U.S. GOVERNMENT PUBLISHING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Publishing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

99–399 2016

S. HRG. 114–311 

THE ECONOMIC OUTLOOK 

HEARING 

BEFORE THE

JOINT ECONOMIC COMMITTEE 

CONGRESS OF THE UNITED STATES 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

DECEMBER 3, 2015 

Printed for the use of the Joint Economic Committee 

( 

DeShaun on LAP51NQ082 with DISTILLER

(II) 

JOINT ECONOMIC COMMITTEE 

[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress] 

SENATE 

DANIEL COATS, Indiana, Chairman 

MIKE LEE, Utah 

TOM COTTON, Arkansas 

BEN SASSE, Nebraska 

TED CRUZ, Texas 

BILL CASSIDY, M.D., Louisiana 

AMY KLOBUCHAR, Minnesota 

ROBERT P. CASEY, JR., Pennsylvania 

MARTIN HEINRICH, New Mexico 

GARY C. PETERS, Michigan 

HOUSE OF REPRESENTATIVES 

PATRICK J. TIBERI, Ohio, Vice Chairman 

JUSTIN AMASH, Michigan 

ERIK PAULSEN, Minnesota 

RICHARD L. HANNA, New York 

DAVID SCHWEIKERT, Arizona 

GLENN GROTHMAN, Wisconsin 

CAROLYN B. MALONEY, New York, Ranking 

JOHN DELANEY, Maryland 

ALMA S. ADAMS, PH.D., North Carolina 

DONALD S. BEYER, JR., Virginia 

VIRAJ M. MIRANI, Executive Director 

HARRY GURAL, Democratic Staff Director 

DeShaun on LAP51NQ082 with DISTILLER

(III) 

C O N T E N T S 

OPENING STATEMENTS OF MEMBERS

Hon. Daniel Coats, Chairman, a U.S. Senator from Indiana .............................. 1 

Hon. Carolyn B. Maloney, Ranking Member, a U.S. Representative from 

New York .............................................................................................................. 3 

Hon. Patrick J. Tiberi, Vice Chairman, a U.S. Representative from Ohio ......... 5 

WITNESSES

Hon. Janet L. Yellen, Chair, Board of Governors of the Federal Reserve 

System, Washington, DC ..................................................................................... 6 

SUBMISSIONS FOR THE RECORD

Prepared statement of Hon. Daniel Coats, Chairman, a U.S. Senator from 

Indiana .................................................................................................................. 36 

Prepared statement of Hon. Carolyn B. Maloney, Ranking Member, a U.S. 

Representative from New York ........................................................................... 36 

Chart titled ‘‘Private-Sector Job Growth Continues in October’’ .................. 41 

Report titled ‘‘The Financial Crisis: Lessons for the Next One’’ ................... 42 

Letter dated November 16, 2015, from Chair Yellen addressed to Hon. 

Paul Ryan and Hon. Nancy Pelosi .............................................................. 97 

Prepared statement of Hon. Janet L. Yellen, Chair, Board of Governors of 

the Federal Reserve System, Washington, DC .................................................. 38 

Chart titled ‘‘Low-Income Workers Have Lost the Most Work Hours’’ submitted by Senator Bill Cassidy ........................................................................... 100 

Questions for the record and responses: ................................................................

Questions for Hon. Janet L. Yellen submitted by Chairman Daniel Coats . 101 

Questions for Hon. Janet L. Yellen submitted by Senator Mike Lee ........... 104 

Questions for Hon. Janet L. Yellen submitted by Ranking Member Carolyn B. Maloney .............................................................................................. 111 

Questions for Hon. Janet L. Yellen submitted by Senator Robert P. 

Casey, Jr. ....................................................................................................... 116 

Questions for Hon. Janet L. Yellen submitted by Senator Amy Klobuchar 119 

DeShaun on LAP51NQ082 with DISTILLER

DeShaun on LAP51NQ082 with DISTILLER

(1) 

THE ECONOMIC OUTLOOK 

THURSDAY, DECEMBER 3, 2015 

CONGRESS OF THE UNITED STATES, JOINT ECONOMIC COMMITTEE, Washington, DC. 

The Committee met, pursuant to call, at 10:01 a.m. in Room 216 

of the Hart Senate Office Building, the Honorable Daniel Coats, 

Chairman, presiding. 

Representatives present: Tiberi, Paulsen, Hanna, Schweikert, 

Grothman, Maloney, Delaney, Adams, and Beyer. 

Senators present: Coats, Cruz, Cassidy, Klobuchar, Casey, 

Sasse, Heinrich, and Peters. 

Staff present: David Bauer, Doug Brunch, Barry Dexter, Connie 

Foster, Harry Gural, Colleen Healy, Jason Kanter, Christina King, 

David Logan, Kristine Michalson, Viraj Mirani, Brian Neale, 

Thomas Nicholas, Robert O’Quinn, Leslie Philips, Stephanie 

Salomon, Sue Sweet, Phoebe Wong. 

OPENING STATEMENT OF HON. DANIEL COATS, CHAIRMAN, A 

U.S. SENATOR FROM INDIANA 

Chairman Coats. I would like to first welcome our new Vice 

Chairman, Congressman Tiberi. We have had Congressman Brady, 

I don’t want to say promoted or demoted, to Chairman of the Ways 

and Means Committee and we are very, very happy to have Congressman Tiberi to take over as Vice Chairman. Welcome. 

I also want to welcome our distinguished Chair of the Federal 

Reserve, Janet Yellen, and thank her for appearing before us this 

morning. 

This Committee has a long tradition of receiving regular updates 

from the Chair of the Federal Reserve, and we are pleased to be 

continuing that tradition today. 

The U.S. economy has struggled through a long season of tepid 

growth. It has been six years since our last Recession technically 

ended, and over that time our economy has grown at a historically 

slow pace, averaging 2.2 percent per year. 

Some have suggested that a 2 percent growth rate is and will be 

the new normal for the economy. All of us should view these low 

economic expectations as unacceptable. 

The Fed certainly has an important role to play in setting monetary policy, and that is where its focus should be. There will no 

doubt be discussion of Fed policy and interest rates during today’s 

hearing, as accommodative monetary policy by the Fed has been 

the norm for some time now. 

DeShaun on LAP51NQ082 with DISTILLER

2 

However, we should also be mindful that changing interest rates 

is not a long-term prescription for achieving a more dynamic economy. 

Unlocking the full potential of our economy will require policy 

decisions that incentivize the private sector, including better fiscal 

management of spending by the Federal Government, as well as 

pursuing pro-growth policies such as tax reform and a more balanced regulatory environment and passage of trade agreements, 

and other policy commitments. 

Our commitment to successfully addressing these other policy 

issues—and by ‘‘our’’ I mean the United States Congress, not the 

Federal Reserve—will go a long way toward creating certainty and 

confidence among both businesses and consumers. 

If we do not succeed in furthering pro-growth policies, we may 

face an economic future defined by low expectations and diminished standards of living. At the same time, questions arise regarding the impact of weakening economies in Europe, China, and 

emerging market countries. 

This morning the European Central Bank announced that it is 

expanding its stimulus measures and taking its overnight deposit 

rates further into negative territory. 

China devalued its currency in August in response to financial 

turmoil and other major international trading partners face significant economic challenges. The actions taken by these countries will 

have an impact on the value of the Dollar and the U.S. economy. 

We look forward to hearing the Chairman address that issue, also. 

These are some of the major issues we will discuss, and I certainly look forward to hearing Chair Yellen’s thoughts on those. 

There is global uncertainty also, I think we should add to this 

equation. Too many mornings we tune in to breaking news, or pick 

up the newspaper and find headlines that we do not want to read. 

That appears to be a spreading cancer not only in the United 

States but also throughout the world. 

And so the uncertainty that that levels and the impact that it 

has on economic policies is perhaps another issue that we ought to 

be discussing. 

This morning, unfortunately, the House of Representatives has a 

series of votes coming up shortly, so there may be some in and out 

of Members having to deal with that as we are trying to wrap up 

our session. 

I will ask our members to try to keep their remarks and questions to five minutes. If we need a second round, we will try to accommodate that. And also, try to accommodate those that have had 

to run out for votes and will come back. 

Chair Yellen, most of us sitting—not all of us sitting up here 

today would love to wake up to headlines in The Wall Street Journal, headlines in The New York Times, pictures on the front page 

of Financial Times, and I have all these things that highlight you 

this morning as the person of the day. 

[Laughter.] 

I don’t expect that you have that same enthusiasm for waking up 

every morning, but we are really pleased to have you here and look 

forward to your testimony. 

DeShaun on LAP51NQ082 with DISTILLER

3 

First, though, I would like to turn to Congresswoman Maloney, 

our Ranking Member, and then ask Mr. Tiberi to take a minute or 

so just to introduce himself to us as our new Vice Chairman. 

[The prepared statement of Chairman Coats appears in the Submissions for the Record on page 36.] 

Congresswoman Maloney. 

OPENING STATEMENT OF HON. CAROLYN B. MALONEY, 

RANKING MEMBER, A U.S. REPRESENTATIVE FROM NEW YORK 

Representative Maloney. Thank you, so much, Mr. Chairman. 

And so welcome, Chair Yellen. I am so pleased you are here today 

for this important and timely discussion. I look forward to your testimony in advance of the Federal Open Market Committee’s meeting at which you will decide whether or not to raise the Federal 

Funds Rate. 

I am interested in hearing your perspective on the following 

issues, and others: 

What current trends do you find most important in helping you 

assess the short- and long-term challenges facing our economy? 

Secondly, how can the Federal Reserve time future rate increases 

so we do not jeopardize the current economic recovery, or harm 

American families? 

Thirdly, what do you think of the legislation recently passed by 

the House of Representatives that would compromise the independence of the Federal Reserve? 

Before I turn to these issues and others, I think it is important 

to put this hearing in perspective. At the end of the Bush Administration, just a little less than seven years ago, we faced what 

former Fed Chairman Bernanke called, and I quote, ‘‘the worst financial crisis in global history, including the Great Depression.’’ 

End quote. 

We have come a long way since the economic crisis, and that 

progress is in no small part due to the bold actions by the nonpartisan, nonpolitical Federal Reserve. 

In the month when President Bush left office, we lost almost 

820,000 private-sector jobs. Over the past year, we have gained an 

average of 226,000 jobs per month. In fact, we have added 13.5 million private-sector jobs over a record-breaking 68 consecutive 

months of growth. 

I have this chart, and I would like to put it in the record, which 

explains and documents this growth. In October 2009, unemployment reached 10 percent. Since then, it has been cut in half. It now 

stands at 5 percent. 

[The chart titled ‘‘Private-Sector Job Growth Continues in October’’ appears in the Submissions for the Record on page 41.] 

There were about seven unemployed workers for every job opening in July of 2009. Now there are 1.4 unemployed workers per job 

opening, the lowest this ratio has been since early 2001. 

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

Average home prices dropped 19 percent between 2007 and 2011, 

but now they are back up to where they were in 2007. About $17 

DeShaun on LAP51NQ082 with DISTILLER

4 

trillion in wealth evaporated between the summer of 2007 and the 

beginning of 2009. All of those losses have been recovered and now 

total wealth is about $10 trillion higher than it was at the onset 

of the financial crisis. 

The Federal Reserve played an extraordinary role in turning 

around the economy. It quickly acted to lower rates to almost zero, 

and has held them there for about seven years, which has been a 

principal factor in our economic recovery. 

The Fed did this despite the opposition of those who claimed that 

inflation was on the horizon, and who were later proven wrong. 

Then, having exhausted the conventional tools of monetary policy, 

the Fed deployed several rounds of quantitative easing aimed at 

keeping long-term rates low and further stimulating our economy. 

These efforts helped haul our country out of the depths of the 

Great Recession. But without the Fed’s actions, things would be 

very different today. A recent study by economists Alan Blinder 

and Mark Zandi found that efforts by the Federal Reserve and the 

Obama Administration, with support from Democrats in Congress, 

dramatically reduced the severity and length of the Great Recession. 

Specifically, the report found that without their joint efforts: the 

recession would have lasted twice as long; the unemployment rate 

would have reached nearly 16 percent; and we would have lost 

twice as many jobs, more than 17 million American jobs. 

I would like to enter the Blinder-Zandi report into the record. 

[The Blinder-Zandi report titled: ‘‘The Financial Crisis: Lessons 

for the Next One’’ appears in the Submissions for the Record on 

page 42.] 

Ironically, Republicans in Congress made recovery more difficult. 

As former Federal Reserve Chairman Ben Bernanke wrote in his 

new book—his new book, which I recommend—and I quote: 

‘‘The economy needed help from Congress, if not from additional 

spending on roads and bridges, for example, then at least in areas 

such as retraining unemployed workers.’’ End quote. 

But the Republican-led Congress demanded deep spending cuts 

at a time when we needed aggressive fiscal policy to boost the economy. They ended up doing more to hurt than to help. 

And now Republicans complain that the economic recovery has 

been too slow. Now they have gone one step further. Two weeks 

ago, Republicans in the House of Representatives passed, in my 

opinion, damaging legislation, the FORM Act, that would fundamentally hamper the Fed’s ability to conduct monetary policy. 

It would hurt the Fed’s independence, for example, by forcing it 

to determine target interest rates using a mathematical formula, 

while ignoring a broad range of important economic indicators. 

Chair Yellen, as you have noted before, if the Fed had been 

forced to follow such a rule in recent years—and I quote from you— 

‘‘millions of Americans would have suffered unnecessary spells of 

joblessness over that period.’’ End quote. 

