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87–583 2014

S. HRG. 113–304 

UNWINDING QUANTITATIVE EASING: HOW THE 

FED SHOULD PROMOTE STABLE PRICES, 

ECONOMIC GROWTH, AND JOB CREATION 

HEARING 

BEFORE THE

JOINT ECONOMIC COMMITTEE 

CONGRESS OF THE UNITED STATES 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

MARCH 26, 2014 

Printed for the use of the Joint Economic Committee 

( 
(II) 

JOINT ECONOMIC COMMITTEE 

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

HOUSE OF REPRESENTATIVES 

KEVIN BRADY, Texas, Chairman 

JOHN CAMPBELL, California 

SEAN P. DUFFY, Wisconsin 

JUSTIN AMASH, Michigan 

ERIK PAULSEN, Minnesota 

RICHARD L. HANNA, New York 

CAROLYN B. MALONEY, New York 

LORETTA SANCHEZ, California 

ELIJAH E. CUMMINGS, Maryland 

JOHN DELANEY, Maryland 

SENATE 

AMY KLOBUCHAR, Minnesota, Vice Chair 

ROBERT P. CASEY, JR., Pennsylvania 

BERNARD SANDERS, Vermont 

CHRISTOPHER MURPHY, Connecticut 

MARTIN HEINRICH, New Mexico 

MARK L. PRYOR, Arkansas 

DAN COATS, Indiana 

MIKE LEE, Utah 

ROGER F. WICKER, Mississippi 

PAT TOOMEY, Pennsylvania 

ROBERT P. O’QUINN, Executive Director 

NILES GODES, Democratic Staff Director 
(III) 

C O N T E N T S 

OPENING STATEMENTS OF MEMBERS

Hon. Kevin Brady, Chairman, a U.S. Representative from Texas ...................... 1 

Hon. Carolyn B. Maloney, a U.S. Representative from New York ...................... 3 

Hon. John Delaney, a U.S. Representative from Maryland ................................. 13 

WITNESSES

Hon. John B. Taylor, Ph.D., Mary and Robert Raymond Professor of Economics at Stanford University and the George P. Shultz Senior Fellow in 

Economics at the Hoover Institution, Stanford, CA .......................................... 6 

Mark Zandi, Ph.D., Chief Economist, Moody’s Analytics, West Chester, PA ..... 7 

SUBMISSIONS FOR THE RECORD

Prepared statement of Hon. Kevin Brady ............................................................. 20 

Prepared statement of Hon. Amy Klobuchar ........................................................ 21 

Questions for the Record from Vice Chair Klobuchar .......................................... 22 

Response from Dr. Mark Zandi to Questions for the Record submitted by 

Vice Chair Amy Klobuchar .................................................................................. 23 

Prepared statement of Hon. John B. Taylor .......................................................... 24 

Prepared statement of Dr. Mark Zandi ................................................................. 29 

Chart titled ‘‘Federal Reserve Balance Sheet: Supplying Reserve Funds’’ submitted by Chairman Brady ................................................................................. 47 

Chart titled ‘‘Federal Reserve Balace Sheet: Absorbing Reserve Funds’’ submitted by Chairman Brady ................................................................................. 48 

Chart titled ‘‘Financial Repression’’ submitted by Chairman Brady ................... 49 

Chart titled ‘‘Debt to Cost More Then Defense’’ submitted by Chairman 

Brady ..................................................................................................................... 50 

Chart titled ‘‘48 Months of Private-Sector Job Growth’’ submitted by Representative Maloney ............................................................................................. 51 

Chart titled ‘‘11 Consecutive Quarters of GDP Growth’’ submitted by Representative Maloney ............................................................................................. 52 

(1) 

UNWINDING QUANTITATIVE EASING: 

HOW THE FED SHOULD PROMOTE STABLE 

PRICES, ECONOMIC GROWTH, AND JOB 

CREATION 

WEDNESDAY, MARCH 26, 2014 

CONGRESS OF THE UNITED STATES, 

JOINT ECONOMIC COMMITTEE, 

Washington, DC. 

The committee met, pursuant to call, at 2:50 p.m. in Room 216 

of the Hart Senate Office Building, the Honorable Kevin Brady, 

Chairman, presiding. 

Representatives present: Brady of Texas, Paulsen, Carolyn B. 

Maloney, and Delaney. 

Staff present: Doug Branch, Gail Cohen, Carroll Conor, Al 

Felzenberg, Niles Godes, Colleen Healy, Christina King, J.D. 

Mateus, Robert O’Quinn, and Andrew Silvia. 

OPENING STATEMENT OF HON. KEVIN BRADY, CHAIRMAN, A 

U.S. REPRESENTATIVE FROM TEXAS 

Chairman Brady. Good afternoon, everyone. I apologize about 

the delay from the vote series. It went so long, it was like quantitative easing: I never knew, you know, when it might end, but it 

has. 

[Laughter.] 

Thank you for your patience, to former Chair Maloney, to the 

Members, distinguished witnesses: 

The subject of today’s hearings is how the Federal Reserve 

should proceed to normalize monetary policy after the extraordinary actions taken during and after the Great Recession—consistent with promoting stable prices, economic growth, and of 

course jobs creation in America. 

Three months ago the Federal Open Market Committee began to 

taper its large-scale asset purchase program known as quantitative 

easing. Financial market participants anticipate the program’s termination before the end of the year. Yet, ending quantitative easing is simply the first step toward normalizing monetary policy. 

The FOMC will also have to raise its target rate for federal funds 

to a level consistent with long-term price stability. And then, as it 

presumably allows its mortgage-backed securities to gradually unwind, it will have to deal more proactively with its unprecedented 

build up of excess bank reserves—currently at a stunning $2.64 

trillion. These excess reserves represent the fuel for significant 

price inflation. 
2 

We truly live in challenging economic times. The United States 

suffers from a massive Growth Gap: missing 5.6 million private 

sector jobs and $1.3 trillion in real GDP as compared with the average recovery of the past 50 years. 

Using the same comparison, families are struggling with a cumulative loss of $8,961 per person in real disposable income since the 

end of the Recession. 

The slow-growth economic policies pursued by President Obama 

bear responsibility for this Growth Gap—policies such as higher 

taxes on small businesses, capital gains, and dividends; the Affordable Care Act; resisting the development of traditional energy 

sources on federal lands; and the onslaught of anti-growth regulations. 

The Federal Reserve both contributed to the cause of the financial crisis and deserves praise for its extraordinary actions at the 

height of panic in 2008 which helped to stabilize financial markets. 

However, more than four years after the recovery began, the benefits from quantitative easing and extraordinarily low interest rates 

have diminished. 

The Fed’s policies have boosted Wall Street but left Main Street 

and middle-class families behind. Since the Recession ended, the 

current return adjusted for inflation on the S&P 500 is 98 percent. 

Real disposable income per person has risen by a meager 3.6 percent. 

Ultimately, though an accommodative monetary policy may cushion real output and employment in the short term, it can’t stimulate real output in employment over the long term. Sound monetary policy can’t compensate for bad spending, tax, trade, and regulatory policies. 

Meanwhile, the benefits are diminishing and the risks are rising 

from quantitative easing and extraordinarily low interest rates. I 

am concerned that the FOMC may be unintentionally inflating new 

asset bubbles and possibly setting the stage for significant price inflation and a further decline in the purchasing power of the dollar. 

Today’s hearing addresses a topic that should be of great interest 

to Americans from all walks of life. The Federal Reserve operates 

under a dual mandate for monetary policy—established in 1977— 

which gives equal weight to achieving long-term price stability and 

the maximum sustainable level of output and employment. 

