listening this
    morning. First, this dual mandate, it hasn't always existed.
    The dual mandate of the Fed was put in place in the 1970s at
    some point, correct?
        Mr. Allison. Yes, sir.
        Mr. Emmer. This morning, when you started off your remarks,
    you noted that, in your time, you have seen three financial
    crises that the Fed reacted to.
        And in your expert opinion, as someone who actually ran one
    of these major financial institutions and did so rather
    successfully during difficult times and good, you witnessed
    what you said was the Fed making the situation worse and
    delaying the recovery. Is that correct?
        Mr. Allison. Yes, sir.
        Mr. Emmer. And all three of those crises that you referred
    to happened after the dual mandate was put in place, correct?
        Mr. Allison. Yes. Of course, my career didn't start until
    about the same time, so--
        Mr. Emmer. No, I get it. I get it. We are not that far
    apart in age, I don't think, even though I look a lot older.
        [laughter]
        I guess what I am getting at is you also referenced--well,
    I will go to your actual statement.
        You said, ``While in theory, the Fed has a dual role of
    maintaining both stable prices and low unemployment,'' you, Mr.
    Allison, ``have had numerous private conversations with Board
    members over the years in which they readily admitted that the
    political pressure is to maintain low employment, not stable
    prices.'' Is that correct?
        Mr. Allison. Absolutely. If you get them in a candid
    conversation, they get a lot more--now if prices went up really
    crazy, they would get excited. But they get a lot more worried
    about unemployment because that is politically visible.
        Mr. Emmer. Again, going off your remarks when you started
    this morning, you referenced a potential crisis--I think it was
    in the housing market--in the earlier 2000s.
        Mr. Allison. Yes, sir.
        Mr. Emmer. All right. And you said that the Fed didn't want
    to have a crisis because of ``political and emotional
    reasons.'' Can you explain what you were talking about?
        Mr. Allison. It is really simple. Alan Greenspan was the
    head of the Fed. He had been there a long time. He was
    considered the maestro. He was getting ready to retire in a
    couple of years, and he wanted to go out looking good.
        And so he orchestrated negative real interest rates, which
    took a minor bubble in housing that would have corrected and
    wouldn't have been a big deal, and it created the drive--and
    this is what, I think, Dr. Taylor was talking about.
        All of a sudden, we had these new kind of policies, and
    they were very different from what Greenspan had done in the
    past. I will suggest, I am speculating on what motivated that,
    but there is no rational reason that you can think of of why
    those policies were implemented.
        Mr. Emmer. At no rational reason--
        Mr. Allison. Since the other ones were working.
        Mr. Emmer. All right, as a non-expert but a policymaker who
    has watched this from afar, there is no explanation other than
    the Fed is determined that when it was given the power to not
    only deal with price stability but suddenly to somehow be
    involved as the great God from above in taking care of the
    unemployment in this country, that that just expanded all kinds
    of discretionary ideas within this body that was really
    restricted to do a very important thing.
        And I have listened this morning. It gets very frustrating.
    I have listened this morning. It brought back memories of a
    comedian from the 1960s and early 1970s by the name of Flip
    Wilson, who had a character named Geraldine. Geraldine was
    regularly heard saying, ``Are you going to believe me or are
    going to believe your lyin' eyes?'' Right?
        I look at this, and maybe, Dr. Taylor, you can address it.
    I heard this morning that this unconventional monetary policy,
    which seems to be addressing unemployment, because really it is
    not about price stability, if you can make that argument. But
    it really is this gray area how they are going to tinker tools
    in the toolbox.
        Really? A bloated balance sheet is another tool in the
    toolbox? And I see I have run out of time. Hopefully, I will be
    able to continue this frustration at a later time. Thank you
    for being here.
        Chairman Barr. The gentleman's time has expired. He yields
    back. Thank you.
        Now, the vice chairman of the subcommittee, the gentleman
    from Texas, Mr. Williams, is recognized.
        Mr. Williams. Thank you, Mr. Chairman. I will be brief. As
    you can tell, working on Fed reform is our mission, and our
    chairman is doing a great job of that.
        And I would just maybe ask you, Mr. Goodfriend, or any of
    you, what should the Fed look like? If it were just starting
    over again, what would it look like? I am a Main Street guy. I
    am a car dealer back in Texas, and Main Street is hurting.
        And also probably French and I, and maybe Mr. Taylor, we
    were in business at 21 percent. I remember that. When you take
    21 percent, you take 1988, you take 9/11, and you take today.
        This is the toughest time for Main Street America since
    2008 that I have ever experienced. And so what should the Fed
    look like?
