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[Joint House and Senate Hearing, 113 Congress]
[From the U.S. Government Publishing Office]

                                                         S. Hrg. 113-62
 
                          THE ECONOMIC OUTLOOK

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

                                HEARING

                               before the

                        JOINT ECONOMIC COMMITTEE

                     CONGRESS OF THE UNITED STATES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 22, 2013

                               __________

          Printed for the use of the Joint Economic Committee

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                        JOINT ECONOMIC COMMITTEE

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

HOUSE OF REPRESENTATIVES             SENATE
Kevin Brady, Texas, Chairman         Amy Klobuchar, Minnesota, Vice 
John Campbell, California                Chair
Sean P. Duffy, Wisconsin             Robert P. Casey, Jr., Pennsylvania
Justin Amash, Michigan               Mark R. Warner, Virginia
Erik Paulsen, Minnesota              Bernard Sanders, Vermont
Richard L. Hanna, New York           Christopher Murphy, Connecticut
Carolyn B. Maloney, New York         Martin Heinrich, New Mexico
Loretta Sanchez, California          Dan Coats, Indiana
Elijah E. Cummings, Maryland         Mike Lee, Utah
John Delaney, Maryland               Roger F. Wicker, Mississippi
                                     Pat Toomey, Pennsylvania

                 Robert P. O'Quinn, Executive Director
                 Niles Godes, Democratic Staff Director

                            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. Ben Bernanke, Chairman. Board of Governors of the Federal 
  Reserve System Washington, DC..................................     6

                       Submissions for the Record

Prepared statement of Chairman Brady.............................    36
Prepared statement of Vice Chair Klobuchar.......................    37
Prepared statement of Ben Bernanke...............................    38
Question for the Record from Senator Daniel Coats................    41
Response from Chairman Bernanke to Question for the Record from 
  Senator Coats..................................................    41

                          THE ECONOMIC OUTLOOK

                              ----------                              

                        WEDNESDAY, MAY 22, 2013

             Congress of the United States,
                          Joint Economic Committee,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:00 a.m. in Room 
G-50 of the Dirksen Senate Office Building, the Honorable Kevin 
Brady, Chairman, presiding.
    Representatives present: Brady, Campbell, Duffy, Paulsen, 
Hanna, Maloney, Sanchez, and Delaney.
    Senators present: Klobuchar, Casey, Sanders, Murphy, 
Heinrich, Coats, Lee, Wicker, and Toomey.
    Staff present: Corey Astill, Doug Branch, Conor Carroll, 
Gail Cohen, Sarah Elkins, Al Felzenberg, Connie Foster, Niles 
Godes, Colleen Healy, Robert O'Quinn, and Sue Sweet.