Yet as Federal Reserve Chairman Paul Volcker and Alan Greenspan correctly foresaw, monetary policy could contribute to achieving full employment if, and only if, the Federal Reserve focused 

solely on price stability. 

Under their guidance, the Fed turned to an increasingly rulesbased monetary policy. The results were outstanding: low inflation, 

and two long and strong expansions interrupted only by a brief, 

shallow recession. 

Since the Great Moderation, monetary policy has again become 

discretionary and interventionist. Not surprisingly, the results are 

disappointing. 

Beginning in 2008, the Fed explicitly deviated from the VolckerGreenspan view, invoking the employment half of its mandate to 

justify its extraordinary actions. 
3 

Now we approach the end of quantitative easing. For three consecutive meetings, the FOMC has announced incremental decreases of $5 billion in its monetary purchase of both federal agency mortgage-backed securities and long-term Treasury securities. 

Yet the complex and uncertain task of unwinding quantitative 

easing remains. As of March 19th, the Fed’s balance sheet was 

$4.26 trillion—more than quadruple its September 3, 2008, level; 

and excess bank reserves held at the Fed is $2.64 trillion, compared with the meager $11.9 billion in September of 2008. 

I will be very interested to hear our witnesses’ views on how 

monetary policy should be normalized, and I am hopeful that they 

can also help us gain insights on how the FOMC should respond 

if current forecasts are wrong and significant price inflation materializes. 

Also I am very interested in our witnesses’ thoughts on the economic effects of financial repression—particularly paying higher interest rates to keep bank reserves from flowing into the economy; 

and any thoughts on the Fed turning toward using reverse repos 

instead of the Fed Funds Rate, as a tool to affect interest rates. 

While the Federal Reserve—I say this often—while the Federal 

Reserve is supremely confident that it can end the bond buying, 

normalize interest rates, sell the mortgage-backed securities back 

into the market, and finesse the excess bank reserves while improving the economic and avoiding inflation, I am not so confident. 

Today we are joined by two very distinguished and veteran Joint 

Economic Committee witnesses. Dr. John Taylor is the creator of 

the Taylor Rule that Central Banks have used to implement a 

rules-based monetary policy, and Dr. Mark Zandi is the Chief 

Economist of Moody’s Analytics and highly respected. We are fortunate to have them with us. 

With that, I look forward to their testimony and I would like to 

yield to the former Chair of the JEC, Congresswoman Maloney. 

[The prepared statement of Chairman Brady appears in the Submissions for the Record on page 20.] 

OPENING STATEMENT OF HON. CAROLYN B. MALONEY, A U.S. 

REPRESENTATIVE FROM NEW YORK 

Representative Maloney. Well thank you, Mr. Chairman. 

I do want to note that Vice Chair Klobuchar could not be here 

today, and I am pleased to stand in for her this afternoon. I thank 

Chairman Brady for calling this hearing to continue our Nation’s 

continuing to examine our Nation’s monetary policy and its effect 

on the economy. 

We have come a long way since January of 2009 when the economy shed 821,000 private-sector jobs a month. And you see it in 

this chart, the deep red valley, and then climbing our way out. 

In the Fall of 2009, CEA Chair Christina Romer testified before 

the JEC that the shocks that hit the U.S. economy in the Fall of 

2008 were larger than those that caused the Great Depression, 

with household wealth falling by more than five times the declines 

seen in 1929. 

A large part of the credit for this turnaround is due to actions 

taken by the Congress, the President, and the Federal Reserve. 
4 

Congress enacted policies that supported struggling families and 

encouraged job creation. 

I only have time to mention a few of them. We provided tax relief 

in the Recovery Act for 95 percent of American families, and created jobs while investing in clean energy infrastructure and education. 

We extended a host of safety net programs that helped struggling 

families weather the economic downturn. We extended the net operating loss carryback provision that helped keep small businesses 

working and allowed them to hire new employees. 

We gave tax breaks to businesses that hire unemployed workers, 

and we boosted funding for small business loans via the Small 

Business Administration. 

We are fortunate to have Mark Zandi as a witness at this hearing today. Dr. Zandi, along with Dr. Alan Blinder of Princeton University, quantified the impact of these policies, as well as actions 

taken by the President and the Federal Reserve, and concluded 

that the U.S. Government’s response to the financial crisis prevented another Great Depression and saved about 8.5 million jobs. 

The Fed responded aggressively with creative and effective actions to inject liquidity into our financial system which saved our 

Nation from economic catastrophe. More recently, the Fed has used 

other unconventional means to bolster the economic recovery. 

In 1977, Congress enacted legislation that spelled out in greater 

detail the Fed’s monetary policy objectives, collectively known as 

‘‘The Fed’s Dual Mandate.’’ 

These objectives are to, and I quote: ‘‘Promote effectively the 

goals of maximum employment, stable prices, and moderate longterm interest rates.’’ 

While it is true that in recent years the Fed has implemented 

some extraordinary monetary policies, these actions were necessitated by extraordinary circumstances. And it has helped stabilize 

our economy during this crisis and its aftermath. 

While our recovery from the 2008 financial crisis has been long 

and painful over the last four years, the economy has added 8.7 

million private-sector jobs. 

The national unemployment rate of 6.7 percent has dropped more 

than 3 percentage points since the height of the downturn. The 

Gross Domestic Product has grown for 11 straight quarters. And 

the Council of Economic Advisers told this Committee two weeks 

ago that they project stronger growth in 2014. 

In addition, the inflation fears put forward by critics of the Fed’s 

policies are simply baseless. Inflation is low, about 1 percent over 

the past 12 months. And there are no signs of a rise in inflation 

for the foreseeable future. 

The one area of our economy that continues to struggle is employment. I commend former Chairman Bernanke, Chair Yellen, 

and the other Federal Reserve Governors for continuing to pursue 

the objective of maximum employment. 

The Fed lowered short-term interest rates to close to zero, which 

helped strengthen the economy by keeping borrowing costs affordable for businesses and consumers. This has spurred investment 

and consumer spending. 
5 

The Fed’s purchases of Treasuries, mortgage-backed securities, 

and agency debt also known as quantitative easing, helped bring 

down long-term interest rates and lowered mortgage interest rates. 

Because the economy has strengthened, the Fed announced in 

December that it was reducing its purchases under quantitative 

easing. Last week the Fed announced that it was further reducing 

its purchases under quantitative easing to $55 billion each month. 

I look forward to a discussion on the timing and pace of the tapering of the quantitative easing and whether tapering has had an 

impact on mortgage interest rates or on overall economic growth. 

Last month I asked Chair Yellen whether the Fed would consider 

a tapering pause, given the relatively weak job reports this winter. 

And although Chair Yellen did not think the current data warranted a pause, I would like to discuss with our panel what criteria 

the Fed should be looking for. 

The Fed also changed its forward guidance on short-term interest 

rates. Instead of keeping the Fed Funds Target Rate near zero 

until the unemployment rate reaches 6.5 percent, or until a particular date in the future, the Fed recently stated that: ‘‘even after 

employment and inflation are near mandated consistent levels, economic conditions may for some time warrant keeping the Federal 

Funds Rate below levels the Committee views as normal in the 

longer run.’’ 

I would like the panel’s opinion on that change, as well. Again, 

I thank the witnesses for joining us, and I yield back and look very 

much forward to your testimony. Thank you both, Dr. Taylor and 

Dr. Zandi, for joining us. 

Chairman Brady. Thank you, former Chair. 