        Mr. Goodfriend. That is an awfully big question--
        Mr. Williams. You have a lot of time here.
        Mr. Goodfriend. I am a little bit like a broken record
    here. You want to start out making very clear that the priority
    for monetary policy is stabilizing the purchasing power of
    money.
        And then the way to do that would involve a strategy which
    relied on the oversight process in a coherent way to discipline
    the Federal Reserve's actions.
        And in that sense, I want to say we would talk about the
    Federal Reserve explaining its monetary policy decisions to the
    oversight committees against a familiar Taylor-type reference
    rule.
        That doesn't mean the Fed would follow the rule
    religiously. It means the Fed would invite the oversight
    process to discipline itself so that the Congress and the Fed
    together would finally stabilize the purchasing power of money.
        It is very important, if we were to reform the Fed to
    invite the oversight process into the mix so that the Congress
    and the Fed could work together to lock down in the public's
    mind that we would have secure price stability from here on.
        That would be, in my view, the most important combination
    of things to do if we were really going to reform the Fed.
        Mr. Allison. Can I make an extra comment on that?
        Mr. Williams. Sure, please.
        Mr. Allison. I think it would be very critical to separate
    regulation from monetary policy. I think that is one of the
    problems we had during the financial crisis. I don't think it
    was monetary policy that caused the Federal Reserve to save
    Citigroup. And that led to Dodd-Frank and a lot of other stuff.
        I think it was they were regulating Citigroup and they
    didn't want Citigroup to look bad because they would look bad.
    And all of this contagion stuff being in the banking business,
    I think that is a myth. And so I think it would be really
    important to separate regulation from monetary policy.
        And then on the regulatory side I think Congress ought to
    come up with some simple rules. If you have ``X'' amount of
    capital then you don't get all these regulations. And as long
    as you are taking risks with your own money, and not other
    people's money, not through the FDIC insurance, then let the
    market decide.
        And some banks, by the way, should fail. It is just that
    you shouldn't have systemic failures, and I don't think you
    will have systemic failures except when all the same rules are
    applied to everybody and everybody does the same thing. And
    that is when you get systemic problems.
        Mr. Williams. Yes.
        Dr. Taylor?
        Mr. Taylor. I would like to second the--
        Mr. Williams. Yes, sir?
        Mr. Taylor. I would like to second very much John's
    comments. I think a combination of what we have been saying is
    important.
        Mr. Williams. Yes. Yes, sir.
        I have some time left. Dr. Taylor?
        Mr. Taylor. I would just add to the list of reforms along
    the lines of Mr. Allison, is some way to revise the bankruptcy
    code that could apply to a large financial institution so that
    you could definitely say this is an alternative to the bailouts
    which there is legislation.
        I think it is part of the CHOICE Act, but out of the
    Judiciary Committee in the House, which I think is very good,
    very worthwhile considering. And I think it should be part of
    this mix. It is really part of the notion it is bankruptcy not
    bailouts notion.
        Mr. Williams. Dr. Bivens, would you like to add to that?
        Mr. Bivens. Yes. I think if we are starting from blue sky
    and reconstituting the Fed, one thing I would like to see would
    be regional Federal Reserve Boards that were not dominated by
    the financial sector.
        And I would say the one caveat to independence that I see
    in the current Fed structure today is that it is not
    independent from the policy preferences of the finance sector,
    which dominate the regional boards.
        There are supposed to be seats on there for consumer,
    labor, and advocacy groups. They sometimes are, sometimes
    aren't. That share of seats should be much higher, so I think
    that would be the first thing I would do.
        Second, I would keep the dual mandate. I think making them
    be responsible for maximum employment in the short run is a
    very key reason why they are considered among the gold standard
    of central banks in the world.
        Mr. Williams. I appreciate that. Thanks for being here.
        Mr. Chairman, I yield back.
        Chairman Barr. The gentleman yields back the balance of his
    time.
        And for our final round of questioning, the gentleman from
    Arkansas, Mr. Hill, is again recognized.
        Mr. Hill. Thanks, Mr. Chairman.
        We were talking in the previous round about the size of the
    balance sheet and raising short term rates, which the Board of
    Governors announced yesterday, versus shrinking the balance
    sheet, in other words, letting actual net sales of assets
    start.
        But there is this other issue that that balance sheet is
    funded by excess reserves in the banking system. And we really,
    or I haven't heard if we have talked much about that today.
        Section 201 of the Financial Services Regulatory Act of
    2006 allowed the Fed to start paying interest on excess
    reserves in 2011. And they are supposed to statutorily not pay
    more than the comparable short-term market rate.