    OPENING STATEMENT OF HON. KEVIN BRADY, CHAIRMAN, A U.S. 
                   REPRESENTATIVE FROM TEXAS

    Chairman Brady. Chairman Bernanke, welcome again to the 
Joint Economic Committee. Thank you for your service as 
Chairman of the Federal Reserve. You deserve great credit for 
the leadership that calmed America's financial crisis in 2008.
    Four-and-a-half years after that crisis, nearly four years 
after the Recession has ended, the Fed is still engaging in 
extraordinary monetary actions and may continue doing so well 
into the future.
    Today this Committee will examine how these actions have 
affected jobs and middle class Americans, and how and when the 
Fed will exit its current accommodative policies.
    America's economy is improving, but faces significant 
challenges. We are experiencing the worst economic recovery 
since World War II. The growth gap between this recovery and an 
average post-War recovery is large and growing.
    We are missing 4.1 million private sector jobs, and $1.2 
trillion dollars from real GDP. More troubling is that many 
economists are predicting a new normal for America where long-
term growth is diminished.
    The Congressional Budget Office recently reduced its 
estimate for future growth in real potential GDP from 3.2 
percent to 2.2 percent. Now a 1 percentage point difference may 
not sound like much, but it is huge.
    A one percent growth gap means a $30 trillion smaller 
economy in 2062 in today's constant dollars. The unemployment 
rate has declined, which is very encouraging, but there are red 
flags that we should not ignore.
    Twenty million Americans cannot find a full-time job. 
Millions more, from recent college graduates to workers in 
their prime earning years, have simply given up looking for 
work. Long-term unemployment remains historically high, and the 
labor force participation rate is at a 35-year low.
    While it is encouraging that since the Recession hit bottom 
over 6 million Americans have found work, more than that--over 
8 million Americans--have been forced onto Food Stamps. 
Regrettably, one in six Americans must now rely on Food Stamps 
to feed their hungry families.
    With strong earnings' reports and the Fed's accommodative 
monetary policy, there is no question that Wall Street is 
roaring. But Main Street continues to struggle.
    Since the Recession ended, in real terms the S&P 500 Total 
Return Index has risen by 74.2 percent, while disposable income 
per person has only advanced a mere 2.3 percent.
    That means that over the last four years the real 
disposable income for Joe Sixpack increased a mere $745. In an 
average recovery since 1960, he would have $3,604 more in his 
pocket by now.
    Extraordinarily low interest rates have clearly boosted 
housing prices and housing construction, with positive economic 
effects. However, these same low rates are punishing seniors, 
savers, pension funds, and insurance products. Families may now 
feel more secure about their house, but less secure about their 
income and job prospects.
    As for the Fed's unemployment rate targeting, quantitative 
easing has run out of steam. Long-term interest rates are 
already at a near 70-year low. Banks have $1.9 trillion in 
excess reserves at the Fed, and nonfinancial corporations have 
$1.5 trillion more sitting on the sidelines. More liquidity and 
lower long-term rates cannot solve the problems that are 
holding back job creation in America.
    Business investment in new buildings, equipment, and 
software which drive job creation remains the missing 
ingredient in this recovery. Monetary policy, no matter how 
thoughtfully applied, has its limits. It cannot fix poor 
Washington budgetary and regulatory tax policies that are 
deterring business investment and the jobs that come with it.
    I think my key point today is that I do not question the 
intention of current Fed policy to fulfill its dual mandate, 
but I question the policy's effect on employment, and I worry 
about its future risks.
    In the near term, these extraordinary monetary actions 
become an enabler of bad fiscal policy, allowing President 
Obama and Congress to avoid the tough and necessary decisions 
that would clear the roadblocks to a strong economy, such as 
addressing America's long-term financial sustainability, 
creating a pro-growth tax code, rebalancing regulation, and 
addressing the harmful economic effects of the President's 
Affordable Care Act.
    In the long term, the Fed's extraordinary monetary actions 
pose three risks to our economy.
    First, the Fed may be inflating new asset price bubbles.
    Secondly, large excess reserves at the Fed could become the 
fuel for future inflation when economic growth accelerates, 
unless the Fed acts quickly to contract its balance sheet.
    Third, the Fed's expansive balance sheet creates a perverse 
incentive for future financial repression, an economic term 
which means channeling domestic savings to the Federal 
Government to lower its interest costs.
    Since 2009, the Fed has purchased the equivalent of 24 
percent of all newly issued Treasuries. When growth picks up--
and we hope it does--the Fed cannot raise its target rate for 
Federal Funds and sell long-term Treasuries without recognizing 
substantial losses on its balance sheet, creating uncertainty.
    To avoid that, the Fed will likely boost the interest rate 
paid to banks on their reserves and increase reserve 
requirements, which restrict economic growth by limiting bank 
loans to small businesses and families.
    The net effect is financial repression, redirecting credit 
from the private sector through the Fed to the Treasury to help 
contain federal interest costs.
    Given these risks and the limits to monetary policy in the 
current economic recovery, the Federal Reserve should begin now 
to carefully exit from its extraordinary monetary actions and 
return to a more predictable, rules-based monetary policy that 
focuses on maintaining the purchasing power of the U.S. dollar 
over time.
    Begin now, with clear communication to the market that will 
lessen uncertainty and form the best long-term foundation for 
maximum economic growth for America. Today we intend to explore 
the Fed's exit strategy and timing in detail.
    Chairman Bernanke, I look forward to your testimony and I 
yield to the Vice Chairman of the Committee, Senator Klobuchar.
    [The prepared statement of Chairman Brady appears in the 
Submissions for the Record on page 36.]