If the FORM Act had been a law during the time of the recession, the Federal Reserve would not have been able to take the aggressive steps needed to help pull our Nation out of the greatest 

economic crisis since the Great Depression. 

DeShaun on LAP51NQ082 with DISTILLER

5 

I hope today that we can focus on the critical issues before us: 

How the Federal Reserve should act to strengthen our economic recovery. But, if necessary, we must clearly show that efforts to hamstring the Federal Reserve are misguided and dangerous. 

Chair Yellen, thank you for appearing before the Joint Economic 

Committee today, and I look very much forward, as always, to your 

testimony. 

[The prepared statement of Representative Maloney appears in 

the Submissions for the Record on page 36.] 

Chairman Coats. Thank you. 

Congressman Tiberi. 

OPENING STATEMENT OF HON. PATRICK J. TIBERI, VICE 

CHAIRMAN, A U.S. REPRESENTATIVE FROM OHIO 

Vice Chairman Tiberi. Thank you for your courtesy, Chairman. I want to thank Speaker Ryan for giving me this opportunity, 

and I want to thank you for your Indiana Hoosier niceness in this 

process. You and your staff have been great in welcoming me. I 

look forward to working with my colleagues from the Senate, as 

well as the House. 

I know we have, in Ohio at least, still many challenges. A lot of 

moms and dads are underemployed. Yes, the unemployment rate 

has gone down, but there is a tremendous amount of anxiety I 

know in our State about the future of the economy. And this is so 

important. 

Chairman Yellen—Chair Yellen, thank you for your time today. 

I look forward to hearing from you. 

Chairman Coats. Thank you. I would like to now introduce our 

witness, Janet L. Yellen, who took office as Chair of the Board of 

Governors of the Federal Reserve System on February 3, 2014, for 

a four-year term ending February 3, 2018. 

Dr. Yellen also serves as Chair of the Federal Open Market Committee, the System’s principal monetary policymaking body. 

Prior to her appointment as Chair, Dr. Yellen served as Vice 

Chair of the Board of Governors, taking office in 2010, when she 

simultaneously began a 14-year term as a member of the Board 

that will expire not until 2024. 

Dr. Yellen is Professor Emeritus at the University of California 

at Berkeley where she was a Eugene E. and Catherine M. 

Trefethen Professor of Business Administration and Professor of 

Economics, and has been a faculty member there since 1980. 

Dr. Yellen took leave from Berkeley for five years starting in August of 1994. She served as a member of the Board of Governors 

of the Federal Reserve System through February of 1997, and then 

left the Federal Reserve to become Chair of the Council of Economic Advisers through August 1999. She also chaired the Economic Policy Committee of the Organization for Economic Cooperation and Development. 

She has served as President and Chief Executive Officer of the 

Federal Reserve Bank of San Francisco, and has a distinguished 

academic background. 

Dr. Yellen, we are pleased to have you here this morning. Thank 

you very much for coming. This is an important time. You have 

had a busy week, and we appreciate you taking the time to share 

DeShaun on LAP51NQ082 with DISTILLER

6 

with us your thoughts on where we are and where we are going 

with this economy and the role of the Federal Reserve. 

STATEMENT OF HON. JANET L. YELLEN, CHAIR, BOARD OF 

GOVERNORS OF THE FEDERAL RESERVE SYSTEM, WASHINGTON, DC 

Chair Yellen. Thank you very much. Chairman Coats, Ranking 

Member Maloney, and Members of the Committee, I appreciate the 

opportunity to testify before you today. 

In my remarks I will discuss the current economic outlook before 

turning to monetary policy. 

The U.S. economy has recovered substantially since the Great 

Recession. The unemployment rate, which peaked at 10 percent in 

October 2009, declined to 5 percent in October of this year. 

At that level, the unemployment rate is near the median of Federal Open Market Committee participants’ most recent estimates of 

its longer run normal level. The economy has created about 13 million jobs since the low point for employment in early 2010, and 

total nonfarm payrolls are now almost 41⁄2 million higher than just 

prior to the Recession. 

Most recently, after a couple of months of relatively modest payroll growth, employers added an estimated 271,000 jobs in October. 

This increase brought the average monthly gain since June to 

about 195,000, close to the monthly pace of around 210,000 in the 

first half of the year and still sufficient to be consistent with continued improvement in the labor market. 

At the same time that the labor market has improved, U.S. economic output as measured by inflation-adjusted Gross Domestic 

Product, or real GDP, has increased at a moderate pace on balance 

during the expansion. 

Over the first three quarters of this year, real GDP is currently 

estimated to have advanced at an annual rate of 21⁄4 percent, close 

to its average pace over the previous 5 years. 

Many economic forecasters expect growth roughly along those 

same lines in the fourth quarter. Growth this year has been held 

down by weak net exports, which has subtracted more than half a 

percentage point, on average, from the annual rate of real GDP 

growth over the past three quarters. 

Foreign economic growth has slowed, damping increases in U.S. 

exports, and the U.S. Dollar has appreciated substantially since the 

middle of last year, making our exports more expensive and imported goods cheaper. 

By contrast, total real private domestic final purchases, which includes household spending, business fixed investment, and residential investment, and currently represents about 85 percent of aggregate spending has increased at an annual rate of 3 percent this 

year, significantly faster than real GDP. Household spending 

growth has been particularly solid in 2015, with purchases of new 

motor vehicles especially strong. 

Job growth has bolstered household income, and lower energy 

prices have left consumers with more to spend on other goods and 

services. Increases in home values and stock market prices in recent years, along with reductions in debt, have pushed up the net 

worth of households which also supports consumer spending. 

DeShaun on LAP51NQ082 with DISTILLER

7 

Finally, interest rates for borrowers remain low, due in part to 

the FOMC’s accommodative monetary policy, and these low rates 

appear to have been especially relevant for consumers considering 

the purchase of durable goods. 

Other components of private domestic final purchases, including 

residential and business investment, have also advanced this year. 

Indeed, gains in real residential investment spending have been 

faster so far this year than last year, although the level of new residential construction still remains fairly low. 

And outside of the drilling and mining sector, where lower oil 

prices have led to substantial cuts in outlays for new structures, 

business investment spending has posted moderate gains. 

Turning to inflation, it continues to run below the FOMC’s longer 

run objective of 2 percent. Overall, consumer price inflation as 

measured by the change in the price index for personal consumption expenditures, was only one-quarter percent of the 12 months 

ending in October. 

However, this number largely reflects the sharp fall in crude oil 

prices since the summer of 2014. Because food and energy prices 

are volatile, it is often helpful to look at inflation excluding those 

two categories, known as core inflation, which is typically a better 

indicator of future overall inflation than recent readings of headline inflation. 

But core inflation which ran at 11⁄4 percent over the 12 months 

ending in October is also well below our 2 percent objective, partly 

reflecting the appreciation of the U.S. Dollar which has pushed 

down the prices of imported goods, placing temporary downward 

pressure on inflation. 

Even after taking account of this effect, however, inflation has 

been running somewhat below our objective. 

Let me now turn to where I see the economy is likely headed 

over the next several years. 

To summarize, I anticipate continued economic growth at a moderate pace that will be sufficient to generate additional increases 

in employment, and a rise in inflation to our 2 percent objective. 

Although the economic outlook, as always, is uncertain, I currently see the risk to the outlook for economic activity and the 

labor market as very close to balanced. 

Regarding U.S. inflation, I anticipate that the drag due to the 

large declines in prices for crude oil and imports over the past 

year-and-a-half will diminish next year. With less downward pressure on inflation from these factors, and some upward pressure 

from a further tightening in U.S. labor and product markets, I expect inflation to move up to the FOMC’s 2 percent objective over 

the next few years. 

Of course inflation expectations play an important role in the inflation process, and my forecast of a return to our 2 percent objective over the medium term relies on a judgment that longer term 

inflation expectations remain reasonably well anchored. 

Let me now turn to the implications of the economic outlook for 

monetary policy. 

In the policy statement issued after its October meeting, the 

FOMC reaffirmed its judgment that it would be appropriate to increase the target range for the Federal Funds Rate when we had 

DeShaun on LAP51NQ082 with DISTILLER

8 

seen some further improvement in the labor market and were reasonably confident that inflation would move back to the Committee’s 2 percent objective over the medium term. 

That initial rate increase would reflect the committee’s judgment 

based on a range of indicators that the economy would continue to 

grow at a pace sufficient to generate further labor market improvement and a return of inflation to 2 percent, even following the reduction in policy accommodation. 

As I have already noted, I currently judge that U.S. economic 

growth is likely to be sufficient over the next year or two to result 

in further improvement in the labor market. 

Ongoing gains in the labor market, coupled with my judgment 

that long-term inflationary expectations remain reasonably well anchored, serve to bolster my confidence in a return of inflation to 2 

percent, as the disinflationary effects of declines in energy and import prices wane. 

Committee participants recognize that the future course of the 

economy is uncertain, and we take account of both the upside and 

downside risks around our projections when judging the appropriate stance of monetary policy. 

In particular, recent monetary policy decisions have reflected our 

recognition that with the Federal Funds Rate near zero we can respond more readily to upside surprises to inflation, economic 

growth, and employment than to downside shocks. 

This asymmetry suggests that it is appropriate to be more cautious in raising our target for the Federal Funds Rate than would 

be the case if short-term nominal interest rates were appreciably 

above zero. 

Reflecting these concerns, we have maintained our current policy 

stance even as the labor market has improved appreciably. 

However, we must also take into account the well-documented 

lags in the effect of monetary policy. Were the FOMC to delay the 

start of policy normalization for too long, we would likely end up 

having to tighten policy relatively abruptly to keep the economy 

from significantly overshooting both of our goals. Such an abrupt 

tightening would risk disrupting financial markets and perhaps 

even inadvertently push the economy into a recession. 

Morever, holding the Federal Funds Rate at its current level for 

too long could also encourage excessive risk taking and thus undermine financial stability. 

On balance, economic and financial information received since 

our October meeting has been consistent with our expectation of 

continued improvement in the labor market. And as I’ve noted, continuing improvement in the labor market helps strengthen our confidence that inflation will move back to our 2 percent objective over 

the medium term. 

That said, between today and the next FOMC meeting, we will 

receive additional data that bear on the economic outlook. These 

data include a range of indicators regarding the labor market, inflation, and economic activity. 

When my colleagues and I meet, we will assess all the available 

data and their implications for the economic outlook in making our 

policy decision. As you know, there has been considerable focus on 

DeShaun on LAP51NQ082 with DISTILLER

9 

the first increase in the Federal Funds Rate after nearly seven 

years in which that rate was at its effective lower bound. 

We have tried to be as clear as possible about the considerations 

that will affect that decision. Of course, even after the initial increase in the Federal Funds Rate, monetary policy will remain accommodative. And it bears emphasizing that what matters for the 

economic outlook at expectations concerning the path of the Federal Funds Rate over time. 

It is those expectations that affect financial conditions, and 

thereby influence spending and investment decisions. In this regard, the committee anticipates that even after employment and inflation are near mandate-consistent levels, economic conditions 

may for some time warrant keeping the target Federal Funds Rate 

below levels the committee views as normal in the longer run. 

So in closing, let me say the economy has come a long way toward the FOMC’s objectives of maximum employment and price 

stability. 

When the committee begins to normalize the stance of policy, 

doing so will be a testament also to how far our economy has come 

in recovering from the effects of the financial crisis and the Great 

Recession. 

In that sense, it is a day that I expect we are all looking forward 

to. So thank you. Let me stop there. I would be pleased to take 

your questions. 

[The prepared statement of Chair Yellen appears in the Submissions for the Record on page 38.] 

Chairman Coats. Chair Yellen, thank you very much. It is a 

day we have long waited for, and hopefully your positive remarks 

today will bear that out and set us on the right trend, a positive 

trend. 

As we had discussed earlier in private, I want to raise this in 

public. While our trends are moving toward positive territory, the 

EU’s trends seem to be moving into negative territory, with negative overnight interest in deposit rates, also additional thoughts 

about ways to stimulate their economy. They play a major role in 

the world economy. 

We see slowdowns in China. We see problems, significant problems in Brazil and throughout many emerging markets. 

My question is, how—that clearly, much of the world seems to 

be on a negative trend—how do you balance those two issues out 

relative to their impact on each other? And how does the FOMC 

take that into consideration in terms of their decision-making? 

Chair Yellen. Thank you for that question. We have seen relatively weak growth in the global economy with different parts of 

the global economy faring differently, but relatively weak growth. 

The U.S. has enjoyed stronger growth in labor market performance. That weak growth shows through to the demand for U.S. exports, and it is one factor that has been depressing U.S. net exports. 

In addition, that difference in strength between the global economy and the U.S., and reflected also in different expectations about 

the path of monetary policy, as you noted the ECB has added stimulus, has taken additional actions today to provide further stimDeShaun on LAP51NQ082 with DISTILLER

10 

ulus, while there is an expectation that the FOMC is coming closer 

to raising rates. 

That difference in expectations about monetary policy reflecting 

different underlying strength has led over the last year and a half 

to a substantial appreciation of the Dollar. 

So the combination of weak foreign growth and a strong Dollar 

has, both of those things have depressed our export growth and increased imports, because imports are cheaper. 

So that is a drag on the U.S. economy. But again, we have to remember that consumer spending, business investment, residential 

investment, account for 85 percent of total spending. And domestic 

spending is on a solid course. It has been growing around 3 percent. 

