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88–497 2014

S. HRG. 113–339 

THE ECONOMIC OUTLOOK 

HEARING 

BEFORE THE

JOINT ECONOMIC COMMITTEE 

CONGRESS OF THE UNITED STATES 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

MAY 7, 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. Amy Klobuchar, Vice Chair, a U.S. Senator from Minnesota ..................... 3 

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. Kevin Brady ............................................................. 32 

Figure 1 titled ‘‘Recovery’s Growth Gap Remains Large’’ ............................. 34 

Figure 2 titled ‘‘5.7 Million! More Private Sector Jobs with an Average 

Recovery’’ ....................................................................................................... 35 

Figure 3 titled ‘‘Missing $1,072/mo.’’ ............................................................... 36 

Chart titled ‘‘Unemployment Rate Decline’’ ................................................... 37 

Chart titled ‘‘American Families Suffer While Wall Street Roars’’ .............. 38 

Prepared statement of Hon. Janet L. Yellen ......................................................... 39 

Article titled ‘‘Study: U.S. is an oligarchy, not a democracy’’ submitted by 

Senator Bernard Sanders .................................................................................... 42 

Charts submitted by Vice Chair Klobuchar: .........................................................

‘‘50 Months of Private-Sector Job Growth’’ ..................................................... 45 

‘‘Employment Rate Reaches Five-and-a-Half Year Low’’ .............................. 46 

Response from Hon. Janet L. Yellen to Questions for the Record submitted 

by: ..........................................................................................................................

Chairman Brady ............................................................................................... 47 

Vice Chair Amy Klobuchar .............................................................................. 58 

Representative Duffy ........................................................................................ 59 

(1) 

THE ECONOMIC OUTLOOK 

WEDNESDAY, MAY 7, 2014 

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

The committee met, pursuant to call, at 10:09 a.m. in Room 216 

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

Chairman, presiding. 

Representatives present: Brady of Texas, Amash, Paulsen, 

Hanna, Carolyn B. Maloney, Cummings, and Delaney. 

Senators present: Klobuchar, Casey, Sanders, Murphy, 

Heinrich, Coats, and Wicker. 

Staff present: Douglas Branch, Hank Butler, Conor Carroll, 

Gail Cohen, Barry Dexter, Connie Foster, Niles Godes, Paige 

Hallen, Colleen Healy, J.D. Mateus, Patrick Miller, Robert 

O’Quinn, Andrew Silvia, and Sue Sweet. 

OPENING STATEMENT OF HON. KEVIN BRADY, CHAIRMAN, A 

U.S. REPRESENTATIVE FROM TEXAS 

Chairman Brady. Good morning. The Joint Economic Committee hearing on The Economic Outlook for the United States will 

begin. To start, I congratulate Chair Yellen on her appointment to 

head the Board of Governors of the Federal Reserve System. I and 

other Members welcome you to your first appearance as Chair before the Joint Economic Committee and we look forward to many 

more. 

June will mark the fifth anniversary of the end of the Great Recession. By virtually every economic indicator, this recovery ranks 

as the weakest or near the bottom. This recovery’s persistent weakness has created a Growth Gap relative to other recoveries over the 

last half a century. 

For example, if this recovery had been merely average, then the 

U.S. economy would be $1.4 trillion larger; American Workers 

would have 5.7 million more private-sector jobs available; and a 

family of four in America would have over $1,000 more each month 

in real after-tax income. 

Ironically, for an Administration that has repeatedly bemoaned 

income inequality, the one exception to this weakness is Wall 

Street—where the S&P 500 Total Return Index, adjusted for inflation, has more than doubled. Last week, the Bureau of Economic 

Analysis and the Bureau of Labor Statistics released conflicting 

data about the strength of this recovery. On the one hand, according to the BEA, real GDP growth was basically flat in the first 

quarter, and according to the BLS the labor force participation rate 
2 

fell in April to 62.8 percent, tying a multi-decade low only reached 

in the Carter and now the Obama Administrations. 

Moreover, the employment-to-population ratio is actually lower 

than when the recession ended, which means there are proportionally less adults working today than when the recovery began. That 

is headed in the wrong direction. 

On the other hand, the BLS reported that for only the fifth time 

since the recession ended, the monthly growth of non-farm payroll 

jobs in April exceeded the equivalent average monthly job growth 

during pat recoveries with the unemployment rate declining to 6.3 

percent from its October 2009 peak of 10 percent. 

Correctly judging the strength of the labor market is very important because the Federal Open Market Committee has tied the tapering of large-scale asset purchases and the normalization of interest rates to its assessment of the labor market. Members of the 

FOMC attribute much of the slack in the labor market to cyclical 

factors and believe that a highly accommodative monetary policy 

can strengthen economic output and employment. 

However, if a substantial portion of the weakness in the labor 

market is due to structural factors such as an aging population and 

a skills mismatch, then maintaining a highly accommodative monetary policy could instead create economic bottlenecks that would 

trigger price inflation. 

Addressing structural unemployment requires much different 

policies, such as reforming education, strengthening job-training 

programs, and modernizing means-tested entitlement programs to 

encourage work. 

I am encouraged that the FOMC began to taper large-scale asset 

purchases in December and appears on track to terminate these 

purchases before the end of the year. 

However, I am concerned that the FOMC stated that it will likely maintain its zero-interest rate policy long after QE ends, and at 

levels below those that ‘‘the Committee views as normal in the 

longer run.’’ 

I am equally concerned that the discretionary nature of changes 

to the FOMC’s forward-guidance is undermining the Fed’s credibility—weakening the confidence of market participants, and increasing uncertainty. 

I believe the Federal Reserve helped to stabilize financial markets after the panic in the fall of 2008, but extraordinarily low interest rates and repeated rounds of quantitative easing have done 

much more to stimulate Wall Street than help hard-working American families on Main Streets across America. 

As I noted earlier, Wall Street is roaring, up 108.2 percent, while 

for average families and individuals, real after-tax income per capita is only up a mere 4.2 percent. 

Chair Yellen, your predecessor was supremely confident that the 

Fed had the knowledge, tools, and political fortitude to exit smoothly from the Fed’s extraordinary monetary actions and normalize interest rates and the size of its balance sheet before an inflationary 

outbreak could occur. 

Yet the Fed—like many central banks—has an unsatisfactory 

track record over the last century in identifying economic turning 

points and acting in a timely manner to maintain stable prices. 
3 

The task is difficult. So today I am hopeful that you can enlighten the Committee on several points: 

First, what is the FOMC’s assessment of the strength of the 

labor market? How much of the weakness in the labor market do 

you believe is due to cyclical factors? And how much is due to 

structural ones? What statistics are FOMC members using to judge 

the health of the labor market and how much weight are they 

being given? 

Secondly, can an overly accommodative monetary policy create 

asset price inflation that may not be fully captured by the CPI or 

the PCE Index? Do high stock prices reflect the fundamental 

strength of our economy? Or are they partially due to a highly accommodative monetary policy? 

Three, has the FOMC’s failure to abide by its own ‘‘communications channel’’ prescription created more uncertainty and undermined credibility? And when will the FOMC return to a rulesbased approach to monetary policy that helped to achieve the good 

performances of the U.S. economy during the ‘‘Great Moderation’’? 

Fourthly, is the Federal Reserve Bank of San Francisco correct 

that higher federal taxes—including higher marginal rates on individual income, capital gains, and dividends—are presently the 

main cause of ‘‘fiscal drag’’ on our economy? 

Is there a better way for Congress to address the spending side 

of our fiscal imbalances than the present sequester enacted as part 

of the Budget Control Act of 2011? 

Finally, is the Fed willing to make its balance sheet more transparent? Specifically, will the Fed provide a consolidated list of holdings that includes not only maturity values but also average purchase prices for each issue and the current market value of each 

holding? 

With that, those are a lot of questions, Chair Yellen, and you do 

not have to answer all of them, by the way, at this moment. Just 

so you know. 

And with that, I look forward to your testimony. I note, for the 

Members, that the record will be kept open for one week so Members can submit additional written questions for the record. 

With that, I yield to the Vice Chair of the Joint Economic Committee, Senator Klobuchar. 

[The prepared statement of Chairman Brady appears in the Submissions for the Record on page 32.] 

OPENING STATEMENT OF HON. AMY KLOBUCHAR, VICE 

CHAIR, A U.S. SENATOR FROM MINNESOTA 

Vice Chair Klobuchar. Well thank you very much, Chairman 

Brady, and thank you for holding this timely hearing. 

I will only add 15 questions to his list—no, I won’t. I am so 

pleased you are joining us today, Chair Yellen, for this important 

discussion on the Federal Reserve and monetary policy. 

I look forward to your testimony on the short-term and long-term 

issues facing our economy. Over the past five years, we have certainly seen the impact, the important impact, that monetary policy 

can have on economic growth. At a time where Congress has been, 

I think we all admit, gridlocked on some very important things, 

whether it is debt reduction, or whether it was the sequestration 
4 

policy, or other fights that we have had, the Fed has had to step 

in several times. 

And today’s hearing provides a chance to look ahead to policy options in what I hope will be a new environment where we finally 

have a budget in place, and other things that we will be able to 

move ahead as the Fed continues to wind down quantitative easing. 

Both of us I think would agree, Chairman Brady and myself, 

that the recovery has not been as fast as we would like, but I will 

say that after a long, hard winter it is good news that the employment numbers are picking up. 

To hit the lowest unemployment rate in 5–1/2 years is a positive 

sign. It means something, as we move into a summer season that 

we believe will bring more construction jobs, and especially in my 

state, more tourism jobs. 

As we all know, the economy has added jobs for 50 consecutive 

months, as you can see from that chart, and has now regained 

more private-sector jobs than were lost during the recession. 

In April alone, almost 300,000 jobs were added. And as you and 

I discussed, in my State the unemployment rate is down to 4.8 percent. And while I would not say we are roaring, as the Chairman 

described Wall Street, on the Main Streets of Minnesota, we are 

moving at a fast clip. Major expansions were announced from Andersen Windows and Kraus Andersen in just the last few days. 

The national unemployment rate of 6.3 percent has dropped almost 4 percentage points since the height of the downturn. Inflation is low, as you know, well under 2 percent over the past 12 

months, and there is no sign of a risk in inflation in the foreseeable 

future. 

Gross Domestic Product has grown for 12 straight quarters, although growth in the first quarter was slower than anticipated. I 

believe that actions taken by the Fed helped bring about the economic recovery. 

I believe Congress did some good things. I believe we should be 

doing more. And as the Chairman has outlined some of them. 

The Fed lowered the short-term interest rates to near zero at the 

end of 2008, and stated recently that it will keep rates low for a 

considerable period of time. Low interest rates have helped 

strengthen the economy by helping 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. 

Last month, the Fed announced it would further reduce purchases to $45 billion each month. It has always been understood 

that these efforts would be scaled back as the economy strengthens. 

