[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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