So the combination of solid domestic spending, coupled with a 

drag from abroad that has been operative and will continue to be 

operative, overall on balance that’s led, and I think it will continue 

to lead, to growth that is somewhat above trend and on a continuing path of labor market improvement. 

But of course it is highly relevant to our decisions, and the 

strength of the Dollar is one factor that puts——means that monetary policy for the U.S. is more likely to follow a gradual path. 

Chairman Coats. We also have global uncertainty relative to 

our national security and the world security. We seem to be entering a period of time here where violence in one form or another, 

whether it’s domestic, international, whether it’s terrorist-oriented 

or connected to other means, you can lay awake at night thinking 

of scenarios where coordinated terrorist attacks, or just an acceleration of the kind of violence that we are seeing, the mass shootings and so forth and so on, could have a negative effect. I think 

would have a negative effect, on the economy relative to people’s 

fear of spending, going out, enjoying sports entertainment, other 

types of entertainment, or going to malls and shopping, et cetera. 

To what—how does that factor into the Fed’s thinking regarding 

its impact on the economy? 

Chair Yellen. So those risks are ones that we watch very carefully. And I would agree with you that it does have the potential 

to have a significant economic effect. I would not say that I see a 

significant effect at this point, although certainly in the aftermath 

of the financial crisis we have seen rather cautious behavior on the 

part of households and firms. 

And while I think there are many different factors that contribute to that cautious behavior, the crisis itself, the slow growth 

we’ve seen, many businesses talk about regulatory uncertainty, I 

would add geopolitical risk as a further factor that is causing that 

kind of cautiousness. 

Chairman Coats. Thank you. My time has expired, and so I can 

show a good example to my colleagues in terms of implementing 

the five-minute rule, I will call on our Ranking Member, Congresswoman Maloney. 

Representative Maloney. Thank you so much. 

Thank you so much, Chair Yellen. In the speech you gave yesterday at the Economic Club of Washington, you said, and I quote, 

‘‘Many FOMC participants indicated in September that they anticipated, in light of their economic forecast at the time, that it would 

DeShaun on LAP51NQ082 with DISTILLER

11 

be appropriate to raise the target range for the Federal Funds Rate 

by the end of the year.’’ End quote. 

What are the longer term trends that would give you the most 

pause when deciding the timing of liftoff? For example, how would 

you assess tomorrow’s jobs number in the context of its long-term 

trends? 

Chair Yellen. Well I think the two things that we focus on most 

in our evaluation are economic developments that affect the labor 

market, and also those that affect inflation. Our Congressional 

mandate calls for us to achieve maximum employment and price 

stability. And therefore in my testimony I tried to indicate that I 

do see there are ups and downs. Every series is noisy. We will be 

looking of course carefully at tomorrow’s jobs report. 

What we are looking to see is a continued solid trend of job creation that, while we are close to full employment or maximum employment, at least to my mind there remains some margins of slack 

in the labor market. Part-time, involuntary employment remains 

too high. Labor force participation is a declining trend. But nevertheless, I think it is to some extent depressed by the fact that the 

job market hasn’t been stronger. 

So we want to see the economy being on a path where we will 

continue to erode that labor market slack over time. So we will be 

looking very carefully at that. 

But we can’t over-weight any particular number. We need to be 

looking at underlying trends in the data, and not over-weighting 

any number. 

Inflation is also clearly very important. We articulated several 

years ago that the Committee has a 2 percent inflation objective. 

Inflation has been running significantly below that for some time. 

Just as we don’t want to see persistent inflation above our objective, we also don’t want to see persistent inflation below our 2 percent objective. 

So as I discussed, where I think much of it is transitory but we 

will be looking at data to see if our expectation that it’s going to 

move up over time will be realized. And those are key pieces. 

Representative Maloney. Chair Yellen, two weeks ago the 

House passed legislation that would interfere with the Fed’s operations in numerous ways. You wrote a sharply worded letter to 

Congressional leadership expressing your opposition to the bill, and 

I request unanimous consent to place that letter in the record. 

Chairman Coats. Without objection, we will do that. 

[The letter from Chair Yellen addressed to Hon. Paul Ryan and 

Hon. Nancy Pelosi appears in the Submissions for the Record on 

page 97.] 

Representative Maloney. And you said, and I quote, that it 

would, quote, ‘‘severely damage the U.S. economy were it to become 

law.’’ End quote. 

Could you describe why you believe that this legislation would be 

so damaging to the independence of the Fed? 

Chair Yellen. Thank you. Just briefly, this legislation would 

force the Fed to set monetary policy according to a simple rule, 

something called ‘‘the Taylor rule,’’ or a variant of it, that would 

tie short-term interest rates to only two economic variables: the 

current level of inflation and the current level of output. 

DeShaun on LAP51NQ082 with DISTILLER

12 

And while such rules are useful as reference points in thinking 

about monetary policy, to set the Federal Funds Rate in that way 

without deeper analysis of what is appropriate for the economy 

would be extremely damaging. At this point, that rule would call 

for a Federal Rules Rate well over 2 percent. And while we might 

be close to the point at which we should be raising it above zero, 

I think that if we were to follow that rule it would be damaging. 

But maybe more important, I want to say that this is an approach to monetary policy that severely threatens the independence 

of the Federal Reserve in making decisions free of short-term political pressures in the best long-run interests of the economy. 

It would subject us to regular GAO audits of our monetary policy 

decision-making in a way that Congress has decided repeatedly and 

over many years it is wise to insulate the operational decisions of 

the Federal Reserve from those short-term political pressures. 

And I believe that almost all countries around the world have 

independent central banks. They have recognized it leads to stronger economic performance, and I believe this would be a step in 

interfering with the independence of the Federal Reserve in conducting monetary policy. 

Representative Maloney. Thank you. My time has expired. 

Chairman Coats. Congresswoman Maloney, we thank you. We 

understand that you have a series of votes in the House. 

Senator Klobuchar. 

Senator Klobuchar. Thank you very much. 

Thank you for being here, Chair Yellen. My first question is 

about income inequality. We have done studies on this when I was 

the Ranking Member of this Committee, and I know you have written extensively on trends. 

What do you see as the impact? And what do you think could be 

done to reverse the trend? 

Chair Yellen. So I do think there is a very disturbing trend toward rising income inequality in this country. Economists have 

looked carefully at many different factors that might be responsible 

for it, and these are factors that are not recent. They have been 

in operation at least since the early or mid-1980s. 

Two that stand out are, first, that technological change has been 

biased in the direction of increasing the demand for skilled labor, 

and diminishing the demand for less-skilled labor, and particularly 

people who engage in rather routine jobs that can be computerized. 

So technical change, and globalization also appears to have 

played a role in reducing the number of jobs especially in middleincome jobs that can be outsourced or automated away. 

So I think those are key factors. There are others, also, that people have studied. So let me just make clear that these trends are 

not ones that the Federal Reserve can address. The best contribution we can make is to try to achieve our goals, and particularly 

maximum employment and a job market where people who want 

to work can find jobs using their skills. 

But there are many things that Congress could consider. Clearly 

the return to education, the gap between high and low skill people 

is very high. And so policies that enable individuals to get appropriate education and training. I think those are important. 

DeShaun on LAP51NQ082 with DISTILLER

13 

There are many things I think that Congress could do that would 

make a positive difference here. 

Senator Klobuchar. So this is on us—— 

Chair Yellen. It is, it is on you. 

Senator Klobuchar [continuing]. In terms of trying to do—— 

Chair Yellen. We’re trying to do the best we can. 

Senator Klobuchar. I agree. Shifting here, you and I have 

talked about this. We have a lot of community banks in our states 

and we know we’re losing a number of them through consolidation. 

Dodd-Frank, which I strongly supported, has protected many of our 

consumers. But we know for some of the smaller banks it has been 

hard for them to do all the paperwork with this increasing regulatory complexity. 

Any ideas on what we should be doing there? Because I am sure 

you agree we need to have strong competition in the banking market, and we do not want the smaller players to just be eaten up. 

Chair Yellen. So I think that small community banks really are 

suffering from regulatory overload. And I think it behooves us to 

focus carefully on what we can do to try to diminish those burdens. 

Let me say that we recognize how high the burdens are in community banks, and for our own part we are heavily focused on trying to tailor our regulations so that it is appropriate. And we are 

looking carefully for ways that we can make life better for community banks, especially those that are well managed and have adequate capital. 

We have raised the threshold under our Small Bank Holding 

Company policy so that now banks under one billion dollars are not 

subject—the holding companies are not subject to our capital requirements. 

We are trying to do more of our supervisory work offsite, and to 

target our exams toward risk areas. We are engaged with the other 

agencies in the so-called EGRPRA process in which we are holding 

hearings and trying to identify things that we can do to reduce regulatory burden. 

We will be reporting to Congress, and I am sure there will be a 

number of things that come out of that review, that will enable us 

to take steps that will be helpful. But I do recognize there are significant burdens, and I think it behooves us to address them. 

Senator Klobuchar. Well thank you. I am going to put two 

other questions on the record. One is an issue that is getting a lot 

of attention, and that is the $50 billion asset threshold, and your 

views if that could be modified with the systemically important financial institution (SIFI) issue, and maybe someone else will ask 

it. 

And then the second issue is just your views on, I am a strong 

supporter of the infrastructure bill that we are about to vote on 

today, but I would imagine you might have concerns on how some 

of this was paid for. It was not actually a Senate side proposal, but 

that might affect the Federal Reserve. 

And I wish we had more time. Maybe someone else, one of my 

colleagues, can ask that question. But I will, in any case, put it on 

the record. So thank you. 

Chair Yellen. I appreciate that. 

Senator Klobuchar. Thank you. 

DeShaun on LAP51NQ082 with DISTILLER

14 

Chairman Coats. I am going to exercise a little bit of discretion 

here and allow you to answer that question, because I know that 

is on a number of our minds here. Just for those who understand 

the issue here, we are about to pass a Highway bill, which is long 

needed, but part of the pay-for is—comes from your bank at the 

Fed. 

And the word is that there is plenty of profit sloshing around 

there that eventually is going to come back to the Treasury anyway, so why don’t we take some of it now as an early withdrawal. 

Do you want to respond to that? 

Chair Yellen. Yes. I appreciate the opportunity to do so. So the 

Highway bill, as I understand it, will take a large share of our operating surplus, which is part of the Federal Reserve’s capital, to 

pay for this bill and not allow us to build it up. 

This concerns me. I think financing federal fiscal spending by 

tapping the resources of the Federal Reserve sets a bad precedent 

and impinges on the independence of the central bank. 

It weakens fiscal discipline. And I would point out that 

repurposing the Federal Reserve’s capital surplus doesn’t actually 

create any new money for the Federal Government. If you don’t 

mind my quoting what CBO wrote in scoring this bill, they said as 

follows: 

‘‘It’s important to note that the transfer of surplus funds from 

the Federal Reserve to the Treasury has no import for the fiscal 

status of the Federal Government. Although Federal budget accounting does not recognize additions to the Federal Reserve Surplus Account as revenues, such additions have the same effects as 

if they had instead been paid to the Treasury and were counted as 

revenues. A transfer of those funds would have no effect on national savings, economic growth, or income.’’ 

So in effect, by taking our surplus our holdings of U.S. Treasury 

securities declines, and the interest we would earn on those securities would be money that would be transferred every year for many 

years to come back to the federal coffers. And by taking the surplus 

now you are diminishing the stream of revenues into the federal 

budget over many years. 

Now a central bank differs from a commercial bank and the role 

of capital is somewhat different. But almost all central banks do 

hold some capital in operating surplus, and holding such a surplus 

or capital is something that I believe enhances the credibility and 

confidence in the central bank. 

And so on those grounds, as well, our policy—we don’t have a lot 

of capital, but we have long had capital in surplus that I think creates confidence in our ability to manage monetary policy. 

Chairman Coats. Well thank you. I think it was important to 

get an answer to that question. It is so relevant right now. And 

there is the narrative that this is easy money. I think you have 

given us a pretty good response to that question. 

Senator Klobuchar. We appreciate it. Thank you. 

Chair Yellen. Thank you, very much. 

Chairman Coats. Senator Cassidy. 

Senator Cassidy. Madam Chair, thanks for being here. I 

share—so segueing off of Senator Klobuchar’s concern about income 

DeShaun on LAP51NQ082 with DISTILLER

15 

inequality, you have written about the problem of those who are involuntarily working part-time. We have also looked at that. 

And knowing that you know this, but just for context to the further conversation, Purnay, would you hold up the poster, please, 

we have noted that—we have noted that this effect occurs in all 

quintiles, but disproportionately upon the lowest quintile. 

So if these are the five quintiles of workers in terms of income, 

actually post-recession most have returned in terms of the average 

number of hours per week except the bottom quintile is the one 

which is still lagging way behind. No dispute there, I’m sure. It is 

your data, so I am guessing you will agree with it. 

And my concern is that the CBO did a study pointing out the 

marginal tax rate that the Affordable Care Act essentially puts a 

marginal tax rate upon the employer providing employment. 

If someone is working full-time, obviously you’ve got to pay more 

to give them insurance and that effect is seen most profoundly 

upon that lowest quintile of workers. Would you agree with all 

that? 

Chair Yellen. Well, so I think the data you presented is interesting. I am not aware we have tried to monitor ourselves, but I 

know others have looked at the impact of the Affordable Care Act. 

I am not aware that it has had a very large effect on the phenomenon that we are talking about. 