In its announcement of last month’s actions, the Federal Open 

Market Committee changed its assessment of the economy slightly 

saying that, quote, ‘‘economic activity has picked up recently.’’ End 

quote. 

The Fed also highlighted an acceleration in household spending. 

Even with the economic progress, we all know families who are 

working several jobs to get by, as well as workers who cannot find 

a job after months and months of searching. 
5 

Though the short-term unemployment rate has fallen to close to 

its pre-recession level, the long-term unemployment rate is 2.2 percent, more than double the pre-recession level, which is one of the 

reasons many of us have continued to work on the unemployment 

compensation issue. 

I have been pleased to hear you express your concerns about the 

long-term unemployed, Chair Yellen, and I am glad to know that 

addressing this problem is high on your list of priorities. Addressing long-term unemployment has also been a focus of my work on 

this Committee. 

Despite some good news recently about job growth, there are still 

3.5 million Americans out of work for longer than six months. I 

look forward to hearing your thoughts on the dual mandate. I look 

forward to hearing your thoughts on increased transparency at the 

Fed. And then of course I would again mention, as I have several 

times in this Committee when your predecessor was here, that I 

think that there have been some major issues with Congress in 

terms of bouncing back and forth, and careening from fiscal crisis 

to fiscal crisis, which certainly does not help the economy. 

I am hoping, with this period of stability, with the budget in 

place, with the work that we did since the tragic shutdown, that 

we can now work on these issues that I think will help to build on 

the stability that we see now in the economy. I would list immigration reform, very important in my state, as we have trouble getting 

in engineers and spouses of doctors at the Mayo Clinic. 

I would also focus on moving forward with exports on the job 

training that the Chairman talked about; on comprehensive tax reform; and then finally, and last, something that Minneapolis Fed 

President Kocherlakota brought up to me recently, and that is the 

issue of the tax incentives and the depreciation incentives for manufacturing equipment, which is part of the tax extension, and 

something I think gets a good bang for the buck and I will be asking you about that as well. 

Thank you, very much, for appearing before us, Chair Yellen. 

Chairman Brady. Thank you, Vice Chair. 

Dr. Janet Yellen is Chair of the Board of Governors of the Federal Reserve System. She also serves as Chair of the Federal Open 

Market Committee. Prior to her appointment as Chair, Dr. Yellen 

served as Vice Chair of the Board of Governors. 

She is Professor Emeritus at the University of California at 

Berkeley, where she is a professor of business and professor of economics, and has been a faculty member for over 30 years. 

Dr. Yellen has served as Chair of the Council of Economic Advisers, and as president and chief executive officer of the Federal Reserve Bank of San Francisco. She also served as an economist with 

the Federal Reserve’s Board of Governors, and on the faculty of the 

London School of Economics and Political Science. 

Dr. Yellen graduated summa cum laude from Brown University 

with a degree in Economics, and received her Ph.D. in Economics 

from Yale University. 

Chair Yellen, welcome to today’s hearing. 
6 

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

GOVERNORS OF THE FEDERAL RESERVE SYSTEM, WASHINGTON, DC 

Chair Yellen. Thank you very much, Chairman Brady. 

Chairman Brady, Vice Chair Klobuchar, and other members of 

the Committee, I appreciate this opportunity to discuss the current 

economic situation and outlook along with monetary policy before 

turning to some issues regarding financial stability. 

The economy has continued to recover from the steep recession 

of 2008 and 2009. Real gross domestic product growth stepped up 

to an average annual rate of about 31⁄4 percent over the second half 

of last year, a faster pace than in the first half and during the preceding two years. 

Although real GDP growth is currently estimated to have paused 

in the first quarter of this year, I see that pause as mostly reflecting transitory factors, including the effects of the unusually cold 

and snowy winter weather. 

With the harsh winter behind us, many recent indicators suggest 

that a rebound in spending and production is already under way, 

putting the overall economy on track for solid growth in the current quarter. 

One cautionary note, though, is that readings on housing activity—a sector that has been recovering since 2011—have remained 

disappointing so far this year and will bear watching. 

Conditions in the labor market have continued to improve. The 

unemployment rate was 6.3 percent in April, about 11⁄4 percentage 

points below where it was a year ago. Moreover, gains in payroll 

employment averaged nearly 200,000 jobs per month over the past 

year. During the economic recovery so far, payroll employment has 

increased by about 81⁄2 million jobs since its low point, and the unemployment rate has declined about 33⁄4 percentage points since its 

peak. 

While conditions in the labor market have improved appreciably, 

they are still far from satisfactory. Even with its recent declines, 

the unemployment rate continues to be elevated. 

Moreover, both the share of the labor force that has been unemployed for more than six months and the number of individuals 

who work part-time but would prefer a full-time job are at historically high levels. In addition, most measures of labor compensation 

have been rising slowly— another signal that a substantial amount 

of slack remains in the labor market. 

Inflation has been quite low even as the economy has continued 

to expand. Some of the factors contributing to the softness in inflation over the past year, such as the declines in non-oil import 

prices, will probably be transitory. 

Importantly, measures of longer run inflation expectations have 

remained stable. That said, the Federal Open Market Committee 

recognizes that inflation persistently below 2 percent—the rate 

that the Committee judges to be most consistent with its dual mandate—could pose risks to economic performance, and we are monitoring inflation developments closely. 

Looking ahead, I expect that economic activity will expand at a 

somewhat faster pace this year than it did last year; that the un-
7 

employment rate will continue to decline gradually; and that inflation will begin to move up toward 2 percent. 

A faster rate of economic growth this year should be supported 

by reduced restraint from changes in fiscal policy, gains in household net worth from increases in home prices and equity values, a 

firming in foreign economic growth, and further improvements in 

household and business confidence as the economy continues to 

strengthen. Moreover, U.S. financial conditions remain supportive 

of growth in economic activity and employment. 

As always, considerable uncertainty surrounds this baseline economic outlook. Currently, one prominent risk is that adverse developments abroad, such as heightened geopolitical tensions or an intensification of financial stresses in emerging market economies, 

could undermine confidence in the global economic recovery. 

Another risk—domestic in origin—is that the recent flattening 

out in housing activity could prove more protracted than currently 

expected, rather than resuming its earlier pace of recovery. Both of 

these elements of uncertainty will bear close observation. 

Turning to monetary policy, the Federal Reserve remains committed to policies designed to restore labor market conditions and 

inflation to levels consistent with those that the Committee judges 

to be consistent with its dual mandate. 

As always, our policy will continue to be guided by the evolving 

economic and financial situation, and we will adjust the stance of 

policy appropriately to take account of changes in the economic outlook. 

In light of the considerable degree of slack that remains in labor 

markets and continuation of inflation below the Committee’s 2 percent objective, a high degree of monetary accommodation remains 

warranted. 

With the federal funds rate, our traditional policy Tool, near zero 

since late 2008, we have relied on two less conventional tools to 

provide support for the economy: asset purchases and forward guidance. And because these policy tools are less familiar, we have been 

especially attentive in recent years to the need to communicate to 

the public about how we intend to employ our policy tools in response to changing economic circumstances. 

Our current program of asset purchases began in September 

2012 when the economic recovery had weakened and progress in 

the labor market had slowed, and we said that our intention was 

to continue the program until we saw substantial improvement in 

the outlook for the labor market. 

By December 2013, the Committee judged that the cumulative 

progress in the labor market warranted a modest reduction in the 

pace of asset purchases. At the first three meetings this year, our 

assessment was that there was sufficient underlying strength in 

the broader economy to support ongoing improvement in labor market conditions, so further measured reductions in asset purchases 

were appropriate. 

I should stress that even as the Committee reduces the pace of 

its purchases of longer term securities, it is still adding to its holdings, and those sizable holdings continue to put significant downward pressure on longer term interest rates, support mortgage 
8 

markets, and contribute to favorable conditions in broader financial 

markets. 

Our other important policy tool in recent years has been forward 

guidance about the likely path of the federal funds rate as the economic recovery proceeds. 

Beginning in December 2012, the Committee provided thresholdbased guidance that turned importantly on the behavior of the unemployment rate. As you know, at our March 2014, meeting, with 

the unemployment rate nearing the threshold that had been laid 

out earlier, we undertook a significant review of our forward guidance. 

While indicating that the new guidance did not represent a shift 

in the FOMC’s policy intentions, the Committee laid out a fuller 

description of the framework that will guide its policy decisions 

going forward. 

Specifically, the new language explains that, as the economy expands further, the Committee will continue to assess both the realized and expected progress toward its objectives of maximum employment and 2 percent inflation. 

In assessing that progress, we will take into account a wide 

range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, 

and readings on financial developments. 

In March and again last month, we stated that we anticipated 

the current target range for the federal funds rate would be maintained for a considerable time after the asset purchase program 

ends, especially if inflation continues to run below 2 percent, and 

provided that inflation expectations remain well anchored. 

The new language also includes information on our thinking 

about the likely path of the policy rate after the Committee decides 

to begin to remove policy accommodation. 

In particular, we anticipate that even after employment and inflation are near mandate-consistent levels, economic and financial 

conditions may, for some time, warrant keeping the target federal 

funds rate below levels that the Committee views as normal in the 

longer run. 

Because the evolution of the economy is uncertain, policymakers 

need to carefully watch for signs that it is diverging from the baseline outlook and respond in a systematic way to stabilize the economy. 

Accordingly, for both our purchases and our forward guidance, 

we have tried to communicate as clearly as possible how changes 

in the economic outlook will affect our policy stance. 

In doing so, we will help the public to better understand how the 

Committee will respond to unanticipated developments, thereby reducing uncertainty about the course of unemployment and inflation. 

In addition to our monetary policy responsibilities, the Federal 

Reserve works to promote financial stability, focusing on identifying and monitoring vulnerabilities in the financial system and 

taking actions to reduce them. 

In this regard, the Committee recognizes that an extended period 

of low interest rates has the potential to induce investors to ‘‘reach- 
9 

for-yield’’ by taking on increased leverage, duration risk, or credit 

risk. 

Some reach-for-yield behavior may be evident, for example, in 

the lower rated corporate debt markets where issuance of syndicated leveraged loans and high-yield bonds has continued to expand briskly, spreads have continued to narrow, and underwriting 

standards have loosened further. 

While some financial intermediaries have increased their exposure to duration and credit risk recently, these increases appear 

modest to date—particularly at the largest banks and life insurers. 

More generally, valuations for the equity market as a whole and 

other broad categories of assets, such as residential real estate, remain within historical norms. In addition, bank holding companies 

have improved their liquidity positions and raised capital ratios to 

levels significantly higher than prior to the financial crisis. 

For the financial sector more broadly, leverage remains subdued 

and measures of short-term funding continue to be far below levels 

seen before the financial crisis. 

The Federal Reserve has also taken a number of regulatory 

steps—mainly in conjunction with other federal agencies—to continue to improve the resiliency of the financial system. 