Dr. John Taylor is the Mary and Robert Raymond Professor of 

Economics at Stanford University and the George P. Shultz Senior 

Fellow in Economics at the Hoover Institution. He previously 

served as Under Secretary of the Treasury for International Affairs, Senior Economic on the President’s Council of Economic Advisers, and as a member of the Congressional Budget Office’s Panel 

of Economic Advisers. Dr. Taylor received a BA in Economics from 

Princeton University, and a Doctor of Economics from Stanford 

University. 

Welcome, Dr. Taylor. 

Dr. Zandi is Chief Economist for Moody’s Analytics. He has analyzed the economic effect of various tax and government spending 

policies and assessed the appropriate monetary policy response to 

bubbles in asset markets. 

Dr. Zandi earned his Bachelor’s from Wharton School of the University of Pennsylvania, and his M.A. and Doctorate at the University of Pennsylvania. He is a frequent witness, as Dr. Taylor is, to 

the Joint Economic Committee. 

Welcome to you both. And, Dr. Taylor, let me recognize you. 
6 

STATEMENT OF HON. JOHN B. TAYLOR, Ph.D., MARY AND ROBERT RAYMOND PROFESSOR OF ECONOMICS AT STANFORD 

UNIVERSITY AND THE GEORGE P. SHULTZ SENIOR FELLOW 

IN ECONOMICS AT THE HOOVER INSTITUTION, STANFORD, 

CA 

Dr. Taylor. Thank you, Mr. Chairman, and other Members of 

the Committee, for holding this hearing on monetary policy and for 

inviting me to testify. 

For many years I’ve been a strong supporter of the Federal Reserve, especially during the 1980s and 1990s, until recently. And 

also during the financial panic in 2008, especially October and November. 

But I have become critical of the Federal Reserve policy regarding its unconventional policies, both before the crisis and after. So 

I welcome the decisions recently to begin to intervene less in the 

markets through the so-called tapering. 

I believe that the quantitative easing that really got underway 

after the panic in 2009 has not been effective. If you look at simple 

measures like interest rate spreads, they’ve gone the wrong direction. 

If you think about in addition the uncertainty that this 

unwinding has caused throughout, I think it has been a drag. I 

have argued that there is a two-sided risk to the quantitative easing in its unwinding. 

One, creating a slower recovery. 

The other is the possibility of a higher inflation rate. Unfortunately, I think the risk that has actually been realized is the slower recovery due to this uncertainty of these very unusual policies. 

That does not mean that the risk of inflation is not there; it will 

come if the Fed is unable to adjust the large amount of liquidity 

that’s in the system. 

The other part of the unconventional policy is the use of forward 

guidance that Congresswoman Maloney asked about. I believe that 

the forward guidance, for the most part, has also caused uncertainty. 

There are two reasons for that. One, it is changed constantly. 

Virtually every year since it began, the Fed has changed. It first 

moved the dates out further. Then, changing to the unemployment 

rate index. And now moving off of that. So inherently this has 

caused unpredictability and uncertainty. 

The second reason for the concern about the forward guidance is 

its inconsistency. And in a way, right now this inconsistency is becoming clear as the promises come closer to the future, the promise 

to keep the interest rate lower than normal when times become 

normal. It’s very hard to deliver on that in the future, and that inconsistency causes uncertainty. 

In my view, policy would have been much better in the past and 

would be better in the future if it was more rules-based and more 

predictable. I think there are some promising signs that we can 

move in that direction. The Fed has chosen a 2 percent inflation 

target. Most members of the FOMC see the long-term value of the 

Federal Funds Rate at 4 percent, and they see the importance of 

reacting systematically in their interest rate as the economy recovers. 
7 

All of those are very much consistent with the kind of rules for 

policy that have worked well. But there are still some concerns 

about how this will work in the future. 

There is discussion now that we may even have quantitative easing forever. In answer to your question, Mr. Chairman, about the 

reverse repos, there are proposals out there to introduce reverse 

repos so that the Fed could set the interest rates even with huge 

amounts of liquidity in the system. And the purpose is that the Fed 

could continue to engage in quantitative easing whenever it likes 

and still maintain an interest rate. 

So for these reasons I think it is very important for the Congress 

to consider requiring the Fed to adopt some kind of a rules-based 

policy. I have argued for that before this Committee in the past. 

It would be appropriate for the Fed to choose, itself of course, 

what rule it should follow. That’s the Fed’s job, not the Congress’. 

But it seems reasonable, especially in these days, for the Congress 

to ask the Fed to follow and decide its rule. And if the Fed chose 

because of an emergency or a change in circumstances to deviate 

from its strategy, all it would have to do is report to the Congress 

about the reasons why. 

I think that kind of consistency and transparency, regularity of 

reporting, would go a long way to restoring the kind of monetary 

policy that worked so well in the 1980s and 1990s until recently. 

And could work well again. 

Thank you, very much. 

[The prepared statement of Hon. John B. Taylor appears in the 

Submissions for the Record on page 24.] 

Chairman Brady. Thank you. 

Dr. Zandi. 

STATEMENT OF DR. MARK ZANDI, Ph.D., CHIEF ECONOMIST, 

MOODY’S ANALYTICS, WEST CHESTER, PA 

Dr. Zandi. Thank you, Chairman Brady, Congresswoman 

Maloney, and Congressman Delaney. Thank you for the opportunity to be here today on this very important topic. 

I would like to make three points. 

The first is that, echoing Congresswoman Maloney’s comments, 

I think the Federal Reserve did an admirable job navigating 

through the financial crisis and the Great Recession. Without the 

very aggressive and creative efforts during that period, the financial system would have likely collapsed and the economy would 

have experienced another Depression. And that aggressiveness and 

creativity came in many forms: credit facilities that provided liquidity to different corners of the financial system, to the money markets, to the commercial paper markets. These programs were designed very well to fade away as the financial markets found their 

footing, and they have. 

Bank stress testing put our banking system on solid financial 

footing, which is so key to the provision in the form of credit, which 

is vital to economic growth. 

Zero short-term interest rates. I think that was clearly necessary 

in the context of a peak unemployment rate that was close to 10 

percent, and very low inflation below target and stable inflation expectations in what was going on in the financial system. 
8 

And most controversial, but also important, quantitative easing. 

I think it is fair to say there are potential negatives from quantitative easing, but on net it has been a meaningful plus to the 

economy. It has lowered long-term interest rates, which has helped 

to support housing values, stock prices, and broader economic 

growth. 

There are negatives. There are positives from QE, but on net it 

has been a plus. 

So my second point is to QE. I think it is fair to say that over 

time the benefits have diminished, and thus it’s appropriate for the 

Federal Reserve at this point to begin winding down the program. 

But it has worked out quite well in lowering long rates, bringing 

up housing values, and stock prices. And I think it has actually 

helped monetary policy in general, QE, especially in reducing volatility in the financial system. 

So if you look at the variability of asset values, of fixed income, 

credit spreads, stock prices, you know, the things that you would 

look at to try to gauge whether uncertainties affecting markets and 

the economy, you do not see it in the data. In fact, the stability is 

quite amazing. The value of the dollar has been incredibly stable 

throughout this period. 

I do worry about potential bubbles. I think that is reasonable to 

be concerned about. And I think the Federal Reserve is focused on 

this, as well. They are scouring the financial system for potential 

bubbles. And at least to this point, they feel quite manageable. 

I do worry about future inflation. I think that is a very reasonable concern in the context of the liquidity that is in the banking 

system. But clearly to date that is not an issue. 

Inflation expectations, which is the financial market’s perspective 

on inflation, they’re rock solid. They have not moved at all. They 

are at 2.5 percent, and no movement at all. 

So I think QE has been a plus for the economy on net. 

The third point is, I do agree with the concern about how this 

is going to play out going forward. How do we wind down quantitative easing and normalize interest rates? This is not going to be 

easy. It is going to be tricky, and I am sure there are going to be 

a few bumps along the way. 