It is of course worth monitoring going forward. You know, it is 

important to note that the degree of involuntary part-time employment has declined quite a lot as the economy—— 

Senator Cassidy. But not in that lowest quintile. Is that a fair 

statement? I mean, that data, which is from the Bureau of Labor 

Statistics, shows that it persists in that lowest quintile. 

Chair Yellen. It does persist, but it is diminished. 

Senator Cassidy. Relatively speaking, but still far greater than 

at this point in previous recoveries. 

Chair Yellen. Yes, I think it is disproportionately high. 

Senator Cassidy. Now let me ask, and I am sorry to interrupt 

but we don’t—he is going to hold me to five minutes—I am looking 

at something from Valletta and Bengali from 2013 that suggests 

that rising costs for health benefits may prompt employers to shift 

towards part-time work to hold labor costs down, perhaps intensified by the ACA’s requirement that medium-sized and large employers provide health benefits, et cetera. 

Now again intuitively if the cost of health benefits is added to 

the wages paid as total compensation, the marginal effect of increasing the cost for health benefits for the lower quintile is going 

to be greater than the marginal effect for the upper quintiles. 

So I am just curious that, as much as you have looked at this, 

that is not something that you have noted. I will move on, if you 

just say, well, I haven’t. But I would appreciate any further 

thoughts you have regarding that. 

Chair Yellen. I am not aware of any estimates of the size of it. 

Most significant-sized employers have covered and continue to 

cover their workers. So while there has been a lot of anecdotal discussion of this, I have not seen a study that shows that it is large. 

Senator Cassidy. Let me return to something you said earlier, 

that you implied that the Dollar will weaken over the coming year, 

DeShaun on LAP51NQ082 with DISTILLER

16 

because you said that both the price of oil, you imply, would begin 

to rise—— 

Chair Yellen. I’m sorry? I did not mean to make a forecast 

about—I don’t believe I did—I didn’t make a forecast in terms 

of—— 

Senator Cassidy. Well in terms of the inflationary pressure, 

you said that you thought that the downward effect upon inflation 

will be eased because of the kind of return to the norm, both—— 

Chair Yellen. If I might, when the Dollar appreciates, while it 

is moving up that tends to push import prices down, which cuts inflation. But if the Dollar simply stabilizes at a new higher level, 

then inflation is no longer held down. 

So simply stabilizing the value of the Dollar, stabilizing at a new 

higher level—— 

Senator Cassidy. Let me ask, will that—— 

Chair Yellen [continuing]. Will diminish that effect. 

Senator Cassidy.—will that also apply—then once it plateaus, 

it still intuitively seems to me that our manufacturing is going to 

be negatively impacted. 

Chair Yellen. Yes, that is true. I mean, I think that the strong 

Dollar has been one of the factors, along with the cut in drilling 

activity, yes. 

Senator Cassidy. If the EU is planning, ECB is planning to 

stimulate, and we are sending signals that we are going to raise 

interest rates, it seems like we are creating the dynamic where the 

Dollar will continue to strengthen. 

Chair Yellen. Well the Dollar has strengthened quite a lot over 

the last year-and-a-half. 

Senator Cassidy. But do you anticipate that plateauing? Or do 

you anticipate that continuing? Because if it continues, you mention how the downward pressure on inflation eases once stabilized, 

but if they are stimulating and we are raising rates, it suggests 

that we might continue to rise. 

Chair Yellen. Well I believe much of that expectation is already 

built into the market and into exchange rates. So I think that that 

explains importantly why the Dollar has risen as much as it has. 

I wouldn’t forecast—I wouldn’t forecast where the Dollar is heading. 

Senator Cassidy. Thank you. I yield back. 

Chairman Coats. Just a comment off the side. But related to 

that, I noticed this morning that the Euro actually rose based on 

the decisions made by the ECB, which surprised me. But perhaps 

the thinking was that they were taking the right path to get the 

economy to a better position. I don’t know if you want to just remark on that, but I just thought that was—I fully expected the 

Dollar to strengthen this morning against the Euro, and it didn’t, 

based on what the ECB did. 

Chair Yellen. Just watching a little bit of this morning’s events, 

my understanding is that the market expected some actions that 

were not forthcoming. 

Chairman Coats. That has always been the problem with the 

market, isn’t it? We can never predict what it’s going to do. 

Senator Heinrich. 

Senator Heinrich. Thank you, Chairman. 

DeShaun on LAP51NQ082 with DISTILLER

17 

And, Chair Yellen, welcome again. I want to kind of return to 

this line of questioning that Senator Klobuchar and Chairman 

Coats had touched on with infrastructure in particular. 

And I want to thank you for very diplomatically describing why 

it is a bad idea to pay for things in this way. I might be less diplomatic in my characterization of those types of pay-fors, but I think 

it is very important that we, in our efforts to pay for things as important as infrastructure, have honest payments. 

One of the changes that was made along the way had to do with 

the exemption of community banks from that sort of structure. And 

at this point, Fed Member Banks with assets less than $10 billion 

will be exempted from the changes in the Fed Shared Dividend 

Rate that were included in the Highway Trust Fund bill. 

Community banks in New Mexico and across the country depend 

on the Fed Share Dividend for its solid return on capital investment. And I have been very vocal about how misguided it is to ask 

small community institutions to finance our Nation’s infrastructure. 

Do you have any thoughts on what the impact could have been, 

especially given your previous comments today, on the regulatory 

burden on those institutions, had that change not been made to the 

pay-for? 

Chair Yellen. So I mean obviously there would have been a burden on those institutions. Something that worried me is that it 

might affect the incentives of many of those institutions to be members of the Federal Reserve, to be members of the Fed System. And 

I thought that was something that before one makes a change of 

that significance it is wise to think through more fully. 

Senator Heinrich. Do you think it would have any impact on 

their ability to—on the decision-making in terms of lending to 

small businesses that are on the margin of their business plan? 

Chair Yellen. That is difficult for me to say. I mean clearly 

there is a tax in that, but I don’t know how significant that would 

be to lending decisions. 

Senator Heinrich. So shifting gears a little bit by just going 

back to interest rates, by potentially raising interest rates the Fed 

would endorse the idea that our economy is on a stable path towards full recovery. 

And I am interested in how this potential action may signal improving conditions for job creation in states like my own, especially 

given the fact that New Mexico and a number of other states have 

not experienced the same economic recovery as the country as a 

whole has. 

Do you have thoughts on that? 

Chair Yellen. Well there certainly are differences across states 

and localities in terms of how much the recovery has aided employment in those states. My expectation going forward is that the 

labor market and the economy will continue—the labor market will 

continue to improve, and eventually I think all states will see improvements as that occurs. But of course the exact industrial structure of a state can matter. 

But there probably have been improvements, substantial improvements, and I think the labor market will continue to improve 

over time. 

DeShaun on LAP51NQ082 with DISTILLER

18 

Senator Heinrich. So returning to an issue that a number of 

my colleagues have raised, just generally when you are looking at 

a situation where the FOMC is looking at increasing interest rates, 

but the actions of other central banks around the world are in a 

countervailing direction, how do you overall factor in the actions of 

those other central banks into the broad picture? And how does 

that impact your decision-making as to whether or not it is the 

right time to move forward? 

Chair Yellen. So we are trying to assess the overall U.S. economic outlook, and we need to factor in all the different elements 

that determine that. Our success in selling goods to the rest of the 

world, and the strength of our imports, that’s an important determinant of the outlook. And when we have divergent monetary policies globally, it often means that there will be exchange rate movements that accompany that. We have seen that over the last yearand-a-half. 

And as I’ve said, the combination of the weak growth abroad, 

plus the movement in the Dollar, has been a factor that has been 

depressing net exports, and that has been a subtraction from 

growth. And I think it will continue to be going forward. 

So that is a negative. And of course it is something that makes 

us much more cautious in terms of raising rates. But still, 85 percent of spending on U.S. goods and services comes from consumers, 

investment spending, housing, and for very good, fundamental reasons there is greater strength there. 

So when we put it altogether, we are still seeing an overall picture of slightly above-trend growth, ongoing improvements in the 

labor market. You know, obviously there are risks there. There are 

risks that come from the global environment that we have monitored carefully and recognize, but overall I would say that the 

total—while there is this foreign weakness—overall, we are on a 

solid course. 

Senator Heinrich. Thank you. 

Chairman Coats. Senator Peters. 

Senator Peters. Thank you, Mr. Chairman. 

And thank you, Chair Yellen, for your testimony here today and 

the wonderful work that you do. 

Chair Yellen. Thank you. 

Senator Peters. I want to pick up a little bit on some of the 

comments you made on income inequality. And I realize that the 

Fed doesn’t have the ability to alter that, but certainly you have 

to respond to that in terms of your policymaking and the effectiveness of your policy given some significant structural changes that 

are occurring in our economy as a result of the fact that a vast majority of people in this country have not seen increases in wages. 

The middle class in fact has been stagnant. 

And it seems to be a disconnect from some of the policy, or the 

theory I should say, that I remember learning years ago in economics that normally when you have increases in productivity, that 

productivity translates into higher wage levels. 

We have not seen that. In fact, in recent years we have seen that 

productivity has gone up significantly more than wage levels. And 

if you are looking at formulating monetary policy, you are looking 

at aggregate demand—— 

DeShaun on LAP51NQ082 with DISTILLER

19 

Chair Yellen. Right 

Senator Peters [continuing]. And how you get that demand is 

income in the economy and wages. You mentioned that consumers 

are 80-plus percent of it. So the more money the consumers have, 

the stronger the economy is. And yet, if it is not growing from 

wages, then it has to grow from them taking on debt. And yet if 

we look at the fact that wages have been stagnant, and that actually in recent years consumers are starting to de-leverage, which 

is a different trend from what we saw before. 

You do not have those engines of growth, although in your testimony you mentioned there is a 3 percent increase in consumer 

spending. But I believe that is down from previous years, as well, 

where we saw 31⁄2 or more in consumer spending per year, which 

led to higher GDP growth. 

We are seeing this long-term, many-year trend of lower wages, 

de-leveraging of debt, and the fact that most of all of the economic 

gains are only going to the very top of the income ladder. And the 

folks at the very top don’t spend as much, consumer-wise, as folks 

in the middle class. There may be more resources available for investment and other types of uses of that cash. But how do you see 

this long-term trend of income inequality, how is that going to impact the ability for the Fed to be as effective as it may have been 

in past years using these tools when those things were in balance 

a lot more than what we are seeing right now? 

Chair Yellen. Well that is a great question, and you introduced 

a lot of different elements into it. Clearly the trends in income, or 

disposable income for households, are one of the most important 

factors determining consumer spending. 

And the fact that wages have been pretty stagnant for a number 

of years, I guess compensation has been growing in the 2 to 21⁄2

percent range, that that is something we have had to take account 

of in forecasting what the strength of the overall U.S. economy has 

been, and it is integral to our forecasts. 

But I guess I would say that job growth has been pretty solid 

now for a number of years. So disposable income, in spite of the 

fact that that wage growth has remained in that 2, 21⁄2 percent 

range, there has been a lot of job growth that has added to disposable income. 

So the saving rate moved up after the financial crisis, and it remains in positive territory and has been pretty stable. So the consumer spending we are seeing is not largely being supported by 

taking on additional debt. It is being supported by income that 

households are earning. 

As the economy progresses, the labor market strengthens further, I would expect to see some upward pressure on wage growth. 

Recently in measures of hourly compensation in average hourly 

earnings I think we have seen some welcome hints. It is tentative 

evidence. We don’t know if it will last. But at least recent data does 

suggest some upward movement in wage increases. 

But over the last couple of years, the spending we have seen has 

been supported by income growth. So inequality definitely plays a 

role here, and of course we need to see sufficient wherewithal for 

households to spend in a way that generates a forecast of continuing growth. 

DeShaun on LAP51NQ082 with DISTILLER

20 

Senator Peters. Alright. Thank you. 

Chairman Coats. Senator Casey. 

Senator Casey. Mr. Chairman, thank you. 

Madam Chair, we are grateful for your testimony today, your 

presence here, and your public service. I will have just one question 

and I will submit a second for the record because of the limitations 

on time that we have today, and we have in the Senate as well. 

I wanted to say first that I was heartened by some of the numbers in the first page of your testimony that we all have heard here 

or there but we do not emphasize enough. The statement you made 

that the economy has created about 13 million jobs since the low 

point for employment in early 2010. That is good news. 

Good news on the unemployment rate itself, which as you note 

peaked at 10 percent in October 2009, and declined to 5 percent in 

October of this year. So, literally, cut in half. 

So that is good news. And I think we should emphasize that even 

as we highlight, or itemize some of the challenges with labor force 

participation rate, or folks really discouraged from seeking employment. 

The question I had, though, was more long term, and it really 

is just one question about steps that we should be taking, and 

steps that you might recommend for long-term competitiveness. 

One of the policy steps that I hope we could take, and we had 

a step in the right direction on early learning a couple of months 

ago when we voted in connection with an education bill on an 

amendment that was my amendment, which was the first time in 

a decade really where the Senate was on record voting on a substantial early learning commitment for the country. 

Just to summarize it, if every state signed up—and it would be 

optional—but if every state participated, we could have provided 

early learning to 3 million children at 200 percent of the poverty 

level and lower. So a substantial new investment. 

We did not win. We did not prevail on that vote, but it was good 

to have a clarifying sense of where people stood. 

But I guess just my basic question is: What would you hope we 

would do on taking steps on long-term investments in a more competitive workforce? 