  OPENING STATEMENT OF HON. AMY KLOBUCHAR, VICE CHAIR, A U.S. 
                     SENATOR FROM MINNESOTA

    Vice Chair Klobuchar. Well thank you very much, Chairman 
Brady. Thank you for putting together this hearing. As you can 
see, we have very good attendance for you, Chairman Bernanke. 
And thank you for being here. I look forward to your testimony 
on the state of the economy and your thoughts on the short-term 
and long-run issues facing our economy.
    As you know, the economy has added private sector jobs for 
38 straight months. During that time, 6.8 million private 
sector jobs have been created. Key economic indicators are also 
showing some strength. The housing market is recovering.
    I had the realtors in my office from Minnesota last week, 
and it was the first time they had smiles on their faces in a 
couple of years.
    Credit conditions are improving, but we all know--as 
Chairman Brady has pointed out, that there is a lot more work 
to do. My hope is that this hearing will allow us to talk about 
potential solutions that can move our country forward. And 
because of the Fed's two objectives for the Nation's monetary 
policy--maximum employment, and stable prices--I am eager to 
hear your thoughts on what the Fed is doing to stimulate 
lending and economic activity.
    One issue that I know we are all concerned about is what's 
going on in Congress, and you have testified before about how 
that would be the best solution, and that we would have more 
tools to move this economy forward.
    I was pleased the immigration reform bill passed with a 
strong bipartisan vote last night. I think that is just one 
example, as we look at skilled workers, in addition to our own 
training we need to do in this country for science, 
engineering, math, and technology, in addition to the work we 
have to do on exports which are improving; the work on 
comprehensive tax reform; as well as bringing down the debt and 
getting our fiscal house in order.
    And I wanted to focus on that for a minute. In the past two 
years, Congress has made some progress, as you know, in 
reducing the deficit. We have achieved about $2.4 trillion in 
deficit reduction. And the goal of $4 trillion, which was one 
goal that was set out by a number of economists, is within our 
grasp over the next 10 years.
    Last week the Congressional Budget Office reported that the 
deficit will fall to $642 billion this year, which is $200 
billion less than what the CBO projected just three months ago. 
The better numbers reflect good news in housing and larger-
than-expected increases in tax revenues. But I believe that 
resting on these numbers would be a mistake.
    I think we are closer to reaching a new deficit agreement 
that many people believe, when you look at the numbers at the 
end of the year when Speaker Boehner and the President were 
negotiating, when you look at some of the work that is being 
done on a bipartisan basis in the Senate--and it is as 
frustrating to me as anyone that we are not reigniting those 
negotiations. It is only going to happen, I believe, if we work 
in a bipartisan manner to get a deal done.
    I believe that the budget the Senate passed, which I voted 
for, is a good approach. But I think everyone is open to some 
compromise. The Senate approach, I would note, is balanced with 
targeted spending cuts to replace sequestration, and new 
revenues from closing loopholes and ending wasteful spending in 
the Tax Code, which would stabilize our debt-to-GDP ratio at 
around 70 percent.
    I feel strongly that we should be doing that--we should be 
going to conference committee in regular order with these two 
budgets, the Senate's and the House's, and get this done.
    I note that last night Senator McCain and Senator Collins 
also came out and agreed that these two budgets should go to 
conference committee.
    You have warned, Chairman Bernanke, that cutting too much 
too soon could lead to a sharp contraction on our economy. I 
remember that well because for any woman that's been in labor 
it's a very meaningful phrase, ``the sharp contraction,'' but 
it is one of the reasons I believe that deficit reduction must 
be paired with economic growth.
    Our ultimate goal is not simply a balanced budget; it is a 