But I think the Federal Reserve has all the tools they need to 

execute on this. I think they have the ability to manage short-term 

interest rates very well through the interest rate on reserves, 

through term deposits, and I think the fixed rate reverse repo program is very effective. The Federal Reserve has worked very carefully with money market funds, with primary dealers; they are 

looking to expand counterparties, Federal Home Loan Banks, and 

it seems to be quite effective in terms of managing short-term interest rates in the context of a surfeit of bank reserves. 

And I think they have the will to do this, and the creativity to 

do it. And so far so good. You know, they have begun to taper. They 

have laid out a path for short-term interest rates. And if, I am 

sure, you asked the Federal Reserve Members what they thought 

about a 10-year Treasury Bond at 2–3/4 percent, they would say 

that sounds pretty good to me. That is exactly probably where they 

would like it in the context of the low unemployment or the employment growth is. 
9 

So and even today, you know, with the tapering, long-term rates 

have not risen, and they did not after QE–1 ended and QE–2. So, 

you know, I concur that this is going to be—it is not going to be 

easy, and I am sure there are bumps, but I am confident that they 

will be able to pull this off and the economic recovery will continue 

to gain traction. 

Thank you. 

[The prepared statement of Dr. Mark Zandi appears in the Submissions for the Record on page 29.] 

Chairman Brady. Thank you both, very much. 

A couple of questions to try to understand better. 

Dr. Zandi, I was concerned about the recent statements by the 

new Chairman about lower interest rates continuing far beyond, 

you know, the lower unemployment rates as well. You know, to a 

layman it seemed as if the Fed simply was not moving the goal 

posts but removing them completely. They were almost to the eye 

of the beholder type of Fed policy going forward. 

So, one, do you think the market has assimilated, anticipated the 

end of quantitative easing? 

Two, do you think the market has done the same for this nearzero interest rate approach? I mean, are they starting to understand that this cannot continue? 

And then, do you think the market has given any thought yet to 

just the mortgage-backed securities and the excess bank reserves 

that will have to be addressed as the economy starts to take off? 

Dr. Zandi. Well I think we can glean expectations in financial 

markets from futures markets. And if you look at what the futures 

markets are saying, the sort of consensus view in the financial system is that tapering will end by year’s end, September, October, 

November; that interest rates will remain—short-term interest 

rates remain at zero for, as they say in the FOMC, for a considerable period, and Chairwoman Yellen has articulated that’s roughly 

six months, and that is pretty much embedded in the futures markets. 

And, that interest rates will—short-term interest rates will start 

to rise in the summer or fall of 2015, and slowly normalize over 

time. So that is what is embedded in the financial markets. That 

is what is in the bond market. That is what is in the stock market. 

That is what is in the currency market. 

So I think the Federal Reserve at least at this point in time has 

expectations in the financial markets right where they want them. 

Now I do expect that this spring/summer growth will reaccelerate. I think the economy was temporarily weakened by things 

like very poor weather—at least where I come from it’s been—well, 

here, you know better than anyone. And at that point, bond investors are going to start to anticipate an earlier tightening of monetary policy, pull forward their expectations, and we might see longterm interest rates rise. 

So the Federal Reserve at that point, sometime this spring/summer, will be tested again. And this will be a very important test 

of whether the new Chairwoman can explain some of the thinking 

behind, you know, the path she has articulated for future interest 

rates. But so far, so far so good. 

Chairman Brady. Dr. Taylor, two quick questions. 
10 

One, why haven’t we had significant price inflation? Do you 

think this should be a concern, a threat going forward? 

Dr. Taylor. [Off microphone]. 

Chairman Brady. Could you hit that microphone button? 

Dr. Taylor. Sorry, Mr. Chairman. 

The economy has been quite weak. You mentioned that in your 

opening. So the usual kind of pressure you see that raises inflation 

has not been there. 

The second is this liquidity is staying in the banks for the time 

being at least, and so it has not leaked out to the money growth 

as could occur. But I think going down the road there is no reason 

to be complacent about this at all. It is kind of what you would expect. If anything, you would wonder why there has not been even 

less inflation. But I think it is still a concern going down the road. 

Chairman Brady. As a layman, if you just listen to our businesses back home and then throughout the country, I always get 

the sense there is real uncertainty over increased regulations, including banking regulations in that area, and uncertainty over fiscal policies and about the ability to invest now without repercussions later. 

I sense the Fed has their foot on the pedal, go, go. I think the 

regulators have their foot on the brake for our banks, in addition 

to the lack of demand that is part of the challenge we’ve got. 

Dr. Taylor, a final question. I have introduced legislation to reform the Federal Reserve. And among its major provisions is to 

focus back on price stability, the single mandate versus dual mandate, and some other reforms. 

In past discussions there is concern that should we do that, that 

we somehow, the Fed will somehow ignore job creation in a disappointing recovery, or that it might not have the ability to react 

to a financial crisis in the future. 

Could you address those concerns for me? 

Dr. Taylor. Well it certainly would have the ability to react. 

There is no stipulation that the Fed could not do its lender-of-lastresort activities. So it would be completely unchanged. 

I think what is perhaps confusing to people on this issue is that 

when you look at history it is the very extra focus on other things 

besides stable prices that has caused the problem. And it has even 

led to higher unemployment. 

In the 1970s, the Fed drifted away from its price stability goal 

and it actually tried to address the employment issue. And look 

what happened. Unemployment went up and up and up and up. 

Then you had Paul Volcker come in who changed that and focused 

back on price stability. And look what happened? Unemployment 

went down, down, down. 

And then recently we have had this much discussion of the unemployment again. What happened to unemployment? It’s gone up 

much higher. I was at this committee hearing in 1977 and Hubert 

Humphrey was in your position. And he was outraged that the 

economists were talking about an unemployment rate of 4.9 percent. That’s way too high. 

And so we have had, unfortunately, a policy which has led to 

higher unemployment, even though the statement is to focus on it. 
11 

So that is my concern about this and why I think a focused Fed, 

limited-purpose Fed would work better. 

Chairman Brady. Thank you, Doctor. Thank you, both. Congresswoman Maloney. 

Representative Maloney. Thank you. 

At its current rate, the Federal Reserve will finish its tapering 

in October of this year. And I would like to ask you first, Dr. Zandi, 

then Dr. Taylor, when do you think the Fed will start to raise 

short-term interest rates? 

Dr. Zandi. Well I articulated what the markets think. They 

must be listening to me. 

[Laughter.] 

That is my expectation, as well. The Federal Reserve has me 

right in line with their thinking. That would be consistent with a 

steady improvement in the labor market, a decline in unemployment, increased labor force growth. It would be consistent with inflation below target, 2 percent. Stable inflation expectations. And 

a financial system that is performing reasonably well. 

So I think the most likely scenario, I think with as much certainty as you possibly can have in any kind of economic forecasting, 

short-term rates will begin to rise in the second half of 2015, and 

normalize over the subsequent two or three years. 

Representative Maloney. Dr. Taylor. 

Dr. Taylor. I think that is consistent with what Chair Yellen 

has said, and therefore the intentions of at least the Chair of the 

FOMC and the Fed. 

I think there are differences of opinion within the FOMC at this 

point. You can see that in their own forecasts. Some think it will 

come up earlier. So ultimately I think it’s going to depend on the 

balance of discussion in the FOMC, and it could occur a little bit 

earlier than that—again, depending on the strength of the economy 

and the recovery itself. 

Representative Maloney. And, Dr. Zandi, what economic indicators do you think the Fed is looking at to determine its timing 

on short-term interest rates? 