Chair Yellen. So let me say I think that one of the most disappointing aspects of U.S. economic performance is that the pace 

of growth and the pace of productivity growth have been very depressed. They have fallen very substantially from what we saw in 

pre-crisis times. 

Now the good side of it is, it has not taken very much growth 

to see a substantial improvement in the labor market. The bad way 

to read that complex set of facts—namely, not a lot of growth, quite 

a lot of jobs—is the productivity growth has been very slow. And, 

ultimately, long-term living standards, how well our children will 

do and whether or not they will have better lives than we have, 

really do depend on productivity growth. 

And thinking, then, I would say that Congress should put considerable attention into thinking about policies that could serve to 

speed the productivity growth in the economy, and education is one 

of the things that would head my list. 

DeShaun on LAP51NQ082 with DISTILLER

21 

The fact that we have seen such a large gap between the wages 

of more educated and less educated workers, that is a signal that 

there is a high return to investment in education, and making it 

more available. 

I know there are studies, many studies with respect to early 

childhood education that have particularly pointed to the importance of that in creating skills and better performance. But at all 

levels, at all levels education is important. 

In addition to that, I would say it is well documented that support for basic research and development is an important foundation 

for economic growth. And I would say policies to make entrepreneurship easier, and to encourage it. All of those are the kinds of 

things that are important to long-run trends in economic growth. 

Senator Casey. Thank you, very much. 

Thank you, Mr. Chairman. 

Chairman Coats. I am told the House of Representatives may 

be wrapping up its voting, and members may be coming back. With 

that, it gives us a little more time here. We know you have a cutoff 

time, and we will make sure we hit that. But if you are willing to 

stay a bit to see if members come back. 

Chair Yellen. Yes. 

Chairman Coats. I know Senator Cassidy would like to—— 

speaking of coming back. Congressman Delaney, thank you. You 

are up. 

Representative Delaney. Oh, wow. Okay. Good timing, indeed. 

Thank you, Chair Yellen, for the clarity of your testimony, but 

more importantly for your incomparable leadership of the Federal 

Reserve during this obviously particularly important time. 

I wanted to focus on your view as to the effect of higher rates, 

or let’s say it differently, the first step towards raising interest 

rates will have on borrowing. Because the conventional wisdom is 

always that lower interest rates encourages more borrowing, because credit costs are cheaper. 

But we have had interest rates at such unusually low levels for 

such a sustained period of time that that has obviously been a bit 

of an anomaly in terms of historical rate patterns. 

And I have wondered if that has kind of psychologically changed 

people’s perspective on borrowing, and if a return to a view that 

things are more normal, which is what I think many people would 

interpret an increase in rates would certainly signal, at the levels 

we are at now a modest increase in rates will have, you know, 

largely an inconsequential effect on debt service coverage. And the 

free option that people, borrowers have had. You have talked about 

how corporate investment is kind of moderate. New home construction is still below standard, or below where you would like it to be. 

So, you know, you worry that a lot of those decision makers have 

viewed the zero interest rates as kind of a free option. Well, you 

know, I don’t have to do anything because they are so low and they 

seem to be low for a long period of time. 

So I guess my question is: As you look at a day when rates do 

go up—because that day will occur; as we all know, you were very 

clear about that; exactly when, none of us know yet, of course—but 

do you think that will encourage more credit formation, more borDeShaun on LAP51NQ082 with DISTILLER

22 

rowing? Which I personally think will be good for the economy because some of these people will start looking at rates differently. 

Chair Yellen. So a few things I would like to say. When the Fed 

takes its initial step in raising the target for the Federal Funds 

Rate, it is important to understand that that does not mean that 

there is some predetermined path—— 

Representative Delaney. No. 

Chair Yellen [continuing]. Back to historically normal rates. 

Representative Delaney. I understand. 

Chair Yellen. So the notion that it should be—— 

Representative Delaney. But it is still a signal. 

Chair Yellen [continuing]. Gradual. I mean, in general, higher 

levels of interest rates I think do tend to make borrowing more expensive and discourages it. But it will occur in the context of a 

stronger economy, with higher income where people are doing better. It’s not the only thing that affects investment decisions or borrowing or spending decisions. 

So I would not expect to see borrowing go down, or lending go 

down when we raise rates modestly. 

Representative Delaney. Do you think it might encourage 

more borrowing? 

Chair Yellen. Well, one does often hear especially anecdotal evidence that I hear along the lines that you are suggesting, that 

there are people who do feel, I have a free option, rates will stay 

low for a long time. And if they see rates going up, there may be 

people who are on the fence who may decide now is the hour to act. 

So that is—— 

Representative Delaney. So that would not surprise you as an 

outcome from this decision? 

Chair Yellen. It wouldn’t surprise me as an outcome, but we 

would not be—that is a temporary effect, in a way borrowing from 

the future—— 

Representative Delaney. And you are not making the decision—— 

Chair Yellen. So I don’t want to encourage the idea that I believe that higher rates in and of themselves would permanently 

tend to boost borrowing and spending. 

Representative Delaney. Right. One other quick question, if I 

can. Switching gears. Governor Carney gave a speech about two 

months ago where he talked about one of the long term risks to financial markets being climate change because it will cause a repricing of carbon-related assets and potentially the reinsurance industry around risk related to weather. 

Do you share some of those concerns? I know you don’t have 

much time, so just a short answer. 

Chair Yellen. So I thought it was an extremely interesting 

speech. I cannot say that I am aware of work that we have done 

looking at that, but I think it is something that is worth—certainly 

worth considering. 

Representative Delaney. Do you think you will be doing some 

work in that area? 

Chair Yellen. I will—it is something we can get back to you on 

and have a look on. 

Representative Delaney. Great. Thank you, Chair. 

DeShaun on LAP51NQ082 with DISTILLER

23 

Chairman Coats. Thank you. 

Senator Cruz. 

Senator Cruz. Thank you, Mr. Chairman. 

Chair Yellen, welcome. In the summer of 2008, responding to rising consumer prices, the Federal Reserve told markets that it was 

shifting to a tighter monetary policy. 

This in turn set off a scramble for cash which caused the Dollar 

to soar, asset prices to collapse, and CPI to fall below zero, which 

set the stage for the financial crisis. 

In his recent memoir, former Fed Chairman Ben Bernanke says 

that the decision not to ease monetary policy at the September 

2008 FOMC meeting was, quote, ‘‘in retrospect, certainly a mistake.’’ 

Do you agree with Chairman Bernanke that the Fed should have 

eased in September of 2008, or earlier? 

Chair Yellen. Are you talking about 2008, or 2007? 

Senator Cruz. 2008. 

Chair Yellen. Um, I mean I think the Fed responded pretty 

promptly in easing monetary policy to the pressures that were 

emerging. And I mean I don’t, I don’t disagree with his analysis of 

a particular decision. But I certainly wouldn’t say that that decision is what caused the financial crisis. 

And by December of 2008, the Federal Funds Rate had been lowered to zero. 

Senator Cruz. So when you say you don’t disagree, does that 

mean you agree with Chairman Bernanke that it was a mistake? 

Chair Yellen. So I can’t recall the exact passage that you’re referring to, so before I say if I would agree I would like to have a 

chance to review exactly what he’s said. 

Senator Cruz. Well I would be very interested if you would 

have the opportunity to review the passage and let the Committee 

know whether you agree with his assessment. 

Chair Yellen. Okay. 

Senator Cruz. I want to shift to a different Fed Chairman, 

which is Paul Volcker, who said in a speech before the Bretton 

Woods Committee last year, quote, ‘‘By now I think we can agree 

that the absence of an official rules-based cooperatively managed 

monetary system has not been a great success. In fact, international financial crises seem at least as frequent and more destructive in impeding economic stability and growth.’’ 

Chairman Volcker went on to say, ‘‘The United States in particular had in the 1970s an unhappy decade of inflation ending in 

stagflation. The major Latin American debt crisis followed in the 

1980s. There was a serious banking crisis late in that decade, followed by a new Mexican crisis. And then the really big and damaging Asian crisis. Less than a decade later, it was capped by the 

financial crisis of the 2007 through 2009 period and the Great Recession. Not a pretty picture.’’ Now you have said, quote, ‘‘It would 

be a grave mistake for the Fed to commit to conduct monetary policy according to a mathematical rule.’’ 

Do you agree with Chairman Volcker’s characterization that, 

quote, ‘‘the absence of an official rules-based cooperatively managed 

monetary system has not been a great success and has not been 

a pretty picture’’? 

DeShaun on LAP51NQ082 with DISTILLER

24 

Chair Yellen. Well you have pointed to a large number of very 

damaging financial crises, and in that sense I do believe it was 

very important for us to take steps to have a stronger financial system, and one that is less crisis prone. 

I don’t think that Former Chairman Volcker was proposing a 

rule-based monetary policy in the sense of following a simple mechanical rule. And I guess I would argue that many countries do 

have in essence rule-based monetary policy in the sense that most 

countries have inflation targeting regimes, and transparent monetary policies where the central banks are independent and spell out 

and are accountable to achieve an inflation objective. 

And the Federal Reserve has very much strengthened its transparency as to what our goals are, what our strategy is for trying 

to achieve those goals, and provided the public with very detailed 

forecasts of what policies we think are appropriate to achieve the 

goals that Congress has assigned to us, including a 2 percent inflation objective. 

And over the last 20 years, inflation has been highly stable, 

around 2 percent. So in that sense, even though we may not follow 

the Taylor Rule, or some simple mathematical formula, I believe 

we do have a rules-based monetary policy in the United States, or 

at least a systematic policy in the United States and many other 

countries, most other countries do as well. 

Senator Cruz. And one final question. In 2008, the Fed began 

paying interest on reserves. In the seven years since then, do you 

know how much in interest the Fed has paid to banks under that 

policy? 

Chair Yellen. It has been set at 25 basis points, and I don’t 

have the exact numbers at my fingertips. But I want to say it is 

a critically important tool of monetary policy. It is a tool that all 

most certainly advanced countries’ central banks have and rely on 

as a key tool of monetary policy. 

Senator Cruz. So what has the impact been of paying billions 

of dollars to those banks in the last seven years? 

Chair Yellen. It has helped us to set interest rates at levels that 

we thought were appropriate for economic growth and price stability in this country. 

Senator Cruz. Thank you. 

Chairman Coats. Senator Cassidy. 

Senator Cassidy. Madam Chair, I get to go again. A lot of turmoil in China. There was an earlier discussion about how obviously 

foreign markets are a part of how we judge our growth. 

China may be devaluing their currency. It seems like they have 

weakened their currency. I could go on on things you know better 

than I. 

What do you see as the stability of the Chinese market? And how 

does that impact us? 

Chair Yellen. So China has grown obviously very rapidly for a 

very long period of time, and in recent years has been on a general 

slowing trend for reasons that are entirely understandable. Namely, slower labor force growth; a reduction in the pace of investment 

growth; a desire that they have, which is in their own interest and 

one that we share, that their economy rebalance from such heavy 

DeShaun on LAP51NQ082 with DISTILLER

25 

dependence on trade as a source of growth to domestic consumption. 

And as they have moved toward the technological frontier, further progress in adopting technological changes tend to slow. 

Senator Cassidy. Are they truly attempting to increase domestic consumption? I always had a sense the way that they kind of 

encouraged savings and use those savings to, among other things, 

prop up their stock market, that their rhetoric says that they are 

attempting to increase domestic consumption but their policies do 

not seem to reflect that rhetoric. 

Chair Yellen. So my impression is that they are trying to rebalance their economy. Consumer spending is a smaller share, a far 

smaller share of their economy than consumer spending is of ours. 

And it has been growing rapidly. 

There are challenges that they have faced in trying to boost it, 

but I believe that that is a course that they are on that they regard 

as in their own best interest, and we would agree. 

Senator Cassidy. Okay. Changing subjects, by the way so you 

feel the turmoil we’re currently seeing, and the threat that they 

might devalue their currency, just to be specific, you don’t feel like 

that threatens our economy? And let me ask a secondary question: 

Are they attempting to, if you will, game it by increasing their exports by devaluing their currency, et cetera, et cetera? 

Chair Yellen. Well there was disruption last summer in financial markets when they made a decision to devalue the Renminbi 

by a couple of percent. I think, to put that in context, remember 

that the U.S. Dollar has been rising, has been appreciating significantly over the last year-and-a-half. And the Chinese currency has 

been linked to the U.S. Dollar. And so during that period, the Chinese currency had been strengthening rather substantially relative 

to many of its trading partners. And they made a modest adjustment of their Exchange Rate, but in a way that was arguably not 

well communicated and proved disruptive. And then they say very 

large capital outflows. 

I think they recognize that stability of their Exchange Rate is 

probably in their best interests. But ultimately would like to move 

to a more market-based and flexible system of Exchange Rate determination. 

Senator Cassidy. I wish you were their central banker. I’m not 

sure—but that’s—I hope you’re right. 

Secondly, in January of this year the economy actually slowed. 

I think growth actually became negative. At the time it was attributed to a slowdown in the energy market because oil prices had 

fallen, so energy states which produced a lot of jobs, and by the 

way jobs for those lower income less skilled workers that we have 

spoken much of here today. 

Now it seems as if that fell. Oil production rose a little bit, for 

a variety of reasons. And now it appears that oil production is decreasing once more. The rig counts are falling. My State is impacted by this. Any comments upon how this shedding of jobs in 

the exploration and production component of the energy industry 

is going to impact our economy? 