budget that has balance. As we work towards that goal, we must 
avoid a repeat of the debt ceiling debacle from the summer of 
2011 that rattled financial markets, led to a downgrade of the 
U.S. credit rating, and unnecessarily harmed our economy.
    When I asked you about the debt ceiling showdown at a JEC 
hearing in the fall of 2011, you answered bluntly that it's no 
way to run a railroad. I agree. We must do better this time.
    We have some breathing room now, because of the change, 
with the debt but we must continue to press policies that will 
truly help the economy: the immigration reform I mentioned; a 
long-term farm bill which helps a significant sector of our 
economy that I believe will get through the Senate in the next 
two or three weeks; work-skills training, as I mentioned, for 
our own students; regulatory reforms; streamlining regulations. 
Congressman Paulsen and I have worked a lot on the medical 
device industry trying to make those FDA approvals go quicker. 
Comprehensive tax reform.
    Part of this of course is also smart Federal Reserve 
policies. Since the financial crisis began in 2007, the Fed has 
used many tools to bolster our economy. It has kept short-term 
interest rates near zero since late 2008, and it has taken 
action to keep longer term interest rates and mortgage interest 
rates low.
    As you and I have discussed, this makes it hard on savers. 
Yet, in the past three years Americans have saved more than 4 
percent of their income. The Fed has also taken steps to open 
up its policymaking process, expand communication, provide more 
specific guidance, and enhance the transparency of monetary 
policy.
    Finally, there has to be an ongoing discussion about 
changing the Fed's goal to focus--there has been an ongoing 
discussion, and Chairman Brady had a good hearing on this, 
about changing the Fed's goals to focus solely on price 
stability.
    In my view, now is not the time for the Fed to take its eye 
off promoting employment. My hope is that Democrats and 
Republicans can come together to find solutions and put more 
Americans back to work.
    The unemployment rate, while heading in the right 
direction, remains at 7.5 percent, well above the 6.5 percent 
level the Fed committed to reaching before changing course on 
interest rates.
    As you may know, the unemployment rate in my State is 
significantly lower at 5.4 percent. So, again, there are states 
that have weathered this downturn and are actually expanding 
the economy.
    At the same time, as we know inflation is well below the 
Fed target of 2 percent. It is at about 1 percent over the past 
12 months. Again, we would like to hear your views on how this 
will all work going out if we see improvements in our economy.
    I believe that we have turned the corner and our economy is 
getting stronger, but I also believe there is so much more work 
to do. As Congressman Delaney knows from the hearing that we 
had on long-term unemployment, while the unemployment numbers 
are getting better there are still many, many people, too many 
people that have been unemployed for more than six months and 
are finding it very difficult to get back into the job market.
    While this is all somewhat conflicting news in terms of the 
long-term unemployed and the numbers would show improvement, we 
all know we have more work to do. I look forward to discussing 
how we can build on this economic progress.
    Thank you for being here and for your testimony this 
morning.
    Chairman Brady. I would like to welcome Chairman Bernanke 
to our hearing today. Dr. Bernanke is currently in his second 
term as Chairman of the Board of Governors of the Federal 
Reserve, and also serves as Chairman of the Federal Open Market 
Committee.
    Prior to his current position, Dr. Bernanke was Chairman of 
the President's Council of Economic Advisers, and previously 
served the Federal Reserve System as a member of the Board of 
Governors, a Visiting Scholar and member of the Academic 
Advisory Panel. He has a distinguished teaching and educational 
career.
    I welcome Chairman Bernanke and look forward to your 
testimony. You are recognized, sir.
    [The prepared statement of Vice Chair Klobuchar appears in 
the Submissions for the Record on page 37.]