Dr. Zandi. I think a plethora of indicators, and they articulated 

some of them in the last FOMC meeting when they moved from 

threshold-based guidance to database guidance. 

So labor market indicators are very important. Unemployment, 

labor force participation, wage growth, all very important. Obviously inflation, inflation expectation and various measures of financial market and financial institution performance are very critical 

to their thinking about the conduct of policy. 

So I think it is a plethora of economic and financial market variables they are using. 

Representative Maloney. Well I think all of us would like to 

see the economy improving faster than we are seeing it. It is the 

slowest recovery I have ever seen. And the elephant in the room 

that some economists are beginning to talk about is the huge 

amount of debt that our college students are graduating with and 

not being able to find jobs—$40,000, $50,000. 

And this translates into an area that you talk a great deal about, 

Dr. Zandi, and that is the high importance of housing in our overall 

economy. I would also say car sales. These are two big areas of 
12 

jobs, job growth and strength in our economy. And people who buy 

cars and new houses are young people starting out in their careers. 

They buy the cars. They buy the houses. They start their families. 

They move forward. 

But with this huge amount of debt—and I often ask these young 

people. Some of them say they expect to pay it off in their 50s, 

some earlier. But this is a drag on our economy. And I would like 

to ask both of you to comment on it, on any reflections that you 

have on this. And do you believe it is a drag on our economy? 

Housing has improved, but it is nowhere what we would expect it 

to be at. I have heard some economists say it’s 25 percent of our 

economy with the related activities, and also the purchasing of cars 

are way below. 

So I would like to hear your comments on the elephant in the 

room. 

Dr. Zandi. Well it is in my household. So the elephant is there. 

You know, I have a 23-year-old boy who graduated from Wake Forest and had a happy day two weeks ago when he found a job. He 

did it on his own, so we’re happy. 

But the Millennials are struggling in lots of different ways. You 

mentioned student debt. That’s obviously the case. And actually 

they did the right thing. I mean, they were told, appropriately so, 

that to advance their financial situation in the future they would 

need to get training, and education, and so they went to school. 

And in many cases you cannot do that if you do not have any home 

equity because of the declining housing values and you have to 

take on student loan debt. And they did that. 

For some, it is going to pay off. For others, it is not. If you do 

not graduate, then obviously this is a very significant financial 

weight. The jobs they are getting are paying at lower wages. 

So it is very likely that—and there are really good studies that 

show that your lifetime earnings are a direct function of your starting salary. So I think the Millennials are behind the financial 

eightball, and that means they are going to be getting married 

later than I did and you did, and have children later, start households later, buy homes later, and buy cars later. 

So I think this is a very significant longer term issue for the 

American economy, and I think we need to seriously think about 

student lending broadly and really what it is buying us. And, 

whether we shouldn’t be redirecting the subsidies we provide 

through the Student Loan Program to expanding the availability of 

educational resources—you know, E-learning, universities, community colleges, to bring down the cost of education, because that is 

the way to help these kids have the jobs that they are going to 

need to be able to pay off the debt and to do well in the future. 

Representative Maloney. Dr. Taylor, could you comment? 

Dr. Taylor. I think the reasons for the slow recovery are more 

than just a couple of things. The elephant you referred to, that’s 

important, but it’s a broader issue. 

Just for example, the savings rate that we have is not excessively 

high. It is reasonable. It is much lower than it was during the very 

rapid recoveries in the 1980s. So the factors about that couldn’t be 

the whole issue. 
13 

So, when I look at it, I think of some of the things that Chairman 

Brady mentioned: that there’s this uncertainty about the policies. 

If you look at fast recoveries in the past, we did not have that as 

much. There are a lot of things that need to be done. The Tax 

Code, for example, is causing a drag. 

So I think of it as the best thing that can be done to get a faster 

recovery is to get policy back into, I guess, a more certain, more 

predictable mode. I think if we were able to do that, we would get 

these growth rates like we saw in the past. 

Representative Maloney. Thank you. My time has expired. 

Chairman Brady. Thank you. 

Mr. Delaney. 

OPENING STATEMENT OF HON. JOHN DELANEY, A U.S. 

REPRESENTATIVE FROM MARYLAND 

Representative Delaney. Thank you, Mr. Chairman, for holding this hearing. And I want to thank our witnesses for being here. 

I will comment briefly on the Fed and then just ask a couple of 

questions. I actually think the Fed’s actions around the crisis were 

heroic, which I think both of you have acknowledged. And I actually think QE–1 and QE–2, QE–1 in particular, QE–2 to a lesser 

extent, were important. 

I was of a view that QE–3 was unnecessary, and we were at a 

point of diminishing returns. If you look at where rates had been 

and how long they had been there, and if you look at the amount 

of investment they made for QE–3, it really did not do anything 

other than raise asset prices. And it disproportionately benefitted 

wealthy Americans, and to some extent it hurt middle class Americans who were savers and have a larger percentage of their savings 

in cash, and CDs, and things like that. 

So I was fairly critical of that policy, but I think on balance you 

have to give the Fed very high marks for their performance across 

the cycle, which I think both of you on balance seem to—Dr. Zandi 

in particular. 

And I think this notion about tapering, I think they have been 

pretty clear what they are going to do. And it also seems to me, 

and the thing that is not talked about enough, is I think the Fed 

balance sheet will be the size it is now for 10 years. 

The probability of them shrinking the balance sheet to me is almost nonexistent. And I think that will be a permanent state for 

awhile. They will stop growing it, but the notion that they are 

going to shrink it any time soon seems to me to be very low probability. 

I am interested in your views about—Dr. Zandi, Dr. Taylor— 

what do you think the Fed’s balance sheet will be in 5 or 10 years? 

Dr. Taylor. I have the same concerns as you do that the balance 

sheet will remain high. Remember, it is still rising. 

Representative Delaney. Right. 

Dr. Taylor. And if it stops rising in October, I think it is going 

to remain. And it concerns me because that is a situation which is 

loaded with risk—inflationary risk, or if they try to undo it in a 

way, contractionary risk. Withdrawing liquidity is always hard for 

a Central Bank, and this makes it even harder. 
14 

Just if I could add, I also worry that if it’s a 10-year proposition, 

it is a forever proposition. You are talking about a different kind 

of Central Bank than ever we had before. 

Representative Delaney. Arguably if it stays the same size in 

20 years, it’s a smaller issue because the economy is much bigger, 

right? So you ultimately, if we can have some decent growth, we 

grow ourselves out of all these problems. But I tend to think—and 

so we should just come to grips with the fact that we’re going to 

have a big Fed balance sheet. 

Dr. Zandi, do you have a view? 

Dr. Zandi. No, I don’t think that’s the case. What is going to 

happen, I think, is they are going to stop QE bond buying, and 

then they are going to let the balance sheet mature. 

Representative Delaney. They will let it run off. 

Dr. Zandi. Oh, yeah. And if you let it mature, it is back to 

where it should be in 10 years, roughly 10 years. So they’re not 

going to sell——— 

Representative Delaney. You think they can take that much 

liquidity out of the system? Because it seems to me the average life 

of their investments are probably 5 to 7 years. 

Dr. Zandi. Well the QE has its impact on long-term interest 

rates. 

Representative Delaney. Right. 

Dr. Zandi. So they are slowly going to let that come out of longterm interest rates. So by my calculation, QE all in has lowered 

long-term interest rates by 75 to 100 basis points. That comes out 

of long-term interest rates over a 10-year period. 

Representative Delaney. Right. 

Dr. Zandi. That’s the thinking. And I think that’s the theory. 

Representative Delaney. Right. 

Dr. Zandi. So far that’s been the empirical evidence. 