Most recently, the Federal Reserve finalized a rule implementing 

Section 165 of the Dodd-Frank Act to establish enhanced prudential standards for large banking firms in the form of risk-based and 

leverage capital, liquidity, and risk-management requirements. 

In addition, the rule requires large foreign banking organizations 

to form a U.S. intermediate holding company, and it imposes enhanced prudential requirements for these intermediate holding 

companies. 

Looking forward, the Federal Reserve is considering whether additional measures are needed to further reduce the risks associated 

with large, interconnected financial institutions. 

While we have seen substantial improvements in labor market 

conditions and the overall economy since the financial crisis and severe recession, we recognize that more must be accomplished. 

Many Americans who want a job are still unemployed, inflation 

continues to run below the FOMC’s longer run objective, and work 

remains to strengthen our financial system. 

I will continue to work closely with my colleagues and others to 

carry out the important mission that the Congress has given the 

Federal Reserve. 

Thank you. I will be pleased to take your questions. 

[The prepared statement of Hon. Janet L. Yellen appears in the 

Submissions for the Record on page 39.] 

Chairman Brady. Thank you, Madam Chair. 

I would like to get a clear picture of the Fed’s comprehensive exit 

strategy in a number of areas. 

Assuming the Fed’s economic projections hold, can we expect the 

QE bond purchasing to end sometime this fall? 

Chair Yellen. We have indicated that as long as we continue to 

see improvements in the labor market, and we believe the outlook 

is for continued progress, and as long as we continue to believe and 

see evidence that inflation will move back up over time to our 2 
10 

percent longer run objective, we anticipate continuing to reduce the 

pace of our asset purchases in measured steps. 

So the answer is, yes. 

Now if something were to change notably about the outlook, we 

would reconsider that plan. But if those conditions hold, we would 

continue on our current course, yes. 

Chairman Brady. I will leave it to my colleagues to ask about 

the notably different changes. But just beyond that, the Fed holds 

$4.7 trillion on the balance sheet, extraordinarily large. When do 

you expect to begin normalizing the size of the Fed’s balance sheet? 

Is there a range of years? 

Chair Yellen. When we complete the asset purchase program, 

the Committee has indicated that it expects it will be a considerable time before we begin to normalize policy in the sense of beginning to raise our target for short-term interest rates. 

Chairman Brady. What range—let’s move to that. But before I 

do, what is the appropriate size? Do you have an appropriate size 

for the Fed’s balance sheet? 

Chair Yellen. I can’t give you a number that would be an appropriate size. I believe the Committee anticipated that our balance 

sheet over time will move down to substantially lower levels than 

it is now. 

Whether or not it will ultimately return to pre-crisis levels, or remains somewhat larger, is something that we will determine as we 

gain experience with exit. 

One way that we are likely to turn to to normalize the size of 

our balance sheet eventually would be to cease reinvestment of 

principal as it comes due. The Committee has not given definite 

guidance at this point about when it would take the step of stopping reinvestment of maturing principal, and eventually as we 

come closer to normalization I expect we will give such guidance. 

Chairman Brady. When do you expect—on normalizing interest 

rates, when do you expect that to begin? Assuming the Fed’s economic projections hold. 

Chair Yellen. What we have said in our most recent guidance 

is that in determining when that time is right, we will be looking 

at how much progress we have actually made in coming close to 

our mandate from Congress to attain maximum employment and 

inflation of 2 percent, and we will evaluate the pace at which we 

expect progress going forward. 

Concretely, the Committee indicated that at the time the purchase program ends, it thinks that it will be a considerable time 

beyond that before it will be appropriate to begin that process. 

And the reason is that under its baseline outlook it would like 

to see, or expects it will need to see, further progress in the labor 

market. And it has emphasized that the level of inflation will also 

matter. 

Chairman Brady. If the Fed’s economic projections hold what 

is that range? If I were to say you will begin normalizing interest 

rates in 2015, would I be wrong? 

Chair Yellen. There is no mechanical formula or timetable for 

when that will occur. 

Chairman Brady. But I know—I know that you’ve worked 

through your projections going forward, and certainly if those were 
11 

to hold you have some range of time that you will begin that process. What range is that? 

Chair Yellen. The Committee has simply said ‘‘a considerable 

time’’ without mechanically stating what that time interval is. 

Chairman Brady. Is ‘‘considerable’’—if I were to say this will 

begin normalizing in 2016, would I be wrong? 

Chair Yellen. Again, there is no specific timeline for doing that. 

Individual members of the Federal Open Market Committee, however, every three months provide their own forecasts for how they 

see the economy evolving under appropriate monetary policy. And 

that becomes a basis for discussion in the Committee. 

And you can look at those projections that include individual participants’ expected paths for normalization. You would see that 

most members believe that in 2015 or 2016, normalization would 

begin, under their baseline outlook. 

Chairman Brady. Do you, to put it in perspective, what year, 

what range of years, could we expect the targeted rate to reach 2 

percent, for example? 

Chair Yellen. I think the answer is that it depends on the evolution of the economy. What we are focused on is adjusting our 

monetary policy in light of incoming evidence about the evolution 

of the economy—— 

Chairman Brady. But if it holds—granted. Obviously all this is 

dependent from your view on economic performance. But given 

your projections, you know, how far out are we looking at to just 

move about halfway back to normalization? 

Chair Yellen. Again, I’m afraid I cannot give you a timetable, 

but the Committee did try to, in its recent statements in March 

and April, provide some guidance to the public about the pace at 

which it expects interest rates, short-term rates, to increase once 

that process is started. 

And what they said is that they think it will take some time, 

even after the economy is in a sense functioning normally—namely, 

we’re operating at full employment, and inflation is around 2 percent—they think it is likely it will take some time to come back to 

normal or historically average levels of interest rates. 

Short-term interest rates they would see as normal levels, based 

on history, of something on the order of 4 percent. And they have 

indicated that they think it is going to take some time to reach levels like that. 

I would emphasize that that is a forecast. It is not a promise—— 

Chairman Brady. Sure—— 

Chair Yellen [continuing]. But we have had headwinds that 

have acted on the economy, and headwinds in the global economy, 

and perhaps a slowdown in the pace of growth in the economy. And 

those are some of the factors that lead them to believe a gradual 

pace of interest rate increases will prove appropriate. 

Chairman Brady. Understood. 

The Fed holds about $1.6 trillion in residential mortgage-backed 

securities, a large amount. So again, assuming the Fed’s economic 

projections hold, when do you expect to begin moving them back 

into the market, reverse repos, or other approaches? What range of 

years—and I do worry. I think there will be political resistance 
12 

when you take those steps, but what years will you see that occurring? 

Chair Yellen. We have indicated that we do not intend to sell 

mortgage-backed securities from our portfolio, except perhaps when 

the holdings are very small, to eliminate some residual holdings. 

Eventually—and the Committee hasn’t decided on the timing of 

this—we are likely to cease reinvestment of principal. And at that 

point, our holdings of mortgage-backed securities would begin to 

decline over time as principal matures. 

And so it would take a period of some years for our holdings to 

diminish, to be worth doing. 

Chairman Brady. A final question about bank reserves of $2.6 

trillion. For many, including me, it is potential fuel for inflation. 

When the economy strengthens and banks begin to lend—we hope 

sooner rather than later—to keep rapid inflation checked, will you 

raise reserve requirements for the rate of interest paid on the reserves? Do you have a view at this point? 

Chair Yellen. It’s my expectation that when the time comes to 

raise the level of short-term interest rates, that we will certainly 

raise the interest rate that we pay on excess reserves and are likely to use a number of complementary tools that we have developed, 

including our tool kit that includes overnight reverse repos, term 

repos, and our term deposit facility. We will use those tools to push 

up the general level of short-term interest rates. But interest on reserves will be a key tool that we will be using. 

Chairman Brady. What impact will that have on economic 

growth? 

Chair Yellen. We will only be taking that step when we have 

judged that the economy is strong enough that economic growth is 

sufficient, the labor market has recovered enough, and inflation is 

moving back toward 2 percent, we will have judged that the time 

is appropriate to tighten financial conditions in order to make sure 

that we don’t overshoot our inflation objective. 

And so the effect that it will have on the economy is to restrain 

the economy to make sure that we don’t allow inflation to rise 

above our longer term objective. 

Chairman Brady. Thank you. I will conclude with this—my 

main concern, having served on the Committee, in early to mid2000s your able and very highly respected predecessor sat where 

you sat and assured the Committee that maintaining low interest 

rates for an extended period would not cause general price inflation 

or inflate an unsustainable asset bubble, which did not prove to be 

the case. 

After the credit-fueled housing bubble burst in 2007, your predecessors assured the Committee that the resulting weakness would 

be confined to the subprime segment of the housing market and the 

damage would be limited to about $150 billion, roughly the cost of 

the S&L crisis. 

Following the financial crisis in the Fall of 2008, we were repeatedly assured the Fed had the strategy to exit from the large expansion of its balance sheet to normalize monetary policy, including 

the federal funds target rate. Yet, the goalposts have been moved 

time and time again, and now re-moved. 
13 

Today you have assured the Committee once again, and I so appreciate your testimony, that the Fed is confident it can exit without sparking high inflation. But that we cannot know the details 

or the timetable, but that the Fed and FOMC have it essentially 

handled. 

I do not expect the Fed to be perfect. Yours is a tough job. Theirs 

is a tough job. But it just strikes me that over time this ‘‘don’t 

worry, be happy’’ monetary message isn’t working, at least in my 

view for the Committee, certainly not for the economy at this point. 

I know my colleagues will ask about today’s Wall Street Journal 

where noted economist, Federal Reserve historian Dr. Alan Meltzer 

makes the point: Never in history has a country that’s financed big 

budget deficits with large amounts of central bank money avoided 

inflation. My worry is that the track record of central banks, including the Fed, in identifying these economic turning points and 

acting quickly to prevent inflation, that track record is not as good 

as we would like. 

So forgive me for being skeptical. I believe we need more specifics, and a clear timetable on the comprehensive exit strategy. 

With that, again, thank you so much for being here. Vice Chair 

Klobuchar. 

Vice Chair Klobuchar. Thank you very much, Mr. Chairman. 

Thank you, Chair. 

As the Chairman was talking about with the change to the forward guidance policy, in the past it was tied of course—rising interest rates was tied to the 6.5 percent unemployment rate. And 

now the Fed says it will consider a wide range of economic indicators and not just the unemployment rate. 

And he questioned you a little bit about this with the other indicators, but could you tell me what you see the benefits are of this 

new approach, and what are the drawbacks of moving away from 

an exact number? 

Chair Yellen. Let me, if I might, explain about the number, the 

6.5 percent. 

We issued the number 6.5 percent at a time when the unemployment rate was around 8 percent. And we were very far from what 

anyone could call full employment, which is our goal. 