   STATEMENT OF HON. BEN BERNANKE, CHAIRMAN OF THE BOARD OF 
    GOVERNORS OF THE FEDERAL RESERVE SYSTEM, WASHINGTON, DC

    Chairman Bernanke. Thank you. Chairman Brady, Vice Chair 
Klobuchar, and other members of the Committee, I appreciate 
this opportunity to discuss the economic outlook and economic 
policy.
    Economic growth has continued at a moderate pace so far 
this year. Real GDP is estimated to have risen at an annual 
rate of 2\1/2\ percent in the first quarter after increasing 
1\3/4\ percent during 2012.
    Economic growth in the first quarter was supported by 
continuing expansion in demand by U.S. households and 
businesses, which more than offset the drag from declines in 
government spending, especially defense spending.
    Conditions in the job market have shown some improvement 
recently. The unemployment rate at 7.5 percent in April has 
declined more than \1/2\ percentage point since last summer. 
Moreover, gains in total nonfarm payroll employment have 
averaged more than 200,000 jobs per month over the past 6 
months, compared with average monthly gains of less than 
140,000 during the prior 6 months. In all, payroll employment 
has now expanded by about 6 million jobs since its low point, 
and the unemployment rate has fallen 2\1/2\ percentage points 
since its peak.
    Despite this improvement, the job market remains weak 
overall:
    The unemployment rate is still well above its longer run 
normal level, rates of long-term unemployment are historically 
high, and the labor force participation rate has continued to 
move down.
    Moreover, nearly 8 million people are working part time 
even though they would prefer full-time work. High rates of 
unemployment and underemployment are extraordinarily costly. 
Not only do they impose hardships on the affected individuals 
and their families, they also damage the productive potential 
of the economy as a whole by eroding workers' skills and--
particularly relevant during this commencement season--by 
preventing many young people from gaining workplace skills and 
experience in the first place.
    The loss of output and earnings associated with high 
unemployment also reduces government revenues and increases 
spending on income-support programs, thereby leading to larger 
budget deficits and higher levels of public debt than would 
otherwise occur.
    Consumer price inflation has been low. The price index for 
personal consumption expenditure rose only 1 percent over the 
12 months ending in March, down from about 2\1/4\ percent 
during the previous 12 months.
    This slow rate of inflation partly reflects declines in 
consumer energy prices, but price inflation for other consumer 
goods and services has also been subdued.
    Nevertheless, measures of longer term inflation 
expectations have remained stable and continue to run in the 
narrow ranges seen over the past several years. Over the next 
few years, inflation appears likely to run at or below the 2 
percent rate that the Federal Open Market Committee judges to 
be most consistent with the Federal Reserve's statutory mandate 
to foster maximum employment and stable prices.
    Over the nearly four years since the recovery began, the 
economy has been held back by a number of headwinds. Some of 
these headwinds have begun to dissipate recently, in part 
because of the Federal Reserve's highly accommodative monetary 
policy.
    Notably, the housing market has strengthened over the past 
year, supported by low mortgage rates and improved sentiment on 
the part of potential buyers.
    Increased housing activity is fostering job creation in 
construction and related industries, such as real estate 
brokerage and home furnishings, while higher home prices are 
bolstering household finances which helps support the growth of 
private consumption.
    Severe fiscal and financial strains in Europe, by weighing 
on U.S. exports and financial markets, have also restrained 
U.S. economic growth over the past couple of years.
    However, since last summer, financial conditions in the 
Euro area have improved somewhat, which should help mitigate 
the economic slowdown there while also reducing the headwinds 
faced by the U.S. economy.
    Also, credit conditions in the United States have eased for 
some types of loans as bank capital and asset quality have 
strengthened.
    Fiscal policy at all levels of government has been and 
continues to be an important determinant of the pace of 
economic growth. Federal fiscal policy--taking into account 
both discretionary actions and so-called automatic 
stabilizers--was, on net, quite expansionary during the 
Recession and early in the recovery.
    However, a substantial part of this impetus was offset by 
spending cuts and tax increases by state and local governments, 
most of which are subject to balanced-budget requirements, and 
by subsequent fiscal tightening at the federal level.
    Notably, over the past four years state and local 
governments have cut civilian government employment by roughly 
700,000 jobs, and total government employment has fallen by 
more than 800,000 jobs over the same period. For comparison, 
over the 4 years following the trough of the 2001 recession, 
total government employment rose by more than 500,000 jobs.
    Most recently, the strengthening economy has improved the 
budgetary outlooks of most state and local governments, leading 
them to reduce the pace of fiscal tightening.
    At the same time, though, fiscal policy at the federal 
level has become significantly more restrictive. In particular, 
the expiration of the payroll tax cut, the enactment of tax 