Chair Yellen. Well we have seen a huge decline in oil prices for 

reasons pertaining to both huge increases in supply and perhaps 

DeShaun on LAP51NQ082 with DISTILLER

26 

some slowing in demand. It has had an enormous impact on drilling activity, on jobs in that sector, and that has been one of the 

things that has been holding back growth. 

Senator Cassidy. So even though we have gotten some benefit 

for consumer spending in terms of employment, now going forward 

as those jobs are further shed what impact do you feel like that has 

upon our growth? 

I am struck that your forecast is that the economy is going to 

continue to grow at this kind of 2.5 percent rate, not the 31⁄2 percent we had under Reagan and Clinton, but this kind of 2.5 percent. But if we are shedding all these jobs in the industry which 

provides such a tremendous number of jobs for less skilled workers, 

it seems as if that endangers even this 2.5 percent growth we have. 

Chair Yellen. Well remember that we have been creating roughly 200,000 jobs a month for the entire year. 

Senator Cassidy. I was told once that it actually takes about 

270,000 jobs a month to both bring back into employment those 

who are currently unemployed, to take care of those—but who 

would prefer to work, and because our labor participation market 

is so low—for those newer workers who are entering the market, 

to employ them, as well as to maintain full employment for those 

currently, I’m struck that something I read speaks of those 20 to 

25-year-old workers being underemployed, a higher rate of unemployment among those. 

So all this to say, 210,000 a month, is that adequate to, to both 

increase job participation but also to account for those newly entering? 

Chair Yellen. So to simply provide jobs for those who are newly 

entering the labor force probably requires under 100,000 jobs per 

month. And there is a downward trend in the labor force due to 

its aging. 

If labor force participation is stable, that helps to absorb people 

who are discouraged and who have dropped out. But that still requires quite a bit less than the 200,000 or so jobs—— 

Senator Cassidy. But in terms of increasing back up to full employment—excuse me—our labor market participation is the lowest 

it has been since Jimmy Carter. And so whenever the President 

speaks about how great the unemployment rate is, I always 

think—or labor participation is as low as it has been since Jimmy 

Carter. So I guess my question is: How do we increase our labor 

participation, as well as take care of those who are entering now? 

Because we do not seem to be accomplishing that with even a 

210,000 per month labor growth. 

Chair Yellen. Well we are on the path of declining labor force 

participation due to the aging of the work force, of the population. 

So I don’t think that we should expect to see labor force participation move up a great deal over time. 

If it were simply stable over time, rather than on that declining 

trend, I think we would be absorbing people who were perhaps discouraged and in a stronger job market would move back. But 

200,000 jobs a month is enough to make progress on those dimensions. 

Senator Cassidy. I yield back. Thank you. 

Chairman Coats. Thank you, Senator. 

DeShaun on LAP51NQ082 with DISTILLER

27 

We have had the return now of two of our key members of the 

Committee, and so we have a little bit of time. We have a hard 

12:00 stop, so we have time for both of you to ask your questions. 

Vice Chairman Tiberi. Thank you, Chairman. 

Thank you, Chair Yellen. Sorry about the vote. So in your comments when I was here earlier, you mentioned moderate growth 

within the economy. But yet earlier this week economists at 

Citigroup predicted not only a tightening of the U.S. labor market 

will force the Fed to increase short term interest rates more rapidly 

than was anticipated, they said it would result in an inverted yield 

curve which typically precedes a recession. And actually they said, 

the economists said, that they would assign about a 65 percent 

likelihood of a recession in the United States in 2016. 

Now 65 percent seems high to me, but I am not an economist, 

and I am not the Fed Chair. But zero risk may be too low, as well. 

So what would you assign a risk level of a recession next year? 

Chair Yellen. So I don’t have a number for you, but a decision 

on the part of the FOMC to increase rates would only occur in the 

context where the committee believed that we were going to enjoy 

at least somewhat above trend growth so that we would see an improvement in the labor market. And of course there is always uncertainty that pertains to the economic outlook. There are always 

shocks that occur. 

The risks, the risks are on both sides, to faster growth and also 

slower growth. I can’t put a number on the risk of a recession, but 

I absolutely would not see it as anything approaching 65 percent. 

Vice Chairman Tiberi. Okay. So assuming they either do something or don’t do something with respect to interest rates, I think 

everybody would probably agree that regardless of what you do historically speaking interest rates would still remain at a historically 

lower level. 

What tools would you have? What tools would the Fed have if indeed the economists at Citi were right and we did go, the U.S. did 

go into a recession? What would you have to mitigate the effects 

of such a problem? 

Chair Yellen. So we have all of the tools that we previously 

used to try to combat a recession. First of all, if we had raised rates 

we would have the possibility of lowering rates. 

Important to markets in setting or determining longer term 

yields is expectations about the future path of policy. For a number 

of years, when we had—after rates had hit zero, we discussed the 

reasons that we thought it would be appropriate to keep rates at 

low levels. As it turned out, seven years almost now at zero rates. 

We discussed why we thought we would be keeping rates at low 

levels for a long time. And this market absorbed the notion that 

they will stay low for a long time and longer term yields came 

down. 

Of course we had asset purchases. We undertook substantial 

asset purchases in order to stimulate the economy. I think those 

purchases were successful, as well, in conjunction with that forward guidance in bringing down longer term rates, and those tools 

are still available. 

Vice Chairman Tiberi. Last question, real quick. I met with a 

group of Ohio bankers yesterday, and in December they brought up 

DeShaun on LAP51NQ082 with DISTILLER

28 

to me that the Basel Committee on Banking Supervision is planning to finalize new rules for the amount of capital that banks are 

required to hold against their trading book assets. 

We understand the current proposal could have a negative impact on the financial market liquidity, and significantly increase 

borrowing costs for Americans and American businesses. 

So by some estimates they told me the regulatory changes proposed by the committee would increase mortgage and auto loans by 

a percent-and-a-half, and home loans in America by as much as 6.3 

percent. 

I am a former realtor, so that number just kind of popped out 

to me as a huge, huge problem. So there are real concerns in the 

lending community in Ohio that the Basel Committee’s rules would 

make borrowing money more expensive and hinder growth in Ohio, 

as well as across the country. 

Does the Fed support the Basel Committee finalizing the proposal before these serious concerns are addressed? And will you be 

conducting your own cost/benefit analysis of what impact the rules 

would have in our country? 

Chair Yellen. I believe the Fed is taking part in those discussions, along with other regulators, but I am not aware that there 

is any thought—capital requirements on those positions did go up 

previously—I am not aware that there is any thought of changing 

those requirements in the manner that would have the kind of impact that you are discussing. But we can try to get back to you on 

this. 

Vice Chairman Tiberi. Thank you. 

Thank you, Chair, my time has expired. 

Chairman Coats. Thanks. 

Congressman Schweikert. 

Representative Schweikert. Thank you, Chairman Coats. 

Madam Chair, how are you? First, because I promised my team, 

we wanted to extend a thank you to your staff and your team for 

sort of tolerating many of our very technical written questions, and 

some of the responses. 

Chair Yellen. Thank you. 

Representative Schweikert. It is appreciated, because some of 

them are lengthy in nature. 

Chair Yellen. Thank you. 

Representative Schweikert. Can I take us in a slightly different direction? And, look, I am blessed to sit on Financial Services, so we get to cross each other’s paths quite often. 

Mr. Tiberi a little while ago was discussing some of the indices 

and some of the economists who are saying, look, there are storm 

clouds on the horizon. Our team, we have been collecting information about world-wide debt, and does that cause any fragility to us 

in North America? And, you know, when I am seeing numbers that 

in the last nine years, what developing countries, $57 trillion new 

debt, which is about double their GDP growth. World-wide debt is, 

what, 300 percent of GDP. 

How do you from a policy standpoint, as you are looking at an 

environment of possibly future interest rate adjustments and the 

effects that will have on U.S. currency, at the same time with, let’s 

DeShaun on LAP51NQ082 with DISTILLER

29 

face it, a developing country debt—I won’t call it a crisis—but debt 

stress on the horizon. 

(a) How does that affect your decision-making? 

But (b), does it provide us any fragility to our economic growth, 

or even potential recession threats? 

Chair Yellen. Well it is certainly something that we take account of as we try to evaluate the global environment and the likely impact it could have on the United States. And it is something 

we look at, as well, as part of our financial monitoring to try to determine whether there are risks that could impact financial stability in the United States. 

Representative Schweikert. But will the Fed engage in certain bilateral agreements, or swap agreements with some of the, 

we’ll call them, developing countries’ reserve banks to actually help 

wall off a cascade effect? 

Those of us who remember the Tequila crisis and the others. 

What inoculations, what indemnification does the Fed engage in 

from a policy set? 

Chair Yellen. The Fed has swap agreements with a very small 

number of advanced countries’ central banks where we think it is 

important to make sure that banks doing dollar-based business 

have access to adequate liquidity. 

We have no swap arrangements with emerging market countries. 

And the only reason that we engage in those swap market arrangements is to essentially protect financial stability in the United 

States. So there is no—I don’t know the word you used, indemnification—— 

Representative Schweikert. Yes, I was trying to find a way, 

inoculation, I could pick a few of them. 

Chair Yellen. I mean, these are risks that we consider in looking at U.S. financial markets. When we talk about debts, I think 

what has been discussed over the last year or so is the fact that 

private companies in many emerging markets have taken on Dollar-denominated debt. 

Representative Schweikert. Yes. 

Chair Yellen. I think my sense is that the banking systems and 

the financial sectors of those emerging markets have been much 

more carefully regulated in recent years and are less vulnerable. 

They have themselves less dollar denominated in short-term debts, 

but the companies and corporations in these countries do, have 

taken on a large quantity of debt. 

Representative Schweikert. Do you see cascade risks from developing countries in both sovereign debt loads and private debt 

loads in those countries that would affect our economy? 

Chair Yellen. It is a risk that we monitor. I would not at this 

point say that it is a very serious risk to the U.S. financial system. 

Representative Schweikert. Okay. And this is not meant to be 

sort of a one-off, another one-off question, but we were looking at 

some data about a month ago. And we’ll call it Dollar/Euro contracts. And the movement away from their being settled in New 

York. And some of that I did not know was because of a regulatory 

or a cost situation; they were not being settled under our regulatory environment. 

DeShaun on LAP51NQ082 with DISTILLER

30 

Does that movement of Dollar-denominated contracts being settled overseas have any threat or difficulty to the Federal Reserve’s 

ability to both see data but also influence regulatory and even the 

movement of those resources? 

Chair Yellen. So I am not aware that there is such a trend, but 

I will try to look at that and get back to you. 

Representative Schweikert. Okay. That is one of those technical written questions that we submit. 

Chair Yellen. Yes. 

Representative Schweikert. Mr. Chairman, I yield back. 

Thank you. 

Chairman Coats. Thank you. I just want to inform the members here, the Chair has a need to leave at noon and we want to 

honor that. I just talked to the Ranking Member and she agrees, 

which maybe means what we could do is, I want to give everybody 

a chance to get a question in, but could we limit it to one question 

and maybe keep it to two to three minutes so that everybody has 

an opportunity to do that before we run out of time? 

Dr. Adams, you are next. 

Dr. Adams. Thank you, Mr. Speaker, or Mr. Chair, and thank 

you Ranking Member Maloney for hosting the hearing and, Chair 

Yellen, thank you for being here. 

Based on the commentary I have heard from some of my colleagues made in the media claiming that the Federal Reserve overreaches in its ability to adjust interest rates, it may not be clear 

that one of the most important factors impacting how the Federal 

Reserve will set interest rates is based on what is called the Equilibrium Real Interest Rate, which has been consistently low and 

maybe even below zero. 

And given that the Equilibrium Rate is very low, close to zero, 

what has not been receiving enough attention is how fiscal policy 

should play an increasing role in stimulating demand and providing an uptick to the economy. 

Since the Federal Reserve has limited tools on how it can impact 

economic recovery through monetary policy, including adjusting interest rates and implementing quantitative easing or forward guidance, can you speak to the impact that fiscal policy, particularly sequestration and the lack of support and certainty for certain tax 

expenditures, even financial tools, as the Export-Import Bank has 

had on the rate of recovery for our economy? 

Chair Yellen. Well let me say generally that there is evidence 

that the so-called Equilibrium Rate—this is a real rate of interest 

or inflation and adjusted rate of interest—fell sharply after the financial crisis and remains quite depressed. 

And it is a factor that leads us to believe that even when we 

start raising rates that those rate increases will be gradual. 

Now in general when this rate comes down it means that rates 

are likely to be lower than the historical norm. And to the extent 

that we are operating in a low, even a positive interest rate environment, if the economy is hit by negative shocks, while we do 

have tools that we can use, our most sure and certain instrument 

of policy is the Fed Funds Rate. 

So when the average level of the Fed Funds Rate is low, we have 

less room to respond to negative shocks. So it would be helpful to 

DeShaun on LAP51NQ082 with DISTILLER

31 

be in an environment and give us more scope to be stimulating the 

economy and responding to adverse shocks if the average level of 

interest rates were somewhat higher. And I don’t want to give you 

advice on fiscal policy—that is up to you—but a more stimulative 

fiscal policy is something that would in a sense enable the Fed on 

average to have somewhat higher level of rates, and then have 

more scope to respond to negative shocks. 

Dr. Adams. Thank you very much, Mr. Chairman. I will yield 

back. 

Chairman Coats. Congressman Beyer. 

Representative Beyer. Thank you, Mr. Chairman. 