And we wanted to indicate to markets that we would need to see 

a lot of improvement in the labor market and, assuming inflation 

was under control, before we would dream of raising our target for 

short-term interest rates. 

And to make that clear, we took the number 6.5 percent. We felt 

confident that we would not, if inflation was under control, consider it appropriate to begin that process as long as the unemployment rate was over 6.5 percent, the gap would be sufficiently wide 

that something we shouldn’t consider as a possibility. 

So we gave the number 6.5, considerable distance from where we 

were, to the public to say we will wait at least that long. 

Now we did not say that we would raise our target for the federal funds rate when we reached the level of 6.5 percent. What we 

said was, that would be close enough that we need to look very 

carefully at what—to assess using many different metrics of the 

labor market: where is it? And what is appropriate policy? And now 

it’s appropriate to really look at many more things. 
14 

And we changed our forward guidance only because we were 

coming close to 6.5 percent and we have now crossed it. And there 

is no change in the guidance. We are saying: Now that we are 

there, we want you to understand, we have to develop a more 

nuanced approach to what is going on in the labor market. 

Now, the unemployment rate is a good indicator of the state of 

the labor market. And if I could only have one, I think that’s the 

metric I would probably choose. But there are different things happening in the labor market we need to take account of. 

For example, part-time employment that is involuntary— people 

working part-time who want full-time jobs, want to work more. It 

is at exceptionally high levels, 5 percent of the labor market, which 

is unusually high relative to the unemployment rate. 

We have really never seen a situation where long-term unemployment is so large a fraction of total unemployment, around 35 

percent. That is very unusual. Other things are happening that we 

really, in evaluating how much slack is there in the labor market. 

Labor force participation rate has fallen a lot. 

Now there are some structural reasons for that: demographics, 

Baby Boomers are aging and getting into the years when they retire and their labor force participation naturally declines. So the 

decline we have seen, it is not entirely because of a weak economy. 

But I think some of it is because of a weak economy, and in a 

sense, it is hard to give you a precise number for how much of that 

decline is cyclical. 

But to the extent there is a cyclical decline, that is more slack. 

And that is what we are looking at and trying to judge. We are also 

looking at wage developments and the level of payroll employment 

creation. 

Vice Chair Klobuchar. Let me follow up on a few of those 

things. What do you think the Fed can be doing about long-term 

unemployment, which we all acknowledge is too high? 

Chair Yellen. I think that a stronger economy, as we have 

growth in the economy, my expectation is that long-term unemployment is going to come down. 

Short-term unemployment is around normal levels. But I fully 

expect long-term unemployment to decline as the economy 

strengthens. 

There is a debate about whether or not long-term unemployment 

may have less effect on wages and in turn on inflation than shortterm unemployment; and that is something that is receiving a 

great deal of public attention and discussion, rightly so. 

But I have very little doubt that if growth in the economy picks 

up and continues in an above-trend pace, that long-term unemployment will come down, too. 

Vice Chair Klobuchar. One of the hearings that I chaired this 

last year was with Robert Reich, and it was about income inequality. And he talked about how right now we have a situation in our 

country where the wealthiest 400 have the same amount of wealth 

as the bottom 50 percent. 

And the International Monetary Fund recently warned that income inequality is actually a drag on our country’s economy. 
15 

Why do you think we have seen this rise? And how does it affect 

economic growth for the country as a whole? Do you think it is a 

factor? 

Chair Yellen. We have seen a trend toward rising inequality in 

income, and also in wealth. And I personally view this as a very 

disturbing trend that policymakers should be looking at and considering what is the appropriate response. 

You know, in part a weak economy, the people who are affected 

by unemployment are disproportionately people at the lower income end of the spectrum. And so a weak economy contributes 

something to income inequality. And I think what the Fed can do 

is to promote a stronger economy, a stronger job market generally, 

and that will help. 

But the trends that are responsible for rising inequality go much 

deeper than the fact that we have had a deep recession. We can 

see those secular trends in operation at least since the mid-’80s. 

There is a great deal of discussion about what they are, but they 

probably have to do with technological change in the way it has increased the demand for skills in the workforce with globalization. 

And so the return to education, and to skill has gone up dramatically. 

There may be institutional changes that are at work, as well. So 

there are deeper forces that are affecting this that go beyond anything that the Fed can do, but I really do think it is—— 

Vice Chair Klobuchar. But it is something that we should be 

taking up in Washington. 

Chair Yellen. We should be thinking about it very carefully. 

Vice Chair Klobuchar. One of the things that you mentioned 

in your opening was about how housing had flattened out. And 

could you expand on that? I think what we have seen, while the 

housing market has come back with housing prices—and my State 

is one of the ones where they have gone up the most—residential 

construction, all moving up, but one thing that has held housing 

back is the significant drop in household formation, which gets 

some to the income inequality. 

During and after the recession, about 800,000 fewer households 

were created each year than in the previous 7 years. Young people 

are not forming households as much, and getting new houses. 

Could you comment on this? 

Chair Yellen. I agree with the data that you are citing. We have 

seen very slow household formation. Many young people are living 

with their parents. It is also very difficult for people who come out 

of school with heavy burdens of student debt to be able to qualify 

for mortgages. 

Vice Chair Klobuchar. This is very timely since my daughter 

is arriving tonight at 10:00 p.m., but she is only a first-year in college, but still, yes. 

Chair Yellen. My expectation is that as the job market 

strengthens and the economy strengthens, we will see household 

formation pick up. But it is hard to note here exactly what the new 

normal is. And I think we need to see some pickup in household 

formation in order to see continued recovery in the housing market. 

Mortgage rates went up quite a lot over the Spring and Summer. 

They are still quite low by historical standards. So in that sense, 
16 

housing remains affordable. And I expect housing to pick up, but 

really it has flattened out and a recovery that seemed to be in 

progress really has now flattened out. 

Vice Chair Klobuchar. And you mentioned the cold weather, 

something near and dear to our heart in Minnesota. The first quarter, that is one of the major reasons we saw a slowdown in the first 

quarter. So then you would anticipate some improvement in the 

next few quarters? 

Chair Yellen. Yes. Definitely. And we have heard many different pieces of evidence, as well as what we see in broader statistics, that suggest that the weather played a role. And recent data 

is certainly much more encouraging on a wide range of fronts, from 

car sales, retail sales, industrial production. 

So I am quite hopeful that we will see, and are seeing, a pick 

up in economic activity. 

Vice Chair Klobuchar. And in my opening I talked about how 

we do not foresee a rise in inflation in the near future, a significant 

rise in inflation. Do you agree with that? 

Chair Yellen. That is my forecast. Inflation has been running 

under 2 percent. We expect it to move gradually back over time up 

to 2 percent. There are some transitory things that can give it a 

boost over the next year or so, but my expectation is that it will 

be gradually moving back to 2. But obviously this is something we 

will watch very closely. 

Vice Chair Klobuchar. I asked that for a guy that Tweeted me 

and said I was wrong. So I thought I would maybe have you on my 

side. 

Chair Yellen. I am with you on that. 

Vice Chair Klobuchar. So whoever he is out there with his 

strange handle, he knows the answer now. 

Okay, so I mentioned—this is my last question here—I mentioned in my opening about what we can be doing to continue to 

do in Congress. I mentioned a bunch of things: immigration reform, 

tax reform to make things more straightforward so we are not playing red-light/green-light every single year with our tax code, and 

some of these incentives. 

One of the things I mentioned to you about the head of the Minneapolis Federal Reserve talked to me about in my office just last 

week was the Section 179 deduction limits for depreciation of business investment; that they were increased to $500,000 in 2010, but 

the increased depreciation deduction expired at the end of 2013. 

And ironically, after I met with him, I met with a bunch of small 

businesses through the next few days and, as they had said to me 

during the height of the downturn, they thought this was a very 

useful thing to stimulate investment and add more jobs. 

And I wanted to get your thought about that, as we look at these 

tax extenders. 

Chair Yellen. I think the cost of capital is an important factor 

that influences investment. Although the state of the economy and 

business confidence and optimism about growth is a very important 

role as well. And the tax provision that you mentioned is something that was put into effect at a time when investment spending 

was very weak. 
17 

And I cannot quantify what its impact was, but it probably 

played a role in having it pick up. There are a number of different 

tax provisions that affect the cost of capital. And so tax policy generally, including the provision you mentioned, are definitely relevant to the strength of investment spending. 

Vice Chair Klobuchar. Thank you very much, Chair Yellen. 

Chairman Brady. Thank you. Members should note, we have 

been very generous to make sure the Chair has plenty of time to 

answer questions. We will be returning to the five-minute questioning period. 

Representative Hanna. 

Representative Hanna. Thank you very much. Thank you for 

being here. 

I want to follow up on something that Chairman Brady talked 

about briefly. Milton Friedman once said that inflation is always 

and everywhere. And today we see that the United States Department of Agriculture estimates that food costs may go up as much 

as 3–1/2 percent this year; and that is the highest potential rate 

in the last I think three years. 

In this morning’s Wall Street Journal, Alan Meltzer, a distinguished Federal Reserve historian, writes: The Fed focuses far too 

much attention on distracting monthly and quarterly data, while 

ignoring the long-term effects of money growth. Beyond the pure 

inflationary concerns, he says, some side effects of the Fed policies 

have ugly consequences. One of the worst is the ultra low interest 

rates for retired persons to take—that forces them to take substantially greater risks than bank CDs, and that many of them relied 

on in the past. 

He goes on to say: This ends usually in tears for a lot of people. 

And we see people that planned on a retirement and simply, based 

on historic rates, and they are just not there for them anymore. 

Is maintaining an extraordinarily low interest rate for a decade 

creating market distortions that will have long-term effects on the 

economy? 

And, you know, it is nice to talk about being able to control inflation going forward, and that you will respond to it and keep it 

below 2 percent, but last year it was a percent-and-a-half. 

So can the Federal Reserve identify, you think, accurately a 

change in economic conditions and execute an exit strategy before 

inflation occurs? Since, as Mr. Brady said and Mr. Meltzer said, 

never at any time in history of this country that financed big budget deficits with large amount of central bank money avoided inflation. 

Chair Yellen. I do believe that we have the tools and absolutely 

the will and the determination to remove monetary accommodation 

at an appropriate time to avoid overshooting our inflation objective. 

Everybody on the Committee, a formative experience for them 

was the 1970s when we saw very high inflation and a huge effort 

by Chairman Volcker to tighten monetary policy to bring it down. 

We lived through a period in which Fed policy was not sufficiently tight, and high inflation led to a rise in inflation expectations. We saw that those inflation expectations could become a persistent source of high inflation, and that it could be very costly to 

lower inflation. 
18 

Representative Hanna. And of course—— 

Chair Yellen. Hence, the lessons from that period are very real 

for all of us, and none of us want to make that mistake again. 