increases, the effects of the budget caps on discretionary 
spending, the onset of the sequestration, and the declines in 
defense spending for overseas military operations are expected 
collectively to exert a substantial drag on the economy this 
year.
    The CBO estimates that the deficit reduction policies in 
current law will slow the pace of real GDP growth by about 1\1/
2\ percentage points during 2013 relative to what it would have 
been overwise.
    In present circumstances, with short-term interest rates 
already close to zero, monetary policy does not have the 
capacity to fully offset an economic headwind of that 
magnitude.
    Although near-term fiscal restraint has increased, much 
less has been done to address the Federal Government's longer 
term fiscal imbalances. Indeed, the CBO projects that under 
current policies the federal deficit and debt, as a percentage 
of GDP, will begin rising again in the latter part of this 
decade and move sharply upward thereafter--in large part, 
reflecting the aging of our society and projected increases in 
health-care costs, along with mounting debt service payments.
    To promote economic growth and stability in the longer 
term, it will be essential for fiscal policymakers to put the 
federal budget on a sustainable long-run path. Importantly, the 
objectives of effectively addressing longer term fiscal 
imbalances and of minimizing the near-term fiscal headwinds 
facing the economic recovery are not incompatible.
    To achieve both goals simultaneously, the Congress and the 
Administration could consider replacing some of the near-term 
fiscal restraint now in law with policies that reduce the 
federal deficit more gradually in the near term, but more 
substantially in the longer run.
    With unemployment well above normal levels and inflation 
subdued, fostering our Congressionally mandated objectives of 
maximum employment and price stability requires a highly 
accommodative monetary policy.
    Normally the Committee would provide policy accommodation 
by reducing the target for the Federal Funds rate, thus putting 
downward pressure on interest rates generally.
    However, the Federal Funds rate and other short-term money 
market rates have been close to zero since late 2008, so the 
Committee has had to use other policy tools.
    The first of these alternative tools is ``forward 
guidance'' about the FOMC's likely future target for the 
Federal Funds rate.
    Since December, the Committee's postmeeting statement has 
indicated that its current target range for the Federal Funds 
rate, 0 to \1/4\ percent, will be appropriate, quote, ``at 
least as long as the unemployment rate remains above 6\1/2\ 
percent, inflation between one and two years ahead is projected 
to be no more than a half percentage point above the 
Committee's 2 percent longer-run goal, and longer-term 
inflation expectations continue to be well anchored.''
    This guidance underscores the Committee's intention to 
maintain highly accommodative monetary policy as long as needed 
to support continued progress toward maximum employment and 
price stability.
    The second policy tool now in use is large-scale purchases 
of longer-term Treasury Securities and Agency Mortgage-Backed 
Securities, or MBS.
    These purchases put downward pressure on longer-term 
interest rates, including mortgage rates. For some months, the 
FOMC has been buying longer-term Treasury Securities at a pace 
of $45 billion per month, and Agency MBS at a pace of $40 
billion per month.
    The Committee has said that it will continue its securities 
purchases until the outlook for the labor market has improved 
substantially in a context of price stability.
    The Committee also has stated that in determining the size, 
pace, and composition of its asset purchases, it will take 
appropriate account of the likely efficacy and costs of such 
purchases as well as the extent of progress towards its 
economic objectives.
    At its most recent meeting, the Committee made clear that 
it is prepared to increase or reduce the pace of its asset 
purchases to ensure that the stance of monetary policy remains 
appropriate as the outlook for the labor market or inflation 
changes.
    Accordingly, in considering whether a recalibration of the 
pace of purchases is warranted, the Committee will continue to 
assess the degree of progress made toward its objectives in 
light of incoming information.
    The Committee also reiterated--consistent with its forward 
guidance regarding the Federal Funds rate--that it expects a 
highly accommodative stance of monetary policy to remain 
appropriate for a considerable time after the asset purchase 
program ends and the economic recovery strengthens.
    In the current economic environment, monetary policy is 
providing significant benefits. Low real interest rates have 
helped support spending on durable goods such as automobiles, 
and also contributed significantly to the recovery in housing 
sales, construction, and prices.
    Higher prices of houses and other assets in turn have 
increased household wealth and consumer confidence, spurring 
consumer spending and contributing to gains in production and 
employment.
    Importantly, accommodative monetary policy has also helped 
to offset incipient deflationary pressures and kept inflation 
from falling even further below the Committee's 2 percent 
longer-run objective.
    That said, the Committee is aware that a long period of low 
interest rates has costs and risks. For example, even as low 
interest rates have helped create jobs and supported the prices 
of homes and other assets, savers who rely on interest income 