Representative Delaney. Yes. 

Dr. Taylor. So if I could add? 

Representative Delaney. Yes. 

Dr. Taylor. I really disagree about the empirical evidence. It is 

based on very unusual kind of studies. And if you just look at the 

basics, when QE started, QE–3 started, the 10-year rate was 1.7. 

It is now 2.7. How can you say that this is having an impact? 

If you look at spreads, before we started quantitative easing they 

were smaller than spreads now. It is very hard to find effects of 

these things that hold up to scrutiny. 

Representative Delaney. Right. I mean, there are a lot of 

other variables that go into how people think about spreads. It’s 

their view of risk. Their view of the taper in and of itself caused 

credit spreads to widen because they view it as a risk factor that 

they want to underwrite. 

But it seems to me QE–3 was really in many ways the Fed’s response to Congress’s inability to do things, right? Because the Fed 

is a blunt instrument, as we know, and early on in the crisis, and 

even QE–1 and QE–2, they were doing what they needed to do. 

QE–3 was their attempt to do things in a very imprecise way that 

Congress would do better. 
15 

What worries me, if you look at what’s really caused the unemployment challenges we have in this Nation, they really started before the crisis. They were just masked by a lot of debt. 

You know, we had a very large credit bubble obviously before the 

crisis, and that created artificial employment in the system mostly 

around housing but in other ways. So some of these structural employment issues we have—not structural in terms of people being 

unemployed for a long period of time, but structural in terms of 

what is going on in our economy—probably started a long time ago. 

And they are really related to globalization and technology, two 

very disruptive forces that have affected the workforce. 

I worry significantly that there is another shoe to drop in this, 

and that we are not prepared for this. I know I am out of time, 

but I am just interested in your views as economists how big of a 

threat do you think we have for more disruption in the employment 

market based on continued technological innovation? 

Dr. Zandi. Well first, globalization I think—I agree with your 

assessment that globalization and technological change has had a 

very disruptive effect on the labor market, particularly middle and 

low-income households. 

Representative Delaney. Right. 

Dr. Zandi. Globalization, though, is I think, we’re right at the 

tipping point from where it goes to being a problem to a big plus. 

Representative Delaney. Yes, yes. 

Dr. Zandi. A big plus. So—— 

Representative Delaney. We can’t stop it. I am not arguing to 

stop it. 

Dr. Zandi. But we should be working really hard to—— 

Representative Delaney. Equip ourselves. 

Dr. Zandi. Yes. Because we are going to benefit enormously 

going forward, because the emerging world is now in our sweetspot. 

We are going to sell to them, and that is going to be key. 

Technology, that is an issue. So if you look at, you know, you line 

up occupations by pay scale and you relate that to technological innovation, you quickly see actually the folks in the bottom part of 

the payscale, they’re okay. 

Representative Delaney. They’re fine. They are actually doing 

better because as you get better at the top you create more jobs at 

the bottom. 

Dr. Zandi. Yes. It is the middle that gets coded out effectively. 

Representative Delaney. Right. 

Dr. Zandi. And this is—— 

Representative Delaney. You’ve got a barbell economy. 

Dr. Zandi. And this is the policy challenge because you have to 

raise their educational attainment so they move up and not down, 

and we are not very good at that. We haven’t been, historically. 

Representative Delaney. Right. I know I’m out of time, but 

there’s no one else in the queue. 

Chairman Brady. Dr. Taylor. 

Dr. Taylor. Yes. So I think the globalization has always been 

there. It’s growing. You can point to globalization aspects, many 

people did, in the 1980s when we had a strong recovery. 
16 

The extra exuberance we got before the crisis I would also point 

to the Federal Reserve was very low rates in 2003, 2004, and 2005. 

It wasn’t just the other factors coming from abroad. 

So that is why I say if you could get the policies right, our policies right. And when you say the Fed responded because the Congress wasn’t doing anything, that is not a good position to be in. 

If the Central Bank is going to hold out its shingle saying we will 

take care of this, they are going to be asked all the time. And that 

is kind of the worst situation. 

Representative Delaney. And it is not just the Congress. It’s 

Congress and the Administration——— 

Dr. Taylor. Absolutely. 

Representative Delaney [continuing]. Together. So I want to 

make sure. Okay, thank you. 

Chairman Brady. I know we are out of time. Can I do a followup question on the side of the balance sheet? I think it is important. 

I think it is encouraging that tapering is occurring. The Fed is 

only serving four desserts after each meal rather than seven. You 

know, next month it will be three. It still leaves it with a huge balance sheet, as Congressman Delaney made the case. 

We have got a ton of mortgage-backed securities that at some 

point have to be unwound. But on the issue of inflation, if the economy starts to take off clearly banks are going to begin lending. And 

if inflation emerges, the Fed is going to want to respond either by 

reserving—increasing reserve requirements, or paying more interest on the excess reserves. 

One, how effective a tool is that in dealing with inflation at that 

point? Are there other viable options for the Fed? What is the economic impact? 

Dr. Taylor. So the Fed can raise rates by paying interest on reserves, even with the balance sheet so big. I think it is important 

for them to also be reducing the size of the balance sheet as they 

do this. 

There are two things that are going on, and I think it is a question about whether they will be able to. It is always hard for a central bank to withdraw liquidity, every time. And there are a million 

excuses not to do it. So that is the main concern I have, that they 

will end up being behind the curve. And once inflation gets picked 

up, it is very hard to reverse. 

Dr. Zandi. Can I just say, in terms of managing short-term interest rates in the context of this surfeit of bank reserves, the 

fixed-rate reverse repo program is working very, very well. 

You talk to dealers, you talk to the large money market funds, 

it is working incredibly well. They have got a floor under—they’ve 

got to make some tweaks to the program. They need to increase the 

counterparties. They have to bring in the Federal Home Loan Bank 

System, and then they’re golden. They’ve got it. 

So I think they will be able to manage the short-term interest 

rates higher. 

The other constraint on credit, though, it’s not only liquidity but 

more importantly in the context of the current environment it’s 

capital. So they are going to be able to control the flow of credit 
17 

through capital, and in fact they are doing it through the bank 

stress testing process. 

They can manage the aggregate credit flows very, very precisely, 

and also where the credit goes, by the way. So actually I think the 

stress testing process gives the Federal Reserve much more power 

over the banking system and the economy than monetary policy. 

I mean, they can manage things very, very precisely with that 

tool. And no one is paying attention to that. 

Representative Delaney. So you’re saying—it’s really a good 

insight—they could just say, well, I think there is too much real 

estate credit so we are going to say—— 

Dr. Zandi. Yes. 

Representative Delaney [continuing]. For cumulative losses on 

real estate, we are going to double our downside case, run the numbers, and everyone will pull credit or capital out of real estate. 

Dr. Zandi. Everybody. 

Representative Delaney. That’s a really good point. 

Dr. Zandi. Everybody will, by definition, because you have just 

raised the cost of capital for every bank. 

Representative Delaney. Right, right. 

Dr. Zandi. I mean, overnight. 

Representative Delaney. They are setting the rules basically 

on how banks have to think about risk. 

Dr. Zandi. I really think this should be—— 

Representative Delaney. Do you think that’s a good thing? 

Dr. Zandi. Well that’s a great question. That’s a really good 

question. 

Representative Delaney. Yeah. Sometimes the regulators are 

the best assessors—they haven’t proven to be the best assessors of 

risk. 

Dr. Zandi. Well I think it needs oversight. So, you know, I hear 

the committees talk about monetary policy, quizzing them on interest rates; no one is quizzing them on this regulatory tool, and I 

think it is key that there is oversight here. 

Representative Delaney. That is a really good point. 