I do believe we have the tools and the determination to avoid 

that. We indicate inflationary developments and inflationary expectations are part of our focus as we watch what the likely evolution 

of inflation is. And I can’t say that we will get it perfect. But I can 

tell you that the Committee has adopted a 2 percent inflation objective in order to make clear our commitment to achieving that objective, and to be held accountable for it. And we are determined to 

have that happen. 

Representative Hanna. And of course if we raise interest rates, 

our debt payments, our interest payments, will exceed our national 

defense budget I think within 7 or 8 years, I think 2021 is the estimate. 

So all of that working together, we really need to grow our economy to afford to be able to manage that. 

Chair Yellen. We want to be able to, and we expect as the economy recovers that a point will come when it will be appropriate to 

raise short-term interest rates. Long-term interest rates are likely 

to be rising over time as that occurs, and this is something I think 

Congress should certainly be taking into account as you look at 

what fiscal burdens will be down the road. 

Representative Hanna. Thank you. My time has expired. 

Chairman Brady. Thank you. 

Representative Delaney. 

Representative Delaney. Thank you, Mr. Chairman. 

And thank you, Chair Yellen, for being here. And I also want to 

comment. I was stunned at how remarkably clear and linear your 

remarks have been here today. It should not be a surprise, but it 

is quite impressive to observe it first-hand. So thank you for that. 

You touched on something a few minutes ago about some deeper 

structural trends going on in the employment market and the job 

market. And you tied those, I think very appropriately, to the 

trends, or the macro trends of globalization and technology, which 

as we all know have benefitted people with terrific educations, or 

with access to capital, or with highly refined skills, but they have 

been very disruptive to the average American. 

And in my judgment, this is the root cause of some of the concerns that we have around income inequality and job creation, and 

particularly job creation of jobs that have a decent standard of living. We are creating high-skill jobs and low-skill jobs, but not a lot 

of middle-skill jobs. 

Is it possible—and you hate to use those four words that people 

always regret, quote, ‘‘this time is different,’’ is it possible that 

these trends as they continue to play out in our economy and in 

our job market, put us in a position that we have, the Fed would 

have accommodating monetary policy for a sustained period of 

time, as we work through these things, and particularly absent 

Congress doing things like immigration reform, greater investment 

in infrastructure, a more targeted way to work through these challenges, is it possible that that is the new norm and that the size 

of the Federal Reserve’s balance sheet in fact stays quite large for 

a reasonable period of time? 
19 

Which I do not necessarily think is a problem—which will be my 

second question—but I am just curious about your thoughts on 

that. 

Chair Yellen. I think these longer term trends have to do with 

relative wages of different groups in the labor force, and they have 

been going on for a long time for the reasons you stated. 

I do not think that those trends are ones that the Federal Reserve can really address. 

Representative Delaney. Right. 

Chair Yellen. The appropriate policies lie elsewhere. They may 

have to do with education and training. So in that sense, when the 

labor market has returned to normal in the sense that most people 

who were looking for work are able to find work for which they are 

suited and skilled in a reasonable period of time, there really will 

not be much more that is in our domain that we can do—— 

Representative Delaney. Got it. 

Chair Yellen [continuing]. So we would not keep our balance 

sheet large, or refrain from raising interest rates for that reason. 

But there—— 

Representative Delaney. But—— 

Fed Chair Yellen [continuing]. Are some people who have suggested that the distribution of income and rising inequality are 

pulling down spending—— 

Representative Delaney. Right. 

Chair Yellen [continuing]. And holding down spending growth. 

And it is hard to get clear evidence on that. To the extent that that 

is true, it would be a way in which inequality would be slowing the 

pace of recovery back to full employment. In that sense, it would 

affect how long we would hold interest rates where they are. 

Representative Delaney. And my second question is around— 

and you mentioned in your testimony about how you think about 

certain financial indicators—asset bubbles, in particular. Because 

we have definitely seen in the last couple of years a de-linking that 

has gone on between leveraged spreads and leverage, right? Which 

is as leverage goes up, spreads normally widen; as leverages go 

down, spreads normally tighten. 

We have seen that de-linked, just as we have seen the de-linking 

of equity market values with corporate earnings. So this de-linking, 

I think of it more as froth as opposed to formation of asset bubbles. 

How do you think about these things? Or what kind of benchmarks do you use to indicate that we may in fact be creating asset 

bubbles in different markets? 

Chair Yellen. We can’t detect with any certainty whether or not 

there is an asset bubble, but we can look at a variety of different 

valuation metrics akin to price earnings ratios and the stock market, a variety of ways of measuring those. And we can look to see, 

have valuations in that sense moved out of historically normal 

ranges. 

And I would say for the equity market as a whole, the answer 

is that valuations are in historically normal ranges. Now interest 

rates, long-term interest rates are low, and that is one of the factors that feeds into equity market valuations. So there is that linkage. 
20 

So there are pockets where we could potentially see 

misvaluations in smaller cap stocks, but overall those broad 

metrics do not suggest that we are in obviously bubble territory. 

But we do not have targets for equity prices and can’t detect if we 

are in a bubble with certainty. 

Representative Delaney. Thank you, very much. 

Chairman Brady. Great. Thanks. 

Senator Coats. 

Senator Coats. Thank you, Mr. Chairman, and thank you, 

Chair, for your presentations here today. 

I want to just ask you if you would be willing to step aside for 

a moment in terms of just responding as representing the Fed, and 

give us some of your personal thoughts, as appropriate, relative to 

a couple of—well, this question in particular: 

As I travel throughout Indiana and talk to businesses, large, 

small, and everything in between, so many of the CEOs and owners of those businesses indicate that they are underperforming. 

They are underperforming because of the uncertainty that they 

face relative to fiscal policies, relative to prospects of uncertainty 

about what their tax and regulatory policies are going to be. 

Now essentially they say it is a disincentive to their private-sector business investment, which as we know is the foundation of job 

creation. I asked your predecessor the question what his opinion 

was relative to the policies that really fall in our bucket up here. 

His answer was: You know, we have pretty much exhausted the 

major tools that we have to address some of these problems. He 

agreed that these were disincentives for investment, and sitting on 

an awful lot of unused capital. But, he said, that really is a function for you people at the other end of Constitution Avenue. 

He is right. It is. But my question is, I think it was in your statement to the New York Fed you made reference to the fact that it 

is going to be, and I quote ‘‘ . . . a gradual return over the next two 

to three years of economic conditions consistent with the Fed mandate.’’ 

And given that, would you be willing to give us some direction 

relative to what legislative policies we could take, or not take? And 

the consequences of either accelerating that movement to where we 

want to get to, beyond the two- or three-year period? Or 

disincentivizing and perhaps pushing that even further out? 

What recommendation would you give to us in terms of dealing 

with this uncertainty that is basically causing a lot of businesses 

to underperform? 

Chair Yellen. I agree with you. In my own discussions with 

businesses, I hear exactly the same things that you’re citing: concern about regulations, about taxation, about uncertainty, about 

fiscal policy. 

I guess one recommendation that I would give you is that longterm budget deficits, we can see in for example CBO’s very longterm projections, that they remain. There is more work to do to put 

fiscal policy on a sustainable course; that progress has been made 

over the last several years in bringing down deficits in the short 

term, but with a combination of demographics, the structure of entitlement programs, and historic trends in health care costs, we can 

see that over the long term deficits will rise to unsustainable levels 
21 

relative to the economy and putting in place a package of reforms— 

I know these are very controversial matters—but that would probably help confidence. 

As regulators ourselves in the aftermath of a financial crisis, we 

also can see very clearly, for example, that the kinds of regulations 

we are putting in place and during the process of doing that, create 

uncertainty and burdens. We hear this, for example, from community banks all the time. 

And, here I would say to some extent the regulations, we are 

doing this for a very good reason. We had a financial crisis. It is 

important to make the financial system safer and sounder. And for 

our own part, we will try to make sure that we worry about regulatory burden. We try to design regulations that are different and 

appropriate for different sectors of the economy. 

I think it is important for us, too, to be sensitive to regulatory 

burden in order to minimize its impact on the economy, but we are 

doing things that are important to make the economy safer and 

sounder. 

Senator Coats. Well thank you for that answer. And in closing 

here, because I have been noticed that my time is up, you join a 

long list of very responsible Americans who have the experience 

and the expertise to give us some warnings about what may happen in the future, and the consequences of our inability to act over 

the last several years now in addressing these major problems that 

are going to have significant consequences on the economy of this 

country, and on future generations. 

I do not know what it is going to take for us to summon the will 

to do what we all know we need to do, but I appreciate you adding 

your name to that long list saying Congress has a responsibility up 

here and is not fulfilling that responsibility. 

Thank you. 

Chairman Brady. Senator Casey. 

Senator Casey. Thanks very much, Mr. Chairman. 

Madam Chair, thank you and welcome. It is good to be with you 

this morning. 

I wanted to ask you a couple of questions about jobs and manufacturing. I will start with that. And then I will ask you a question 

about the preparation for job growth and some of the investments 

I think we are not making in our children. 

But I will start with the job picture. We have a lot to be positive 

about with all of the cautionary notes that your testimony articulates. When I think about it from the national perspective, both 

good job numbers in the last couple of months and even the recent 

report, a lot less in the way of good news in terms of the labor participation rate which I am told is at a 35-year low. 

I noted though in your testimony that you said on page 1 and 

I’m quoting: ‘‘During the economic recovery so far, payroll employment has increased by about 81⁄2 million jobs since its low point, 

and the unemployment rate has declined about 33⁄4 percentage 

points since its peak.’’ End quote. 

So that is good news both in terms of the recent news, as well 

as over a number of years, but we have still got a long way to go. 

I guess the real cautionary note though, or the reason for concern, 
22 

or the main reason for concern, would be on labor force participation. 

Can you speak to that in terms of what you had hoped to see, 

or what you are concerned about with regard to that number? 

Chair Yellen. We have seen a substantial decline, especially 

over the last year or so, in labor force participation. And I think 

it is clear that part of it is demographic, secular, and will continue. 

And it purely reflects the fact that we have an aging population 

and, as people move into that 60-plus age bracket, the amount that 

they work declines notably in spite of the fact that current vintages 

of retirees are working more and participating more in the labor 

force than earlier vintages. 

But nevertheless, if we had a strong economy, even for that 

group, it would not surprise me at all if we didn’t see more participation in the labor force by retirees. 

In addition, we are seeing for all age groups, prime age workers 

and younger people, a reduction in labor force participation. For 

young people, it is partly related to going back to school. But eventually of course those people will enter the labor force and seek 

jobs. 

And especially in those non-retiree demographic groups, to me it 

is clear that the weak state of the labor market partly explains 

why we have seen a decline in labor force participation. 

So I will be looking very carefully at trends in labor force participation as the economy strengthens, as the unemployment rate 

comes down. We need to really figure out what portion of the labor 

force participation decline is secular and what portion is cyclical, 

and that is what we are going to be looking at very closely. 