from savings accounts or government bonds are receiving very 
low returns.
    Another cost--one that we take very seriously--is the 
possibility that very low interest rates if maintained for too 
long could undermine financial stability. For example, 
investors or portfolio managers, dissatisfied with low returns, 
may ``reach for yield'' by taking on more credit risk, duration 
risk, or leverage.
    The Federal Reserve is working to address financial 
stability concerns to increased monitoring, a more systemic 
approach to supervising financial firms, and the ongoing 
implementation of reforms to make the financial system more 
resilient.
    Recognizing the drawbacks of persistently low rates, the 
FOMC actively seeks economic conditions consistent with 
sustainably higher interest rates. Unfortunately, withdrawing 
policy accommodation at this juncture would be highly unlikely 
to produce such conditions.
    A premature tightening of monetary policy could lead 
interest rates to rise temporarily but would also carry a 
substantial risk of slowing or ending the economic recovery and 
causing inflation to fall further.
    Such outcomes tend to be associated with extended periods 
of lower, not higher, interest rates as well as poor returns on 
other assets. Moreover, renewed economic weakness would pose 
its own risks to financial stability.
    Because only a healthy economy can deliver sustainably high 
real rates of return to savers and investors, the best way to 
achieve higher returns in the medium term and beyond is for the 
Federal Reserve--consistent with its Congressional mandate--to 
provide policy accommodation as needed to foster maximum 
employment and price stability. Of course we will do so with 
due regard for the efficacy and costs of our policy actions and 
in a way that is responsive to the evolution of the economic 
outlook.
    Thank you, Mr. Chairman.
    [The prepared statement of Chairman Ben Bernanke appears in 
the Submissions for the Record on page 38.]
    Chairman Brady. Thank you, Mr. Chairman.
    If the economy were to accelerate, the Fed would have to 
start unwinding QE-3. So what is the Fed's exit strategy, the 
steps it will undertake? And when do you anticipate to begin 
executing this?
    Chairman Bernanke. Mr. Chairman, so the first thing of 
course would be to wind down eventually the quantitative easing 
program, the asset purchases.
    As I've said, the program relates the flow of asset 
purchases to the economic outlook. As the economic outlook, and 
particularly the outlook for the labor market, improves in a 
real and sustainable way the Committee will gradually reduce 
the flow of purchases.
    I want to be very clear that a step to reduce the flow of 
purchases would not be an automatic mechanistic process of 
ending the program. Rather, any change in the flow of purchases 
would depend on the incoming data and our assessment of how the 
labor market and inflation are evolving.
    So at some point of course we will end the asset purchase 
program. Subsequent to that, we will follow the guidance that 
we have provided about interest rates. Our principal tool for 
raising interest rates will be the interest rate on excess 
reserves that we pay, which will induce higher money market 
rates and a higher Federal Funds rate.
    And we will complement that with other tools, including 
tools that we have for draining reserves. We may or may not 
sell assets. At this point, it does not appear that it is 
necessary for us to sell any assets, and particularly not any 
mortgage-backed securities, in order to exit in a way that does 
not endanger price stability.
    So there are a number of steps. We are currently discussing 
further our exit strategy, and we hope to provide more 
information going forward. But we certainly are confident that 
we can exit over time in a way that will be consistent with our 
policy objectives.
    Chairman Brady. Do you anticipate allowing maturing 
securities to roll off the balance sheet before you begin 
selling the securities themselves?
    Chairman Bernanke. As I said, we could normalize policy by 
simply letting securities roll off. And I think there are some 
advantages to doing that. For one, it would not disrupt markets 
so much. It would avoid irregularity in our fiscal payments to 
the Treasury. But we will see.
    Ultimately, in the very long run, I think there is a desire 
to get back to a predominantly Treasury Security portfolio. But 
again, in the exit process allowing assets to roll off would be 
sufficient to bring us to a more normal balance sheet within a 
reasonable period.
    Chairman Brady. When do you expect this strategy to begin? 
What are the benchmarks you are looking at to begin this 
process?
    Chairman Bernanke. We are trying to make an assessment of 
whether or not we have seen real and sustainable progress in 
the labor market outlook. And this is a judgment that the 
Committee will have to make.
    If we see continued improvement and we have confidence that 
that is going to be sustained, then we could in the next few 
meetings, take a step down in our pace of purchases.
    Again, if we do that, it would not mean that we are 
automatically aiming towards a complete wind down. Rather, we 
would be looking beyond that to seeing how the economy evolves, 
and we could either raise or lower our pace of purchases going 
forward.
    Again, that is dependent on the data. If the outlook for 
the labor market improves and we are convinced that that is 
sustainable, we will respond to that.
    If the recovery were to falter, if inflation were to fall 
further and we felt that the current level of monetary 