Chairman Brady. Dr. Taylor. 

Dr. Taylor. Just to say, when the Fed moves beyond monetary 

policy to credit allocation, which is what you are talking about, it 

is a different type of institution. And I think for the most part it 

was set up as a limited-purpose institution; it gets into credit allocation? It affects fiscal policy. It affects your job, as you were talking about a few minutes ago. But the responsibility of Congress is 

appropriation and things like credit allocation, not the Federal Reserve. 

Chairman Brady. And the concern there is credit allocation invites political interference. You know, as that price list goes on, the 

Fed did contribute to the credit bubble and we don’t all have the 

same level of confidence going forward. But this is the conversation 

that we hope to have on monetary policy, an adult conversation on 

what is the best role for the Fed? What are the real concerns and 

threats out there? What do we need to be aware of from this Committee and its economic impacts. 
18 

So I want to thank the Members who were here today. Dr. Taylor, Dr. Zandi, thank you again for always being available to have 

this conversation. With that, the hearing is adjourned. 

(Whereupon, at 3:39 p.m, Wednesday, March 26, 2014, the hearing was adjourned.) 
(19) 

SUBMISSIONS FOR THE RECORD 
20 

PREPARED STATEMENT OF HON. KEVIN BRADY, CHAIRMAN, JOINT ECONOMIC

COMMITTEE

Vice Chair Klobuchar, Members, and Distinguished Witnesses: 

The subject of today’s hearing is how the Federal Reserve should proceed to normalize monetary policy after the extraordinary actions taken during and after the 

Great Recession—consistent with promoting stable prices, economic growth, and job 

creation for America. 

Three months ago the Federal Open Market Committee (FOMC) began to taper 

its large-scale asset purchase program, known as quantitative easing. Financial 

market participants anticipate the program’s termination before then end of the 

year. Yet ending quantitative easing is simply the first step toward normalizing 

monetary policy. 

The FOMC will also have to raise its target rate for federal funds to a level consistent with long-term price stability; and then as it presumably allows its mortgage-backed securities to gradually unwind, it will have to deal more proactively 

with its unprecedented build-up of excess bank reserves—currently at a stunning 

$2.64 trillion. These excess reserves represent the fuel for significant price inflation. 

We truly live in challenging economic times. The United States suffers from a 

massive Growth Gap—missing 5.6 million private-sector jobs and $1.3 trillion in 

real GDP as compared with the average recovery of the past 50 years. Using the 

same comparison, families are struggling with a cumulative loss of $8,961 per person in real disposable income since the end of the recession. 

The slow-growth economic policies pursued by President Obama bear responsibility for this Growth Gap—polices like higher taxes on small businesses, capital 

gains, and dividends; the Affordable Care Act, resisting the development of traditional energy sources on federal lands, and the onslaught of anti-growth regulations. 

The Federal Reserve both contributed to the cause of the financial crisis and deserves praise for its extraordinary actions at the height of panic in 2008, which 

helped to stabilize financial markets. However, more than four years after this recovery began, the benefits from quantitative easing and extraordinarily low interest 

rates have diminished. 

The Fed’s policies have boosted Wall Street but left Main Street and middle-class 

families behind. Since the recession ended the current return adjusted for inflation 

on the S&P 500 is 98%, but real disposable income per capita has risen by a meager 

3.6%. 

Ultimately, though an accommodative monetary policy may cushion real output 

and employment in the short term, it cannot stimulate real output and employment 

over the long term. Sound monetary policy cannot compensate for bad spending, tax, 

trade and regulatory policies. 

Meanwhile the benefits are diminishing and the risks are rising from quantitative 

easing and extraordinarily low interest rates. I am concerned that the FOMC may 

be unintentionally inflating new asset bubbles and possibly setting the stage for significant price inflation and a further decline in the purchasing power of the dollar. 

Today’s hearing addresses a topic that should be of great interest to Americans 

from all walks of life. The Federal Reserve operates under a dual mandate for monetary policy— established in 1977—which gives equal weight to achieving long-term 

price stability and the maximum sustainable level of output and employment. 

Yet as Federal Reserve Chairmen Paul Volcker and Alan Greenspan correctly 

foresaw, monetary policy could contribute to achieving full employment—if and only 

if—the Federal Reserve focused solely on price stability. 

Under their guidance, the Fed turned to an increasingly rules-based monetary 

policy. The results were outstanding: low inflation and two long and strong expansions, interrupted only by a brief, shallow recession. 

Since the Great Moderation, monetary policy has again become discretionary and 

interventionist. Not surprisingly, the results are disappointing. Beginning in 2008, 

the Fed explicitly deviated from the Volcker-Greenspan view, invoking the employment half of its mandate to justify its extraordinary actions. 

Now we approach the end of quantitative easing. For three consecutive meetings, 

the FOMC has announced incremental decreases of $5 billion in its monetary purchase of both federal agency mortgage-backed securities and long-term Treasury securities. 

Yet the complex and uncertain task of unwinding quantitative easing remains. As 

of March 19th the Fed’s balance sheet was $4.26 trillion—more than quadruple its 

September 3, 2008 level of $945 billion, and excess bank reserves held at the Fed 

is $2.64 trillion—compared with $11.9 billion on September 3, 2008. 

I will be very interested to hear our witnesses’ views on how monetary policy 

should be normalized, and I am hopeful that they can also help us gain insights 
21 

on how the FOMC should respond if current forecast are wrong and significant price 

inflation materializes. 

Also I am very interested in our witnesses’ thoughts on the economic effects of 

financial repression—particularly paying higher interest rates to keep bank reserves 

from flowing into the economy; and any thoughts on the Fed turning toward using 

reverse repos instead of the Fed Funds rate, as a tool to affect interest rates. 

While the Federal Reserve is supremely confident that it can end the bond buying, 

normalize interest rates, sell the mortgage backed securities back into the market 

and finesse the excess bank reserves while improving the economy and avoiding inflation, I am not. 

Today we are joined by two very distinguished and veteran JEC witnesses. Dr. 

John Taylor is the creator of the Taylor rule that central banks have used to implement a rules-based monetary policy, and Dr. Mark Zandi is the chief economist of 

Moody’s Analytics. We are fortunate to have them with us. 

With that, I look forward to their testimony. 

OPENING STATEMENT OF HON. AMY KLOBUCHAR, VICE CHAIR, JOINT ECONOMIC

COMMITTEE

Thank you Chairman Brady for holding today’s hearing on monetary policy. We’re 

fortunate to be joined by two witnesses with a deep understanding of these issues, 

Dr. Mark Zandi and Dr. John Taylor. I want to thank both of you for being here 

today. 

STATE OF THE ECONOMY

Chairman Brady held a hearing of this Committee on monetary policy and the 

mission of the Federal Reserve about a year ago. Since then, the labor market has 

strengthened, inflation has remained in check, the economy has continued to grow 

and the Fed has begun to wind down its quantitative easing program. 

While we are still not where we would like to be, we have continued to make real 

progress recovering from the recession. The economy has added jobs for 48 consecutive months. It has now regained 8.7 million of the 8.8 million private-sector jobs 

lost during the recession. 

The national unemployment rate of 6.7 percent has dropped more than three percentage points since the height of the downturn. In my state, the unemployment 

rate is better than the national average at 4.7 percent. Inflation is low, about one 

percent over the past 12 months, and there is no sign of a rise in inflation for the 

foreseeable future. Gross Domestic Product (GDP) has grown for 11 straight quarters and the Council of Economic Advisers told this Committee two weeks ago that 

they project stronger growth in 2014. 

FEDERAL RESERVE’S ACTIONS

Actions taken by the Fed and Congress helped bring about the economic recovery. 