But I guess I would expect, as the economy recovers, we might 

see labor force participation strengthen rather than continue to decline. 

Senator Casey. One thing that we talk about a lot is the skills 

gap and the disconnect there between the jobs that we need to fill, 

or that need to be created in the future, and the skill level of folks 

that are seeking those jobs or looking for work in the marketplace. 

And I guess one of the questions that I have for you is: You look 

at trends all the time. You look at the economic impact of policies 

that we put in place here. And you see those trends and the kind 

of skills that folks would need for the jobs of the future. And I 

guess I would ask: 

My youngest daughter is a junior in high school. If she were 

three, or say two or three years old right now, what would you 

hope that she would get to be placed in one of those high-skill jobs 

that we hope we are creating and we hope that we have policies 

that undergird a strategy to get us to the point where we no longer 

have that kind of skills gap? What would you hope that either I 

or society at large could provide her in terms of a healthy or smart 

start? 

Chair Yellen. I hope that you and society at large will make 

sure that she has access to a good college education. The gap in 

earnings between those with a college degree and those with less 

education has increased enormously, and good opportunities to get 

advanced training and skills I think will clearly—every bit of evi-
23 

dence suggests that they will make a difference to her lifelong 

earnings. 

Senator Casey. I will send you some questions for the record, 

as well. Thank you, very much. 

Chair Yellen. Thank you. 

Chairman Brady. And don’t worry, Madam Chair, knowing 

Senator Casey she will get a good education. 

Chair Yellen. I have no doubt. 

Chairman Brady. Senator Wicker. 

Senator Wicker. Thank you, Dr. Yellen. This has been very enlightening. 

Let me first just try to clean up a few things. In his very fine 

opening statement Chairman Brady got to a point where he said 

he was hopeful you would enlighten the Committee on six specific 

points. 

There is no time for you to answer those. I would like to submit 

those questions as my questions for the record and ask you if you 

will answer them on the record. Will you do that? 

Chair Yellen. I would be glad to. 

Senator Wicker. And the last point is about the transparency, 

which I think is a very fine question. Also, I understand your reluctance to be tied down to specific predictions of when this or that 

will happen, but I do think we got a ‘‘yes’’ from you on one thing. 

And that is, when the asset purchase program will end. 

As I understand it, you have a set of expectations for the rest of 

the year. And if those expectations are met, you expect the asset 

purchase program to end this fall. 

Is that a ‘‘yes’’? 

Chair Yellen. It is correct, if the labor market continues to recover and we continue to see the evidence as pointing to inflation 

moving up over time to 2, the Committee is likely to continue taking further steps that would end the program next Fall. 

Senator Wicker. In the Fall of this year? 

Chair Yellen. Correct. 

Senator Wicker. Okay. And Senator Klobuchar said she saw no 

sign of a rise in inflation for the foreseeable future. You do not 

agree with that. And ideally, inflation should increase to 2 percent, 

and that would be a better result as far as you are concerned? 

Chair Yellen. Two percent is the Committee’s longer term objective. And we would not want to see a persistent deviation either 

below or above 2 percent. 

Senator Wicker. Okay. Good. 

Chair Yellen. So it will not be at that level at every moment, 

but we expect it to move up gradually over time back toward 2 percent. 

Senator Wicker. Great. You mentioned during your testimony 

today ‘‘maximum employment’’ and ‘‘full employment.’’ Would you 

just define those for the Committee? 

Chair Yellen. I am using those terms interchangeably. ‘‘Maximum employment’’ is the wording that is used in the Federal Reserve Act. It is our goal that Congress has defined for us, and I am 

using the term ‘‘full employment’’—— 

Senator Wicker. And that is—what is—could you reduce that 

to a percentage rate? What is ‘‘maximum employment’’? 
24 

Chair Yellen. So I interpret ‘‘maximum employment’’ as meaning a level of employment in the labor market where people are 

able in a reasonable amount of time to gain work for which they 

are qualified. 

Senator Wicker. For today’s purposes, you are not going to put 

a percentage point? 

Chair Yellen. I am not going to put a percentage point on that. 

Senator Wicker. Now in terms of economic income inequality, 

and let’s get back to the Meltzer article in today’s Wall Street Journal, he suggests that actually the policies of the Obama Administration and the Federal Reserve are responsible for the income inequality. And he says, ironically, despite often repeated demands 

for increased redistribution to favor middle and lower income 

groups, that policies pursued by the Obama Administration and 

supported by the Federal Reserve have accomplished the opposite. 

He goes on to say: Voters should recognize that goosing the stock 

market through very low interest rates, not to mention the subsidies and handouts to cronies, have contributed to that result. 

We will leave the subsidies for another discussion, but don’t you 

acknowledge, Dr. Yellen, that the interest rates which you have 

achieved have driven people to the stock market, therefore goosing 

the stock market and contributing to this maldistribution of income? 

Chair Yellen. I would not deny that the level of interest rates 

affects the stock market. I would hardly endorse the term ‘‘goosing 

the stock market.’’ We have no target for stock prices. The policies 

that we have undertaken are meant to ease financial conditions in 

a whole variety of ways that will be conducive to generating greater spending, and greater spending means that we create jobs 

throughout the economy. 

So to think of that as something that is promoting an increase 

in income inequality I would take issue with. I think a stronger 

economy brings benefits to a wide variety of households throughout 

the economy, including lower income households who are gaining 

jobs. 

We do probably have an impact on the stock market. We also 

have an impact on house prices. And house prices have come back 

up again. And for so many households, middle income households, 

that is their most important asset. And that return of house prices 

to more normal levels I think has been a major benefit to many, 

many American households. They have seen themselves move from 

situations where they are underwater on their mortgages, to being 

back in the black. And it also helps give them access to credit, if 

they want to send a kid to school, or have an emergency, or want 

to start a small business. 

And so there have been benefits in this policy, in the policies we 

have pursued for Main Street as well as for those who hold the equities in their portfolios. 

Senator Wicker. Thank you. 

Chairman Brady. Thank you. 

Senator Sanders. 

Senator Sanders. Thank you, Mr. Chairman. 

And, Dr. Yellen, welcome and good luck on your new endeavor 

here. 
25 

Chair Yellen. Thank you. 

Senator Sanders. Mr. Chairman, with your permission I would 

like to put into the record a recent BBC article entitled ‘‘Study: 

U.S. is an oligarchy not a democracy.’’ 

Mr. Chairman, is that all right? Mr. Chairman? Can I place that 

into the record? 

Chairman Brady. Excuse me, Senator. Without objection. 

[The article titled ‘‘Study: U.S. is an oligarchy not a democracy’’ 

appears in the Submissions for the Record on page 42.] 

Senator Sanders. Thank you. 

Madam Chair, in the U.S. today the top 1 percent own about 38 

percent of the financial wealth of America; the bottom 60 percent 

own 2.3 percent. One family, the Walton family, is worth over $140 billion. That 

is more wealth than the bottom 40 percent of the American people. 

In recent years we have seen a huge increase in the number of 

millionaires and billionaires, while we continue to have the highest 

rate of childhood poverty in the industrialized world. 

Despite this, as many of my Republican friends talk about the 

oppressive Obama economic policies, in the last year Charles and 

David Koch struggled under these policies and their wealth increased by $12 billion in one year—despite the oppressive Obama 

economic policies. 

In terms of income, 95 percent of new income generated in this 

country in the last year went to the top 1 percent. Now a study, 

which I have just introduced into the record, by two professors 

from Princeton University, Professor Martin Gillins and Northwestern University Professor Benjamin Page, basically suggest that 

while historically we have considered our society to be a capitalist 

democracy, we may now have entered into a phase where we are 

an oligarchic form of society. 

In your judgement, given the enormous power held by the billionaire class and their political representatives, are we still a capitalist democracy? Or have we gone over into an oligarchic form of 

society in which incredible economic and political power now rests 

with the billionaire class? 

Chair Yellen. All of the statistics on inequality that you have 

cited are ones that greatly concern me. And I think for the same 

reason that you are concerned about them. 

They can determine the ability of different groups to participate 

equally in a democracy, and have grave effects on social stability 

over time. And so I don’t know what to call our system, I would 

prefer not to give labels—but there is no question that we have had 

the trend toward growing inequality, and I personally find it a very 

worrisome trend that deserves the attention of policymakers. 

Senator Sanders. Thank you. I mean, I think the point that the 

professors are making, and others have made, is that there comes 

a point where the billionaire class has so much political power, 

where the Koch brothers are now because of Citizens United able 

to buy and sell politicians, they have so much political power, at 

what point is that reversible? And that is a great concern to me. 

I want to go to another point. Some of my colleagues, especially 

in the House, believe that we can improve lives for the middle class 

and create jobs by completely repealing the estate tax, which ap-
26 

plies now to perhaps less than 1/10th of 1 percent of the wealthiest 

families in this country. 

Would it make sense to you to give enormous tax breaks to the 

families of the top 1 percent of people in this country? 

Chair Yellen. I have indicated that I share your concern with 

inequality, but I guess I am going to say on this that it is up to 

the Congress to decide what is appropriate. And there are a number of different ways to address it; that certainly is on the list. 

Senator Sanders. All right. Well let me ask you another question. 

Some of my friends in the House, on the Ryan budget and so 

forth, suggest that one way to stimulate the economy to create decent-paying jobs is to give more tax breaks to the wealthiest people 

in this country, and the largest corporations, despite the massive 

wealth and income inequality we have right now. 

If we give tax breaks to the Koch brothers, who are worth $80 

billion, do you think that is going to create a whole lot of jobs in 

this country? 

Chair Yellen. I would say most of the evidence that we have 

suggests that transfers to lower income people tend to be spent, a 

larger fraction of the dollar is spent, than when there is a transfer 

to a wealthy individual, but changes in tax policy—so that is from 

the demand side; tax policy also has supply side effects that one 

should take into account. 

Senator Sanders. Thank you, Mr. Chairman. 

Chairman Brady. Thank you. 

Representative Paulsen. 

Representative Paulsen. Thank you, Mr. Chairman. Dr. 

Yellen, thank you for being here and offering your testimony today. 

You have mentioned several times that the unemployment rate is 

still too high, and clearly we as elected officials representing our 

constituencies would agree with that. 

Now, in April you made some remarks to the Economic Club of 

New York. At that time you said that the central tendency of the 

Federal Open Market Committee participant projections for the unemployment rate at the end of 2016—so this is still out a year-anda-half—would be 5.2 to 5.6 percent. And for inflation, the central 

tendency is 1.7 to 2 percent. You mentioned the 2 percent again 

today. 

If this forecast was to become a reality the economy would be approaching what my colleagues and I view as maximum employment 

and price stability for the first time in nearly a decade. 