        But in fact they have, significantly, and so I would like
    your thoughts on that. And your thoughts on the interplay of
    that?
        Should we begin lowering that rate as a part of the mix in
    the toolbox to affect the short-term marketplace of rates? And
    our ranking member of the full Financial Services Committee,
    Ms. Waters, described it at last year's Humphrey-Hawkins
    testimony.
        This was a massive subsidy to the biggest financial
    institutions in the country, and when you answer my question
    about the use of that tool, if you would add to the point
    should we have that published, the amount of interest paid to
    the banking industry on an institution to institution basis?
        So I will start with you, Mr. Allison?
        Mr. Allison. I think that paying interest on reserves was a
    very bad decision, particularly at the time it was made. It is
    interesting that the context of the decision was that banks
    were at a disadvantage because they weren't getting any
    interest on their reserves competing with other institutions,
    many of which got into financial trouble.
        I would not have allowed the Fed to manage monetary policy
    through high rates on reserves. I think they ought to phase the
    interest rates on reserves out period. And I think that would
    lead to banks getting more aggressive back in the lending
    business. And at the same time they have to reduce the
    regulations so banks can make loans.
        They have to do both because the combination is what
    created this problem. They made it hard for banks to make loans
    and then they pay high rates on reserves.
        So in terms of the subsidy to banks, I think in a way that
    is unfair because the Fed is incenting banks to do this, right?
    It is not that the banks are doing something they are not
    supposed to do.
        They are doing something the Fed wants them to do. They are
    incentivized to do this. The Fed puts pressure on banks to keep
    excess reserves now, because they like having excess reserves
    to fund their huge bond portfolio.
        I don't think the banks are doing any more than they have
    to because of the Fed's goals. I think they are doing what the
    Fed wants them to do.
        Mr. Hill. Clearly, if you are paying over the statutory
    rate you are supposed to be paying, there is a Fed inducement
    there.
        Dr. Goodfriend?
        Mr. Goodfriend. The reason the Federal Reserve initiated
    paying interest on reserves in the first place dates back to
    the post-crisis rescue.
        And it was to enable the Federal Reserve to keep interest
    rates above zero at the time, worrying about inflation, while
    also funding a reintermediation of credit markets, which had
    collapsed at the time, by creating reserves and then using the
    funds to lend to those parts of the economy that could no
    longer get credit.
        But that was an emergency measure. What we should do now is
    shrink the Fed balance sheet, drain those reserves out of the
    system so we can move back to the pre-crisis way of doing
    monetary policy where the Federal funds rate would float above
    interest on reserves.
        We would recreate a scarcity of reserves and that would
    solve the problem you are talking about. And that is why this
    morning we have been talking about a bunch of reasons to scale
    back the Fed's balance sheet.
        Mr. Hill. And just for the viewers at home, I think it is
    $2 trillion in excess reserves now. And for the 10 years prior
    to the 2007 peak in the economy it averaged about $1.7 billion
    with a ``B.'' And you look at that as a percentage of the GDP,
    it is a massive increase.
        Dr. Taylor?
        Mr. Taylor. Yes. I think the goal should be to get the
    balance sheet down to the point where the supply and demands
    for reserves determines the interest rate so it will be a
    market interest rate. Then these issues would go away, and I
    think in the meantime, or at the appropriate time, don't have
    interest on excess reserves.
        Mr. Hill. Yes.
        Mr. Taylor. I think that is the goal and how fast you
    should get there is the question of the day. So it would be
    really rapid. I think it should be strategic, but that goal I
    think is very important. That you don't need a gigantic balance
    sheet. You don't need a lot of excess reserves.
        You need the scarcity, as Marvin put it, to get to the
    right level. And that is a market-determined rate that way. It
    worked fine in the past. We don't need all these excess
    reserves. And there are people out there who say we do, and I
    try to deal with that, some of that criticism in my testimony.
        Mr. Hill. Thank you, Dr. Taylor.
        Chairman Barr. The gentleman's time has expired.
        And I would like to thank all of our witnesses for their
    insightful testimony today. I also want to thank my colleagues
    for their excellent questions.
        The Chair notes that some Members may have additional
    questions for this panel, which they may wish to submit in
    writing. Without objection, the hearing record will remain open
    for 5 legislative days for Members to submit written questions
    to these witnesses and to place their responses in the record.
    Also, without objection, Members will have 5 legislative days
    to submit extraneous materials to the Chair for inclusion in
    the record.
        This hearing is adjourned.
        [Whereupon, at 12:29 p.m., the hearing was adjourned.]

                                A P P E N D I X

                                 March 16, 2017

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