And, Madam Chair, thanks so much. The recent FOMC projections have a medium- and longer-run unemployment rate of 4.9 

percent, which is very close to what we were always taught was 

maximum unemployment. But the broader labor market that the 

BLS uses, the U6, counts those who have recently given up looking 

for work, or are employed part-time for economic reasons, and the 

U6 stood at 9.8 percent in October, which is still higher than its 

average 9 percent during the last economic expansion from 2001 to 

2007. 

So this suggests there may still be considerable slack in the labor 

market. So how important is the U6 and other labor tools? And basically, given the considerable slack suggested by this 9.8 percent, 

is this going to be the right time to raise rates? 

Chair Yellen. Well, so I would agree with you that U6 remains 

elevated relative to its historic norms. It is higher than I would 

have expected based on our historical experience, given where the 

standard, or U3 unemployment rate is. And it is one of the things 

that leads me to believe that even though we are close to that 4.9 

percent median, there does remain a margin of slack in the labor 

market. 

An important part of U6 that makes it that high is involuntary 

part-time employment. And while that has come down substantially, it is still hard to tell for sure because there is a trend over 

time toward more part-time employment in the U.S. economy. But 

I believe that it remains higher than it ought to be in a so-called 

‘‘full employment’’ economy. 

In addition, as you noted, there are also discouraged and marginally attached workers, and a fair number of them. Again, that has 

come down, too. So I do see margins of slack, and I think they are 

reflected in that discrepancy on U6. 

Representative Beyer. Very good. Thank you, Madam Chair. 

Chairman Coats. Congressman Paulsen. 

Representative Paulsen. Thank you, Mr. Chair. And thank 

you, Chair Yellen, for being here. I appreciate your patience. 

I am going to follow up a little bit on what Vice Chairman Tiberi 

had mentioned. It is more along the cumulative impact that I had 

concerns with from a regulatory perspective, that the financial institution or the financial sector had to deal with. 

I am thinking of the recent adoption of capital surcharges and 

the total loss-absorbing capacity or TLAC proposal. 

Can you describe what all of these changes mean on a cumulative basis, both on the industry and on the economy, and in particular this cost/benefit idea or analysis. Have you done, or has it 

DeShaun on LAP51NQ082 with DISTILLER

32 

been talked about or discussed about doing a more comprehensive 

cost/benefit analysis of what the accumulation of all these regulations have on the industry in particular, and on the economy? 

I am just thinking from the perspective of this regulatory 

rulebook that has been in a constant state of revision, essentially, 

for the last six years. Can you see any benefit of pausing the process just to assess that cumulative impact of regulations on the 

economy? 

Chair Yellen. So I do think the regulation is having an important impact on the economy. And my assessment would be the 

most important impact it has had is to make the banking system 

and the financial system more broadly far safer and sounder and 

less crisis prone than it was prior to the financial crisis. 

You described two regulations, the so-called TLAC, or Long-Term 

Debt Requirement, we proposed recently. And I believe you also 

mentioned capital surcharges. 

Now it is important to understand that those regulations only 

apply to the eight largest systemically important banks. In our regulations, we are trying to make sure that community banks that 

are not systemic are not responsible for the financial crisis, are not 

going to be hit with all of those regulations. But I do think it is 

critically important that the very largest and most systemic organizations need to be safer and sounder. 

They need to have more capital. They need to have more liquidity. And Congress told us that they need, in the event that they 

encounter difficulties or insolvency, we need to be able to resolve 

those institutions. 

We do not want the taxpayer bailing out those institutions again. 

And the SIFI surcharges, or higher capital standards means that 

they are much less likely to fail. It gives an advantage to medium 

and smaller sized institutions to the extent it burdens them in 

competing away their business, and that is safer. 

And if they did need to be resolved, that loss absorbency that 

comes from having long-term at the holding company is going to be 

something that is very important that would enable their resolution either under Title II or under the Bankruptcy Code. 

So I do think that, yes, there are some costs associated with 

these regulations, and certainly on parts of it we have done significant cost/benefit analysis. But really there is a huge benefit. 

I mean according to one estimate the cost to the United States 

of the financial crisis probably amounted to $16 trillion. I’ve seen 

one estimate that puts it at $16 trillion. So having a safer and 

sounder financial system, by having more capital and liquidity and 

resolvability, is really I think clearly a net benefit. 

Representative Paulsen. Thank you, Mr. Chairman. 

Representative Grothman. Thank you. I hope this question 

has not been asked before. 

Your two publicly stated mandates are price stability and full 

employment. And insofar as when you answer my question on full 

employment, I want you to remember we have a lot of safety net 

programs, and a lot of people feel that we are not going to achieve 

any better than when we were at 4.9 right now because the safety 

nets are so generous, people are either not looking or working part 

time because they make so much more on that. 

DeShaun on LAP51NQ082 with DISTILLER

33 

But at least right now, price stability and full employment are 

supposedly where you want them to be. So given that we are in a 

period of price stability, full employment, and the banking system 

is recovered, can you explain to all the savers—and I used to represent older people; you know, you’d save money, a hundred grand 

in the bank, you live off the interest rate—could you explain to our 

savers and our elderly population why you continue to maintain a 

zero interest rate, given that it appears we are at full employment, 

given it appears our banks are stable, and given it appears we 

have no inflation? 

Chair Yellen. Well, so I would say that inflation is running, I 

think we are pretty close to maximum employment. Inflation is 

running below our 2 percent objective. And we certainly want to 

see that changed. 

But the economy is in the sense that you have described doing 

well. And that is the reason that it is a live option for us at our 

December meeting to discuss, as we indicated, whether or not it is 

appropriate to raise rates. 

But we do have to ask the question: What is a so-called ‘‘neutral 

rate’’ at which the economy would continue to operate near full employment, and approach price stability? 

And a good deal of research, and I discuss some of this in a 

speech I gave just yesterday, suggests that the neutral rate of interest is very much lower than it has been historically. In real or 

inflation-adjusted terms, perhaps close to zero at present. 

So the level of interest rates that would support a continuation 

of these desirable trends is probably low. Of course when we were 

recovering from the Great Recession with high unemployment, to 

stimulate all the job creation we had we had to keep interest rates 

at very low levels, zero. We are contemplating raising them, but we 

have said that we expect that process to be gradual. 

And we want to make sure that, having achieved this progress 

in the labor market, we maintain it and don’t put it in danger. 

Representative Grothman. You mean my whole lifetime, when 

older people put money in the bank and they were getting 3, or 4, 

or 5 percent, we didn’t know it but during that whole time we were 

putting an unnecessary drag on the economy? 

Chair Yellen. We had a different economy then, and many 

things are different domestically and globally than they were then. 

The rates of return that savers are able to get depend on the 

strength of investment demand, the strength of demand for borrowing the funds that savers are trying to provide, and we live in 

an economy globally as well as domestically where in some sense 

there is a great deal of savings relative to the demand for those 

funds. 

And that is a market force that shapes the reality that the Federal Reserve operates in, and conditions our ability to set rates that 

will be consistent with the attainment of Congress’s objectives they 

have asked us to achieve. 

Representative Grothman. Okay, so people are saving more 

money now so we can’t give them as much interest rates? They are 

saving more than they used to. 

Chair Yellen. Well if there were a huge demand for those funds, 

interest rates would be bid up to the levels that we are more accusDeShaun on LAP51NQ082 with DISTILLER

34 

tomed to having experienced historically. But the demand for those 

funds is simply not strong enough to generate a level of interest 

rates that is more historically normal. 

Chairman Coats. Thank you, Congressman. Congressman 

Hanna has graciously waived his time, but I want to say, Madam 

Chair, that I think this has been a very instructive and timely 

hearing and we deeply appreciate your willingness to be with us. 

We have a common goal, those of us on both ends of Constitution 

Avenue. The Congress of the United States, along with the Executive Branch, but also the Federal Reserve. I think that common 

goal is to enact and implement sound policies that achieve a dynamic economy, that provides meaningful employment not only for 

our generation but meaningful employment for future generations. 

And the more we can work together, and the more we can share 

how we get to those common goals and pass that on to future generations, that clearly is a goal that has to be pursued with a lot 

of passion and a lot of intellect. And you provide both. So we thank 

you for that. 

And with that, the hearing is adjourned. 

(Whereupon, at 12:02 p.m., Thursday, December 3, 2015, the 

hearing was adjourned.) 

DeShaun on LAP51NQ082 with DISTILLER

(35) 

SUBMISSIONS FOR THE RECORD 

DeShaun on LAP51NQ082 with DISTILLER

36 

PREPARED STATEMENT OF HON. DAN COATS, CHAIRMAN, JOINT ECONOMIC

COMMITTEE

The committee will come to order. I would first like to welcome Congressman 

Tiberi to the committee, and congratulate him on his new position as Vice Chairman 

of the Committee. I look forward to working with him. 

• I would now like to welcome Federal Reserve Chair Janet Yellen and thank her 

for appearing before the Joint Economic Committee today to share her outlook 

on the U.S. economy. This committee has a long tradition of receiving regular 

updates from the Chair of the Federal Reserve, and we are pleased to be continuing that tradition here today. 

• The U.S. economy is in the midst of a long season of tepid growth. It has been 

six years since our last recession technically ended, and over that time, our 

economy has grown at a historically slow pace, with real GDP growth averaging 

2.2 percent per year. 

• Our labor market also continues to underwhelm. Unemployment has hovered 

around 5 percent for some time now, but this doesn’t tell the whole story. The 

labor force participation rate continues to fall, standing today at a recovery low 

of 62.4 percent, and millions of workers in their prime earning years are either 

out of work or underemployed. 

• Many developed countries in the global economy haven’t fared much better, experiencing growth rates of less than 2 percent, high youth unemployment and 

general lack of opportunity. 

• In part due to these subpar expectations in advanced economies, some have suggested that a 2 percent growth rate is the ‘‘new normal’’ for our economy. All 

of us should view these low economic expectations as unacceptable. 

• The Fed certainly has an important role to play in setting monetary policy, and 

that is where its focus should be. There will no doubt be discussion of interest 

rates during today’s hearing, as accommodative monetary policy by the Fed has 

been the norm for some time now. However, we should be mindful that changing interest rates is not a long-term prescription for what ails our economy. 

• It is the role of Congress and the President, not the Federal Reserve, to set the 

stage for greater economic growth. 

• For example, in my home state of Indiana, things are looking up. Our labor 

force participation is trending upward, and our unemployment rate has fallen 

to 4.4 percent. This is remarkable given that Indiana’s unemployment rate once 

topped the nation’s recession high of 10 percent. 

• Indiana has benefitted from pro-growth policies, and Congress should follow 

suit. 

• We already know how to unlock the full potential of our economy: through free 

trade, tax reform, and elimination of regulatory barriers. Our commitment to 

putting our fiscal house in order will also go a long way toward creating certainty and confidence among both businesses and consumers. 

• History confirms that it is up to public policymakers to enact laws that allow 

the private sector to thrive. 

• If we do not succeed in furthering pro-growth policies, we may face an economic 

future defined by low expectations and diminished standards of living. 

• I would like to again thank Chair Yellen for joining us today. I look forward 

to hearing her thoughts on the state of the economy and what we might expect 

in the coming months. 

I now recognize Ranking Member Maloney for her opening statement. 

PREPARED STATEMENT OF HON. CAROLYN B. MALONEY, RANKING MEMBER

Thank you, Mr. Chairman. Chair Yellen, I am pleased you are here today for this 

important and timely discussion. I look forward to your testimony in advance of the 

Federal Open Market Committee’s meeting at which you will decide whether or not 

to raise the federal funds rate. 

I am interested in hearing your perspective on the following issues and others: 

• What current trends do you find most important in helping you assess the 

short- and long-term challenges facing our economy? 

• How can the Federal Reserve time future rate increases so we don’t jeopardize 

the current economic recovery or hurt American families? 

• What do you think of the legislation recently passed by the House that would 

compromise the independence of the Fed? 

DeShaun on LAP51NQ082 with DISTILLER

37 

RECOVERING FROM THE GREAT RECESSION

Before I turn to these issues, I think it’s important to put this hearing in context. 

At the end of the Bush administration, just a little less than 7 years ago, we faced 

what former Fed Chairman Ben Bernanke called ‘‘[ . . . ] the worst financial crisis 

in global history, including the Great Depression.’’ 

We have come a long way since that economic cataclysm. And that progress is in 

no small part due to bold actions by the non-partisan, non-political Federal Reserve. 

In the month when President Bush left office we lost almost 820,000 privatesector jobs. Over the past year, we have gained an average of 226,000 jobs 

per month. In fact, we have added 13.5 million private-sector jobs over a 

record-breaking 68 consecutive months. 

This chart shows this impressive growth—I’d like to enter it into the record. 

In October 2009, unemployment reached 10.0 percent. Since then it has been 

cut in half—it now stands at 5.0 percent. 

There were about seven unemployed workers for every job opening in July 

2009. Now there are 1.4 unemployed workers per job opening, the lowest 

this ratio has been since early 2001. 

Real GDP fell 4.2 percent between the end of 2007 and the second-quarter 

of 2009. But GDP has increased by more than 14 percent since then. 

Growth has been positive in 23 of the last 25 quarters. 

Average home prices dropped 19 percent between 2007 and 2011. But now 

they are back up to where they were in 2007. 

About $17 trillion in wealth evaporated between the summer of 2007 and the 

beginning of 2009. All of those losses have been recovered, and now total 

wealth is about $10 trillion higher than it was at the onset of the financial 

crisis. 

THE FEDERAL RESERVE PLAYED A KEY ROLE IN THE RECOVERY

The Federal Reserve played an extraordinary role turning around the economy. 