I guess I am wondering, because you did not want to put a number on maximum or full employment today but you referenced this 

in April. In light of the unemployment rate being around 4–1/2 percent in the middle part of the last decade, you are indicating that 

maybe full employment or maximum employment is significantly 

higher, that 5.2 to 5.6 percent range. 

Is that the new normal that you are potentially targeting for ‘‘full 

employment’’? 

Chair Yellen. This is a number that is purely a guess based on 

empirical evidence that each member of our Committee is asked to 

make every three months. 
27 

What they are trying to write down is the level of the unemployment rate that they think would be consistent with stable inflation, 

rather than gradually rising inflation over time. And based on the 

evidence that they see, their current read—and these are again 

just estimates and something that changes from time to time—but 

their best assessment, most of them are in a range of 5.2 to 5.6 percent. 

Now when unemployment was as low as 4 percent previously, to 

some extent that may have involved overshooting. It’s nothing that 

says that 5.2 to 5.6 is a floor on how low unemployment can go. 

For example, in the late 1990s unemployment fell well below those 

levels. 

But there may have been special factors, an increase in productivity growth, and a strong dollar appreciation of the dollar that 

was holding inflation down and made that happy coincidence of 

very low unemployment and stable inflation possible. 

So at the moment, this is their best guess. And it is where they 

envision the economy as being in 2016. 

Representative Paulsen. You mentioned, too, that with the 

April jobs numbers that came out, it was nice to see the unemployment level fall to 6.3 percent. But you said you wanted to look at 

the details of that labor force participation rate, which fell to essentially tying a low of 62.8 percent. That was one of the most concerning numbers for me, 800,000 people that have now left the 

work force, right? Or the labor force has declined by 800,000. That 

is a pretty significant number. 

What do you envision the labor force participation rate might actually be if we hit that 5.2 to 5.6 percent full employment rate? 

Chair Yellen. It’s a little bit hard for me to give you an estimate 

of that. We had a huge move. It is very unusual to see a 4/10ths 

percent decline in the unemployment rate in a single month with 

a comparable move in labor force participation. 

We always tell ourselves, and I’ll state, I think one should not 

make too much of any single month’s numbers. My preference 

would be to look at those labor force and labor market statistics 

over three or six months to get a read on things. 

If we do that, what we see is the unemployment rates come 

down. For the last six months, job growth has been, employment 

has been gaining about 200,000 jobs a month, and somewhat higher over the last 3 months. 

The labor force participation rate has bounced around, but it has 

been roughly stable. So it came down. It had gone up previously. 

Over the last six months, it has been roughly stable, which is—I 

think there is a declining labor force participation rate as a trend— 

so a stable labor force participation rate could signify that some cyclical slack in the labor market is gradually diminishing over time. 

So looking over three to six months, I would say that the patterns we are seeing are consistent with improvement in the labor 

market. 

Representative Paulsen. Thank you. 

Chairman Brady. Thank you. 

Representative Cummings. 

Representative Cummings. Chair Yellen, in February Senator 

Elizabeth Warren and I wrote to you urging that a formal vote of 
28 

the Board of Governors be required before the Fed enters into consent orders over a million dollars. 

My staff reviewed all Fed enforcement actions between 1997 and 

2013 and found that only about 2 percent resulted in penalties over 

$1 million. 

During the hearings before the Senate Banking Committee on 

February 27, Senator Warren asked whether you agreed with our 

proposal. 

You answered, and I quote: ‘‘I do think it’s appropriate for us to 

make changes, and I fully expect that we will.’’ End of quote. 

Yesterday, Senator Warren and I received the response letter 

from you—thank you—in which you wrote: ‘‘I agree that it is appropriate for the Board of Governors to be fully involved in important decisions relating to the enforcement and supervisory matters.’’ You went on to say: ‘‘Steps are already underway to develop 

new processes and procedures for review and approval of significant enforcement actions.’’ 

My question is this: Can you tell me what specific steps are underway for the Board procedures to be changed to require formal 

votes on all major enforcement actions? And if so, by what date will 

that occur? And if this is not the procedural change you anticipate 

making, what new processes and procedures for review and approval of enforcement actions will be introduced? 

Chair Yellen. We have met and it is in the public record that 

we have had a number of meetings at this point over the last couple of months to discuss enforcement actions. 

We are participating in those discussions with our staff early so 

that we can guide their handling of these matters. I think this is 

fully appropriate, and I pledge that we will continue to do so. 

We have taken a vote on at least one very important enforcement 

matter. And I want to take a little bit more time working with the 

staff to decide exactly what the guidelines will be for when we 

should delegate and when Board action is required. 

You suggested a particular cutoff, and I want to think more carefully about how to define precisely which actions should require 

Board votes, when it’s appropriate for us to vote. But what I do 

want to pledge is that the Board will be very involved, discuss, and 

meet to discuss major enforcement actions. 

Representative Cummings. Thank you. 

Chair Yellen. And we have done so. 

Representative Cummings. You were Vice Chair of the Board 

of Governors when the Fed and the OCC terminated the Independent Foreclosure Review and agreed to a settlement with the 

mortgage servicing companies in January 2013. 

Did the Board formally approve the amendments to the consent 

decrees that terminated the IFR? 

Chair Yellen. The Board did not vote on that agreement. Under 

the procedures in place, this was a matter that was delegated to 

the staff. But the staff consulted closely with members of the Board 

before they took those actions. And so the Board did have input in 

an informal way when those decisions were made. But there was 

no formal vote. 

Representative Cummings. On March 4th, I joined with Oversight Chairman Darrell Issa in a letter requesting that both the 
29 

Fed and the OCC produce documents relating to this decision. The 

OCC produced its documents several weeks ago. We received the 

Fed’s documents yesterday. Thank you. And we are still reviewing 

them. 

The documents produced by the OCC showed that there were no 

reliable data or error rates at the time you terminated the IFR, but 

there are preliminary data showing double-digit error rates in some 

categories and some services. 

Deep dives were planned to identify the full extent of harm, but 

they could not be completed because the IFR was terminated. Did 

you know this when the IFR was terminated? Did you know that? 

Chair Yellen. The IFR was terminated because it was decided 

that the process was too slow in terms of its time frame and its 

ability to get money into the pockets of homeowners who had been 

harmed. 

It was a decision that the OCC took the lead in, and the Federal 

Reserve went along with, after consulting closely with community 

groups and looking at the process that was in—that was taking 

place with the independent consultants reviewing these files. 

It was not a happy outcome. It was a—— 

Representative Cummings. It was a horrible outcome. 

Chair Yellen. It was horrible—— 

Representative Cummings. It was horrible. I mean—and I 

don’t know whether you have looked into it, but it is a very sad 

commentary on what happened here. 

Chair Yellen. It is. 

Representative Cummings. I know I am out of time, but I will 

send you some follow-up questions along with Senator Warren. 

Chair Yellen. Yes. I’d be happy to answer them. 

Chairman Brady. Thank you, Representative. 

Madam Chair, thank you for being here today and for your testimony and answering the questions. You have a difficult job. We 

wish you well, and we look forward to future hearings to come. 

The hearing is adjourned. 

(Whereupon, at 11:49 a.m., Wednesday, May 7, 2014, the hearing 

was adjourned.) 

(31) 

SUBMISSIONS FOR THE RECORD 
32 

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

COMMITTEE

To start, I congratulate Chair Yellen on her appointment to head the Board of 

Governors of the Federal Reserve System. I welcome you to your first appearance 

before the Joint Economic Committee and look forward to many more. 

June will mark the fifth anniversary of the end of the ‘‘Great Recession.’’ By virtually every economic indicator, this recovery ranks as the weakest or near the bottom. This recovery’s persistent weakness has created a Growth Gap relative to other 

recoveries over the last half century. For example, if this recovery had merely been 

average, then: 

• The U.S. economy would be $1.4 trillion larger (Figure 1); 

• American workers would have 5.7 million more private-sector jobs available 

(Figure 2); and 

• A family of four would have over $1,000 per month in additional real after-tax 

income (Figure 3). 

Ironically, for an Administration that has repeatedly bemoaned income inequality, 

the one exception to this weakness is Wall Street—where the S&P 500 Total Return 

Index, adjusted for inflation, has more than doubled. 

Last week, the Bureau of Economic Analysis (BEA) and the Bureau of Labor Statistics (BLS) released conflicting data about the strength of this recovery. On the 

one hand, according to the BEA, real GDP growth was basically flat in the first 

quarter, and according to the BLS, the labor force participation rate fell in April 

to 62.8 percent, tying a multi-decade low only reached in the Carter and Obama Administrations. Moreover, the employment-to-population ratio is actually lower than 

when the recession ended, which means there are proportionally less adults working 

today than when the recovery began. That’s headed the wrong direction. 

On the other hand, the BLS reported that, for only the fifth time since the recession ended, the monthly growth of non-farm payroll jobs in April exceeded the 

equivalent average monthly job growth during past recoveries with the unemployment rate declining to 6.3 percent from its October 2009 peak of 10 percent. 

Correctly judging the strength of the labor market is very important because the 

Federal Open Market Committee has tied the tapering of large-scale asset purchases and the normalization of interest rates to its assessment of the labor market. 

Members of the FOMC attribute much of the slack in the labor market to cyclical 

factors and believe that a highly accommodate monetary policy can strengthen economic output and employment. However, if a substantial portion of the weakness 

in the labor market is due to structural factors such as an aging population and 

a skills mismatch, then maintaining a highly accommodative monetary policy could 

instead create economic bottlenecks that would trigger price inflation. 

Addressing structural unemployment requires much different policies such as reforming education, strengthening job-training programs, and modernizing meanstested entitlement programs to encourage work. 

I am encouraged that the FOMC began to taper large-scale asset purchases in December and appears on track to terminate these purchases before the end of this 

year. However, I am concerned that the FOMC stated that it will likely maintain 

its zero-interest rate policy long after QE ends, and at levels below those that ‘‘the 

Committee views as normal in the longer run.’’ 

I am equally concerned that the discretionary nature of changes to the FOMC’s 

forward-guidance is undermining the Fed’s credibility—weakening the confidence of 

market participants and increasing uncertainty. 

I believe the Federal Reserve helped to stabilize financial markets after the panic 

in the fall of 2008, but extraordinarily low interest rates and repeated rounds of 

quantitative easing have done more to stimulate Wall Street than help hard-working American families on Main Streets across America. As I noted earlier, since the 

recession ended the S&P 500 Total Return Index, adjusted for inflation, is up 108.2 

percent, while real after-tax income per capita is only up 4.2 percent. 

The Fed has Wall Street roaring, but has left middle-class families and Main 

Street business behind. 

Chair Yellen, your predecessor was supremely confident that the Fed had the 

knowledge, tools, and political fortitude to exit smoothly from the Fed’s extraordinary monetary actions and normalize interest rates and the size of its balance 

sheet before an inflationary outbreak could occur. 

Yet the Fed—like many central banks—has an unsatisfactory track record over 

the last century in identifying economic turning points and acting in a timely manner to maintain stable prices. 