The Fed lowered short-term interest rates to near zero at the end of 2008 and stated 

last week that it will keep those rates low for a considerable period of time as the 

economy continues to recover. 

Low interest rates have helped strengthen the economy by keeping borrowing 

costs affordable for businesses and consumers. This has spurred investment and 

consumer spending. Because the economy has strengthened, the Fed announced in 

December that it was reducing its purchases under quantitative easing. A further 

reduction to $55 billion each month was announced last week. It has always been 

understood that these efforts would be scaled back as the economic recovery 

strengthened. The Fed’s tapering is a sign that the recovery has gained traction. 

THE FED MUST REMAIN FOCUSED ON FULL EMPLOYMENT

In 1977, Congress clarified that the Fed’s dual mandate is to promote maximum 

employment and stable prices. Even with the progress we have made, we all know 

families who are working several jobs to get by, as well as workers who can’t find 

a job after months and months of searching. Though the short-term unemployment 

rate has already declined to close to its pre-recession level, the long-term unemployment rate remains at 2.5 percent, nearly triple what it was before the recession 

began. 

Now is not the time for the Fed to take its eye off promoting employment. Requiring the Fed to focus solely on price stability would be directing it to essentially ignore employment at a time when the labor market is still recovering. 
22 

CONCERNS ABOUT THE FED

Under Chairman Bernanke, the Fed also improved its communication about the 

policy-making process. This was movement in the right direction. I believe the Fed 

needs increased transparency and accountability. I will encourage the Federal Reserve Chair Janet Yellen to build on the steps taken by her predecessor and I look 

forward to our witnesses’ views on this as well. Finally, the Fed has kept interest 

rates low to strengthen the economy, which is hard on savers. Yet, in the past four 

years, Americans have saved well over four percent of their incomes. 

FISCAL POLICY

While my focus this afternoon has been on monetary policy and the role of the 

Fed, Congress has a critical role to play in boosting our economy in the short term 

while laying a stronger foundation for growth in the long term. 

We have taken steps to put our country on a sound fiscal path. The deficit has 

been cut by more than half since the end of 2009. We’ve passed the bipartisan Murray-Ryan budget agreement, which led to passage of the Omnibus spending bill this 

year and sets us on a clear path for spending next year. We reached an agreement 

through March 15, 2015 to ensure our nation will pay its bills on time. And finally, 

we passed the Farm Bill, which saves $23 billion over the last bill and is vital to 

many states in this country. 

As we pursue smart fiscal policy, we must continue to press policies that will help the economy —immigration reform, which saves $158 billion over 10 years and over 

$800 billion over 20 years, training our workers, making sure we move forward with 

exports and growth in the manufacturing sector, and comprehensive tax reform. 

CONCLUSION

Over the past five years, we’ve seen the impact monetary policy can have on the 

economy. Monetary policy can support business investment, manufacturing and consumer spending —accelerating economic growth. 

To get the biggest bang for the buck, monetary and fiscal policies should complement each other. In recent years, monetary policy has contributed to growth 

while unnecessary and shortsighted cuts in spending have made it more difficult for 

the economy to grow. 

Thank you again to our witnesses for being here. 

QUESTIONS FOR THE RECORD FROM VICE CHAIR AMY KLOBUCHAR

FOR DR. MARK ZANDI

Question 1: 

Last week, the Fed decided to change its ‘‘forward guidance’’ for when it will consider raising interest rates. Previously, the Fed had said a 6.5 percent unemployment rate was a level that might make it consider raising rates. 

Now the Fed says it will consider a wide range of economic indicators, not just 

the unemployment rate. This new guidance is not tied to specific numbers, making 

it more ambiguous but also perhaps more flexible and effective. 

a) What are the benefits of the new approach to forward guidance the Fed 

decided to take last week? 

b) Are there any drawbacks to moving away from specific numerical thresholds? 

Question 2: 

Low interest rates have helped spur the economy by promoting investment by 

businesses and households. And, low mortgage interest rates have helped both new 

and existing home owners. But lower interest rates have hurt older Americans who 

live off fixed incomes and are relying on the safe return they can get from the savings they keep in government bonds. 

Could you describe the overall impact you think low interest rates have had on 

U.S. households? 

FOR DR. JOHN TAYLOR

Low interest rates have helped spur the economy by promoting investment by 

businesses and households. And, low mortgage interest rates have helped both new 

and existing home owners. But lower interest rates have hurt older Americans who 

live off fixed incomes and are relying on the safe return they can get from the savings they keep in government bonds. 
23 

Could you describe the overall impact you think low interest rates have had on 

U.S. households? 

RESPONSE FROM DR. MARK ZANDI, CHIEF ECONOMIST OF MOODY’S ANALYTICS, TO

QUESTIONS FOR THE RECORD SUBMITTED BY VICE CHAIR AMY KLOBUCHAR

Question 1: 

The recent change to the Federal Reserve’s forward guidance is intended to provide policymakers with greater flexibility to respond to economic and financial market conditions. The previous explicit 6.5% unemployment rate threshold for raising 

short-term interest rates proved to be inadequate in measuring the health of the 

labor market given declining labor force participation and the large number of underemployed workers. Financial markets have responded well to the shift in guidance, at least so far. Long-term interest rates have not changed appreciably since 

the announced change in forward guidance. 

The increased ambiguity in the Fed’s forward guidance may make it less effective 

in keeping long-term rates from rising more quickly than desired once the economy 

reaccelerates in earnest. At that time, bond investors may begin to anticipate that 

the Fed will begin raising short-term rates sooner than the currently strongly held 

view of next summer. Or that short-term rates will rise more quickly than currently 

anticipated by bond investors once the Fed does begin increasing them. It is likely 

the Federal Reserve will have to change its guidance once again to align bond investors’ expectations regarding the path of short-term interest rate with their own. 

It is unlikely that the Fed would re-adopt time dependent or numerical dependent 

guidance. More likely would be the release of an explicit forecast for a wider range 

of economic variables and short-term interest rates that reflects policymakers’ outlook, collectively, and perhaps even individually. Policymakers have shown a high 

degree of creativity as forward guidance has evolved, and to date they have been 

largely successful in managing long-term rates higher consistent with conditions in 

the job market, inflation, inflation expectations and financial market conditions. 

Question 2: 

The lower short and long-term interest rates resulting from the Federal Reserve’s 

aggressive monetary policy actions since the Great Recession have been a significant 

financial net positive for U.S. households. Not all households have benefitted from 

the low interest rates, but most have. 

The largest beneficiaries of the low interest rates are homeowners and stockholders. Two-thirds of American households are homeowners, with the home being 

the most important asset for most middle-income households. Approximately onehalf of households own some stock, although households in the top one-fourth of the 

wealth distribution benefit significantly from rising stock values. 

Bond holders have also benefitted significantly from the lower rates, which have 

lifted bond prices. Owners of agency mortgage backed securities have been substantial beneficiaries given the Federal Reserve’s purchases of these bonds via quantitative easing. Most households who own bonds do so via their pension plans and 

insurance products. And like stockholders, they are predominately higher wealth 

households. Lower wealth households have not directly benefited significantly from 

the Fed’s low interest rate policy, but they have been significant indirect beneficiaries as the low rates have supported businesses and thus the job market. Unemployment would be measurably higher today if not for the Fed’s aggressive actions. 

Many older non-working Americans with their savings in deposits and other cashlike instruments have been hurt by the low rates. They are appropriately reluctant 

to put their savings into riskier stocks and real estate investments, and the interest 

income they receive has declined with the lower rates. There are no good investment 

options for this group. This group has been hurt financially by the Fed’s aggressive 

actions. 
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