The Fed quickly acted to lower rates to almost zero and has held them there for 

about seven years, which has been a principal factor in the economic recovery. 

The Fed did this despite the opposition of those who claimed that inflation was 

on the horizon—and who were later proven wrong. 

Then, having exhausted the conventional tools of monetary policy, the Fed deployed several rounds of quantitative easing aimed at keeping long-term rates low 

and further stimulating the economy. 

These efforts helped haul our country out of the depths of the Great Recession. 

But without the Fed’s actions, things would be very different today. 

A recent study by economists Alan Blinder and Mark Zandi found that efforts by 

the Federal Reserve and the Obama Administration—with support from Democrats 

in Congress—dramatically reduced the severity and length of the Great Recession. 

Specifically, the report found that without their joint efforts: 

• the recession would have lasted twice as long, 

• the unemployment rate would have reached nearly 16 percent, and 

• we would have lost twice as many jobs, more than 17 million. 

I’d like to enter the Blinder-Zandi report into the record. 

CONGRESS HAMPERED THE RECOVERY

Ironically, Republicans in Congress made recovery more difficult. 

As former Federal Reserve Chairman Ben Bernanke wrote in his new book 

‘‘The economy needed help from Congress—if not from additional spending 

(on roads and bridges for example), then at least in areas such as retraining 

unemployed workers.’’ 

But the Republican-led Congress demanded deep spending cuts at a time when 

we needed aggressive fiscal policy to boost the economy. 

They ended up doing more to hurt than to help. 

And now Republicans complain that the economic recovery has been too slow. 

DeShaun on LAP51NQ082 with DISTILLER

38 

THE FORM ACT

Now they have gone a step further. Two weeks ago, Republicans in the House 

passed legislation—the FORM Act—that would fundamentally hamper the Fed’s 

ability to conduct monetary policy. 

It would limit the Fed’s independence, for example, by forcing it to determine target interest rates using a mathematical formula, while ignoring a broad range of 

important economic indicators. 

Chair Yellen, as you have noted before, if the Fed had been forced to follow such 

a rule in recent years, quote ‘‘[ . . . ] millions of Americans would have suffered unnecessary spells of joblessness over this period.’’ 

If the FORM Act had been a law during the time of the recession, the Federal 

Reserve would not have been able to take the aggressive steps needed to help pull 

our nation out of the greatest economic catastrophe since the Great Depression. 

CONCLUSION

I hope today that we can focus on the critical issue before us—how the Federal 

Reserve should act to strengthen our economic recovery. 

But if necessary, we must clearly show that efforts to hamstring the Fed are misguided. 

Chair Yellen—thank you for appearing before the Joint Economic Committee 

today. I look forward to your testimony. 

PREPARED STATEMENT OF JANET L. YELLEN, CHAIR, BOARD OF GOVERNORS OF THE

FEDERAL RESERVE SYSTEM

Chairman Coats, Ranking Member Maloney, and members of the Committee, I 

appreciate the opportunity to testify before you today. In my remarks I will discuss 

the current economic outlook before turning to monetary policy. 

THE ECONOMIC OUTLOOK

The U.S. economy has recovered substantially since the Great Recession. The unemployment rate, which peaked at 10 percent in October 2009, declined to 5 percent 

in October of this year. At that level, the unemployment rate is near the median 

of Federal Open Market Committee (FOMC) participants’ most recent estimates of 

its longer-run normal level. The economy has created about 13 million jobs since the 

low point for employment in early 2010, and total nonfarm payrolls are now almost 

41⁄2 million higher than just prior to the recession. Most recently, after a couple of 

months of relatively modest payroll growth, employers added an estimated 271,000 

jobs in October. This increase brought the average monthly gain since June to about 

195,000—close to the monthly pace of around 210,000 in the first half of the year 

and still sufficient to be consistent with continued improvement in the labor market. 

At the same time that the labor market has improved, U.S. economic output— 

as measured by inflation-adjusted gross domestic product (GDP), or real GDP—has 

increased at a moderate pace, on balance, during the expansion. Over the first three 

quarters of this year, real GDP is currently estimated to have advanced at an annual rate of 21⁄4 percent, close to its average pace over the previous five years. Many 

economic forecasters expect growth roughly along those same lines in the fourth 

quarter. 

Growth this year has been held down by weak net exports, which have subtracted 

more than 1⁄2 percentage point, on average, from the annual rate of real GDP 

growth over the past three quarters. Foreign economic growth has slowed, damping 

increases in U.S. exports, and the U.S. dollar has appreciated substantially since 

the middle of last year, making our exports more expensive and imported goods 

cheaper. 

By contrast, total real private domestic final purchases (PDFP)—which includes 

household spending, business fixed investment, and residential investment, and currently represents about 85 percent of aggregate spending—has increased at an annual rate of 3 percent this year, significantly faster than real GDP. Household 

spending growth has been particularly solid in 2015, with purchases of new motor 

vehicles especially strong. Job growth has bolstered household income, and lower energy prices have left consumers with more to spend on other goods and services. Increases in home values and stock market prices in recent years, along with reductions in debt, have pushed up the net worth of households, which also supports consumer spending. Finally, interest rates for borrowers remain low, due in part to the 

FOMC’s accommodative monetary policy, and these low rates appear to have been 

especially relevant for consumers considering the purchase of durable goods. 

DeShaun on LAP51NQ082 with DISTILLER

39 

Other components of PDFP, including residential and business investment, have 

also advanced this year. Indeed, gains in real residential investment spending have 

been faster so far this year than last year, although the level of new residential construction still remains fairly low. And outside of the drilling and mining sector, 

where lower oil prices have led to substantial cuts in outlays for new structures, 

business investment spending has posted moderate gains. 

Turning to inflation, it continues to run below the FOMC’s longer-run objective 

of 2 percent. Overall consumer price inflation—as measured by the change in the 

price index for personal consumption expenditures—was only 1⁄4 percent over the 12 

months ending in October. However, this number largely reflects the sharp fall in 

crude oil prices since the summer of 2014. Because food and energy prices are volatile, it is often helpful to look at inflation excluding those two categories—known 

as core inflation—which is typically a better indicator of future overall inflation 

than recent readings of headline inflation. But core inflation—which ran at 11⁄4 percent over the 12 months ending in October—is also well below our 2 percent objective, partly reflecting the appreciation of the U.S. dollar, which has pushed down 

the prices of imported goods, placing temporary downward pressure on inflation. 

Even after taking account of this effect, however, inflation has been running somewhat below our objective. 

Let me now turn to where I see the economy is likely headed over the next several 

years. To summarize, I anticipate continued economic growth at a moderate pace 

that will be sufficient to generate additional increases in employment and a rise in 

inflation to our 2 percent objective. Although the economic outlook, as always, is uncertain, I currently see the risks to the outlook for economic activity and the labor 

market as very close to balanced. 

Regarding U.S. inflation, I anticipate that the drag due to the large declines in 

prices for crude oil and imports over the past year and a half will diminish next 

year. With less downward pressure on inflation from these factors and some upward 

pressure from a further tightening in U.S. labor and product markets, I expect inflation to move up to the FOMC’s 2 percent objective over the next few years. Of 

course, inflation expectations play an important role in the inflation process, and 

my forecast of a return to our 2 percent objective over the medium term relies on 

a judgment that longer-term inflation expectations remain reasonably well anchored. 

MONETARY POLICY

Let me now turn to the implications of the economic outlook for monetary policy. 

In the policy statement issued after its October meeting, the FOMC reaffirmed its 

judgment that it would be appropriate to increase the target range for the federal 

funds rate when we had seen some further improvement in the labor market and 

were reasonably confident that inflation would move back to the Committee’s 2 percent objective over the medium term. That initial rate increase would reflect the 

Committee’s judgment, based on a range of indicators, that the economy would continue to grow at a pace sufficient to generate further labor market improvement and 

a return of inflation to 2 percent, even following the reduction in policy accommodation. As I have already noted, I currently judge that U.S. economic growth is likely 

to be sufficient over the next year or two to result in further improvement in the 

labor market. Ongoing gains in the labor market, coupled with my judgment that 

longer-term inflation expectations remain reasonably well anchored, serve to bolster 

my confidence in a return of inflation to 2 percent as the disinflationary effects of 

declines in energy and import prices wane. 

Committee participants recognize that the future course of the economy is uncertain, and we take account of both the upside and downside risks around our projections when judging the appropriate stance of monetary policy. In particular, recent 

monetary policy decisions have reflected our recognition that, with the federal funds 

rate near zero, we can respond more readily to upside surprises to inflation, economic growth, and employment than to downside shocks. This asymmetry suggests 

that it is appropriate to be more cautious in raising our target for the federal funds 

rate than would be the case if short-term nominal interest rates were appreciably 

above zero. Reflecting these concerns, we have maintained our current policy stance 

even as the labor market has improved appreciably. 

However, we must also take into account the well-documented lags in the effects 

of monetary policy. Were the FOMC to delay the start of policy normalization for 

too long, we would likely end up having to tighten policy relatively abruptly to keep 

the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push 

the economy into recession. Moreover, holding the federal funds rate at its current 

DeShaun on LAP51NQ082 with DISTILLER

40 

level for too long could also encourage excessive risk-taking and thus undermine financial stability. 

On balance, economic and financial information received since our October meeting has been consistent with our expectation of continued improvement in the labor 

market. And, as I have noted, continuing improvement in the labor market helps 

strengthen our confidence that inflation will move back to our 2 percent objective 

over the medium term. That said, between today and the next FOMC meeting, we 

will receive additional data that bear on the economic outlook. These data include 

a range of indicators regarding the labor market, inflation, and economic activity. 

When my colleagues and I meet, we will assess all of the available data and their 

implications for the economic outlook in making our policy decision. 

As you know, there has been considerable focus on the first increase in the federal 

funds rate after nearly seven years in which that rate was at its effective lower 

bound. We have tried to be as clear as possible about the considerations that will 

affect that decision. Of course, even after the initial increase in the federal funds 

rate, monetary policy will remain accommodative. And it bears emphasizing that 

what matters for the economic outlook are expectations concerning the path of the 

federal funds rate over time: It is those expectations that affect financial conditions 

and thereby influence spending and investment decisions. In this regard, the Committee anticipates that even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target 

federal funds rate below levels the Committee views as normal in the longer run. 

SUMMARY

In closing, the economy has come a long way toward the FOMC’s objectives of 

maximum employment and price stability. When the Committee begins to normalize 

the stance of policy, doing so will be a testament, also, to how far our economy has 

come in recovering from the effects of the financial crisis and the Great Recession. 

In that sense, it is a day that I expect we all are looking forward to. 

Thank you. I would be pleased to take your questions. 

DeShaun on LAP51NQ082 with DISTILLER

41 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 56 here 99399.056
42 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 1 here 99399.001
43 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 2 here 99399.002
44 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 3 here 99399.003
45 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 4 here 99399.004
46 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 5 here 99399.005
47 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 6 here 99399.006
48 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 7 here 99399.007
49 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 8 here 99399.008
50 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 9 here 99399.009
51 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 10 here 99399.010
52 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 11 here 99399.011
53 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 12 here 99399.012
54 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 13 here 99399.013
55 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 14 here 99399.014
56 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 15 here 99399.015
57 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 16 here 99399.016
58 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 17 here 99399.017
59 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 18 here 99399.018
60 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 19 here 99399.019
61 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 20 here 99399.020
62 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 21 here 99399.021
63 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 22 here 99399.022
64 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 23 here 99399.023
65 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 24 here 99399.024
66 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 25 here 99399.025
67 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 26 here 99399.026
68 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 27 here 99399.027
69 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 28 here 99399.028
70 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 29 here 99399.029
71 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 30 here 99399.030
72 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 31 here 99399.031
73 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 32 here 99399.032
74 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 33 here 99399.033
75 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 34 here 99399.034
76 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 35 here 99399.035
77 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 36 here 99399.036
78 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 37 here 99399.037
79 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 38 here 99399.038
80 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 39 here 99399.039
81 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 40 here 99399.040
82 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 41 here 99399.041
83 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 42 here 99399.042
84 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 43 here 99399.043
85 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 44 here 99399.044
86 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 45 here 99399.045
87 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 46 here 99399.046
88 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 47 here 99399.047
89 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 48 here 99399.048
90 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 49 here 99399.049
91 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 50 here 99399.050
92 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 51 here 99399.051
93 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 52 here 99399.052
94 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 53 here 99399.053
95 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 54 here 99399.054
96 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 55 here 99399.055
97 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 57 here 99399.057
98 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 58 here 99399.058
99 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 59 here 99399.059
100 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 60 here 99399.060
101 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 61 here 99399.061
102 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 62 here 99399.062
103 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 63 here 99399.063
104 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 64 here 99399.064
105 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 65 here 99399.065
106 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 66 here 99399.066
107 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 67 here 99399.067
108 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 81 here 99399.081
109 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 82 here 99399.082
110 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 83 here 99399.083
111 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 68 here 99399.068
112 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 69 here 99399.069
113 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 70 here 99399.070
114 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 71 here 99399.071
115 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 72 here 99399.072
116 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 73 here 99399.073
117 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 74 here 99399.074
118 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 75 here 99399.075
119 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 76 here 99399.076
120 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 77 here 99399.077
121 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 78 here 99399.078
122 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 79 here 99399.079
123 

Æ 

DeShaun on LAP51NQ082 with DISTILLER


Insert offset folio 80 here 99399.080