So today, I am hopeful that you can enlighten this Committee on several points: 
33 

1. What is the FOMC’s assessment of the strength of the labor market? 

How much of the weakness in the labor market do you believe is due to 

cyclical factors and how much is due to structural factors? What statistics 

are FOMC members using to judge the health of the labor market and how 

much weight are they being given? 

2. Can an overly accommodative monetary policy create asset price inflation 

that may not be fully captured by the CPI or the PCE index? Do high stock 

prices reflect the fundamental strength of our economy, or are they partially due to a highly accommodative monetary policy? 

3. Has the FOMC’s failure to abide by its own ‘‘communications channel’’ 

prescriptions created more uncertainty and undermined the FOMC’s credibility? And, when will the FOMC return to a rules-based approach to monetary policy that helped to achieve the good performance of the U.S. economy 

during the ‘‘Great Moderation’’? 

4. Is the Federal Reserve Bank of San Francisco correct that higher federal 

taxes—including higher marginal rates on individual income, capital gains, 

and dividends—are presently the main cause of ‘‘fiscal drag’’ on our economy? 

5. Is there a better way for Congress to address the spending side of our 

fiscal imbalances than the present sequester enacted as part of the Budget 

Control Act of 2011? 

6. Is the Fed willing to make its balance sheet more transparent? Specifically, will the Fed provide a consolidated list of holdings that includes not 

only maturity values, but also average purchase prices for each issue and 

the current market value of each holding? 

With that, Chair Yellen, I look forward to your testimony. And, I note that the 

record will be kept open for one week so that Members can submit additional written questions for the record. 
34 
35 
36 
37 
38 
39 

STATEMENT OF JANET L. YELLEN, CHAIR, BOARD OF GOVERNORS OF THE FEDERAL

RESERVE SYSTEM

Chairman Brady, Vice Chair Klobuchar, and other members of the Committee, I 

appreciate this opportunity to discuss the current economic situation and outlook 

along with monetary policy before turning to some issues regarding financial stability. 

CURRENT ECONOMIC SITUATION AND OUTLOOK

The economy has continued to recover from the steep recession of 2008 and 2009. 

Real gross domestic product (GDP) growth stepped up to an average annual rate 

of about 31⁄4 percent over the second half of last year, a faster pace than in the first 

half and during the preceding two years. Although real GDP growth is currently estimated to have paused in the first quarter of this year, I see that pause as mostly 

reflecting transitory factors, including the effects of the unusually cold and snowy 

winter weather. With the harsh winter behind us, many recent indicators suggest 

that a rebound in spending and production is already under way, putting the overall 

economy on track for solid growth in the current quarter. One cautionary note, 

though, is that readings on housing activity—a sector that has been recovering since 

2011—have remained disappointing so far this year and will bear watching. 

Conditions in the labor market have continued to improve. The unemployment 

rate was 6.3 percent in April, about 11⁄4 percentage points below where it was a year 

ago. Moreover, gains in payroll employment averaged nearly 200,000 jobs per month 

over the past year. During the economic recovery so far, payroll employment has 

increased by about 81⁄2 million jobs since its low point, and the unemployment rate 

has declined about 33⁄4 percentage points since its peak. 

While conditions in the labor market have improved appreciably, they are still far 

from satisfactory. Even with recent declines in the unemployment rate, it continues 

to be elevated. Moreover, both the share of the labor force that has been unemployed for more than six months and the number of individuals who work part time 

but would prefer a full-time job are at historically high levels. In addition, most 

measures of labor compensation have been rising slowly—another signal that a substantial amount of slack remains in the labor market. 

Inflation has been quite low even as the economy has continued to expand. Some 

of the factors contributing to the softness in inflation over the past year, such as 

the declines seen in non-oil import prices, will probably be transitory. Importantly, 

measures of longer-run inflation expectations have remained stable. That said, the 

Federal Open Market Committee (FOMC) recognizes that inflation persistently 

below 2 percent—the rate that the Committee judges to be most consistent with its 

dual mandate—could pose risks to economic performance, and we are monitoring inflation developments closely. 

Looking ahead, I expect that economic activity will expand at a somewhat faster 

pace this year than it did last year, that the unemployment rate will continue to 

decline gradually, and that inflation will begin to move up toward 2 percent. A faster rate of economic growth this year should be supported by reduced restraint from 

changes in fiscal policy, gains in household net worth from increases in home prices 

and equity values, a firming in foreign economic growth, and further improvements 

in household and business confidence as the economy continues to strengthen. Moreover, U.S. financial conditions remain supportive of growth in economic activity and 

employment. 

As always, considerable uncertainty surrounds this baseline economic outlook. At 

present, one prominent risk is that adverse developments abroad, such as heightened geopolitical tensions or an intensification of financial stresses in emerging market economies, could undermine confidence in the global economic recovery. Another 

risk—domestic in origin—is that the recent flattening out in housing activity could 

prove more protracted than currently expected rather than resuming its earlier pace 

of recovery. Both of these elements of uncertainty will bear close observation. 

MONETARY POLICY

Turning to monetary policy, the Federal Reserve remains committed to policies 

designed to restore labor market conditions and inflation to levels that the Committee judges to be consistent with its dual mandate. As always, our policy will continue to be guided by the evolving economic and financial situation, and we will adjust the stance of policy appropriately to take account of changes in the economic 

outlook. In light of the considerable degree of slack that remains in labor markets 

and the continuation of inflation below the Committee’s 2 percent objective, a high 

degree of monetary accommodation remains warranted. 
40 

With the federal funds rate, our traditional policy tool, near zero since late 2008, 

we have relied on two less conventional tools to provide support for the economy: 

asset purchases and forward guidance. And, because these policy tools are less familiar, we have been especially attentive in recent years to the need to communicate 

to the public about how we intend to employ our policy tools in response to changing 

economic circumstances. 

Our current program of asset purchases began in September 2012 when the economic recovery had weakened and progress in the labor market had slowed, and we 

said that our intention was to continue the program until we saw substantial improvement in the outlook for the labor market. By December 2013, the Committee 

judged that the cumulative progress in the labor market warranted a modest reduction in the pace of asset purchases. At the first three meetings this year, our assessment was that there was sufficient underlying strength in the broader economy to 

support ongoing improvement in labor market conditions, so further measured reductions in asset purchases were appropriate. I should stress that even as the Committee reduces the pace of its purchases of longer-term securities, it is still adding 

to its holdings, and those sizable holdings continue to put significant downward 

pressure on longer-term interest rates, support mortgage markets, and contribute 

to favorable conditions in broader financial markets. 

Our other important policy tool in recent years has been forward guidance about 

the likely path of the federal funds rate as the economic recovery proceeds. Beginning in December 2012, the Committee provided threshold-based guidance that 

turned importantly on the behavior of the unemployment rate. As you know, at our 

March 2014 meeting, with the unemployment rate nearing the threshold that had 

been laid out earlier, we undertook a significant review of our forward guidance. 

While indicating that the new guidance did not represent a shift in the FOMC’s policy intentions, the Committee laid out a fuller description of the framework that will 

guide its policy decisions going forward. Specifically, the new language explains 

that, as the economy expands further, the Committee will continue to assess both 

the realized and expected progress toward its objectives of maximum employment 

and 2 percent inflation. In assessing that progress, we will take into account a wide 

range of information, including measures of labor market conditions, indicators of 

inflation pressures and inflation expectations, and readings on financial developments. In March and again last month, we stated that we anticipated the current 

target range for the federal funds rate would be maintained for a considerable time 

after the asset purchase program ends, especially if inflation continues to run below 

2 percent, and provided that inflation expectations remain well anchored. The new 

language also includes information on our thinking about the likely path of the policy rate after the Committee decides to begin to remove policy accommodation. In 

particular, we anticipate that even after employment and inflation are near mandate-consistent levels, economic and financial conditions may, for some time, warrant keeping the target federal funds rate below levels that the Committee views 

as normal in the longer run. 

Because the evolution of the economy is uncertain, policymakers need to carefully 

watch for signs that it is diverging from the baseline outlook and respond in a systematic way to stabilize the economy. Accordingly, for both our purchases and our 

forward guidance, we have tried to communicate as clearly as possible how changes 

in the economic outlook will affect our policy stance. In doing so, we will help the 

public to better understand how the Committee will respond to unanticipated developments, thereby reducing uncertainty about the course of unemployment and inflation. 

FINANCIAL STABILITY

In addition to our monetary policy responsibilities, the Federal Reserve works to 

promote financial stability, focusing on identifying and monitoring vulnerabilities in 

the financial system and taking actions to reduce them. In this regard, the Committee recognizes that an extended period of low interest rates has the potential to 

induce investors to ‘‘reach for yield’’ by taking on increased leverage, duration risk, 

or credit risk. Some reach-for-yield behavior may be evident, for example, in the 

lower-rated corporate debt markets, where issuance of syndicated leveraged loans 

and high-yield bonds has continued to expand briskly, spreads have continued to 

narrow, and underwriting standards have loosened further. While some financial 

intermediaries have increased their exposure to duration and credit risk recently, 

these increases appear modest to date—particularly at the largest banks and life 

insurers. 

More generally, valuations for the equity market as a whole and other broad categories of assets, such as residential real estate, remain within historical norms. In 
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addition, bank holding companies (BHCs) have improved their liquidity positions 

and raised capital ratios to levels significantly higher than prior to the financial crisis. Moreover, recently concluded stress tests mandated by the Dodd-Frank Act have 

provided a level of confidence in our assessment of how financial institutions would 

fare in an extended period of severely adverse macroeconomic conditions or a sharp 

steepening of the yield curve alongside a moderate recession. For the financial sector more broadly, leverage remains subdued and measures of wholesale short-term 

funding continue to be far below levels seen before the financial crisis. 

The Federal Reserve has also taken a number of regulatory steps—many in conjunction with other federal agencies—to continue to improve the resiliency of the financial system. Most recently, the Federal Reserve finalized a rule implementing 

section 165 of the Dodd-Frank Act to establish enhanced prudential standards for 

large banking firms in the form of risk-based and leverage capital, liquidity, and 

risk-management requirements. In addition, the rule requires large foreign banking 

organizations to form a U.S. intermediate holding company, and it imposes enhanced prudential requirements for these intermediate holding companies. Looking 

forward, the Federal Reserve is considering whether additional measures are needed 

to further reduce the risks associated with large, interconnected financial institutions. 

While we have seen substantial improvements in labor market conditions and the 

overall economy since the financial crisis and severe recession, we recognize that 

more must be accomplished. Many Americans who want a job are still unemployed, 

inflation continues to run below the FOMC’s longer-run objective, and work remains 

to further strengthen our financial system. I will continue to work closely with my 

colleagues and others to carry out the important mission that the Congress has 

given the Federal Reserve. 

Thank you. I will be pleased to take your questions. 
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