accommodation was still appropriate, then we would delay that 
process.
    Chairman Brady. At the pace we are going, do you think it 
is likely these actions will begin before Labor Day?
    Chairman Bernanke. I don't know. It is going to depend on 
the data. The key to this program, and in our previous 
quantitative easing programs, we gave a total amount of 
expected purchases. And when that total amount was done, we 
stopped. And in some cases, that stopping was premature because 
the economy was not yet on a fully self-sustaining trajectory.
    So the difference in this program is that we are buying a 
flow rate. We are buying a certain amount of assets each month. 
And the amount that we purchase will depend on how the data 
come in, and how the outlook for the labor market goes over 
time.
    Chairman Brady. How much notice will you give the market 
before you start executing the strategy?
    Chairman Bernanke. Well we have explained the strategy. And 
again the market can see the data as well as we can. And what 
we are looking for is increased confidence that the labor 
market is improving, and that that improvement is sustainable.
    And as we see that, we will, in steps, respond to that by 
reducing the amount of accommodation in a way that is 
appropriate and maintains an appropriate level of accommodation 
given the economic outlook.
    Chairman Brady. It is frustrating. Here we are nearly four 
years after the Recession ended, and this economy is in such a 
weak state, fragile state. At this point, the patient ought to 
be out of the hospital, done with rehab, and playing baseball 
with its kids. I feel like the economy is in the outpatient 
room and the Fed continues to feed it medicine on a daily 
basis, asking are you getting better?
    But my worry is that the Fed does not have the prescription 
for what ails our economy. A year ago, the Fed made clear that 
it would not set an employment target rate because it is 
generally affected by nonmonetary factors; but your unwinding 
of QE is based on the employment areas that you have the least 
control of.
    What do we make of that?
    Chairman Bernanke. Well, Mr. Chairman, first of all the 
slowness of the recovery can be explained by a number of 
important headwinds, including the after-effects of the 
financial crisis, developments in Europe, the problems with the 
housing market, and very importantly the fact that fiscal 
policy for the last few years has actually been a significant 
headwind to recovery rather than a supporting tailwind.
    So I would submit that without monetary policy's aggressive 
actions, that this recovery would be much weaker than it has 
been. And indeed, if you compare our recovery to that of Europe 
and other advanced industrial economies, it looks relatively 
good.
    With respect to employment, monetary policy as a general 
rule cannot influence the long-run level of employment or 
unemployment, and that is certainly correct. What we are trying 
to address here is the short-run cyclical gap.
    We are seeing currently the economy operating at a level 
below what it is capable of operating at, and many people out 
of work who normally would have work; and monetary policy can 
help to put people back to work in the short run.
    In the longer run, increasing the potential growth of the 
economy, as you mentioned earlier, that is not really the Fed's 
job. That is the private sector's job and Congress's job in 
terms of things like the Tax Code, investment in 
infrastructure, training, all those things that help create 
more growth potential.
    Chairman Brady. And I'll just thank you and conclude with 
this point. I think monetary policy has limits, and QE, 
quantitative easing, has run its course. I have yet to meet a 
business who tells me that if those lower long-term rates were 
just lower and there was more liquidity, I'd be hiring more.
    That is just not happening. It really is fiscal issues, 
from higher tax increases, regulation, extraordinarily I think 
burdensome to them. The President's new health care law is 
creating a great deal of uncertainty and impacting job hiring 
today. Those I think are the main roadblocks. That is why I 
think the earlier the Fed can begin communicating and 
announcing that it's unwinding, I think the more onus is put on 
Congress and the White House to actually address some of these 
critical fiscal issues.
    With that, I recognize Vice Chairman Klobuchar.
    Vice Chair Klobuchar. Thank you very much, Mr. Chairman. 
Thank you.
    I was going to take the analogy the Chairman just made 
about the hospital, and I was thinking: Well, we are out of 
intensive care, thanks in part to the Fed's actions. And we are 
probably out of the hospital. But one of the problems is, 
because of this brinkmanship that goes on on the Hill here, we 
keep having to go back to the emergency room. And I do not 
think that helps. We also just are not in that kind of long-
term healthy way that we want to be. And so I want to start 
with that.
    Right now the Fed is working to spur the economy, as you 
just discussed with the Chairman, at the same time that 
Congress is implementing across-the-board spending cuts. And I 
am one that believes that we have to have a mixture of cuts and 
revenue.
    But some policymakers are pushing for even deeper cuts than 
we are seeing with sequestration. What effect do you think 
sequestration--you addressed this in your opening statement--
what effect do you think it is having on economic growth? And 
do you think it would be better to have a long-term budget in 
place?
    Chairman Bernanke. Well as I talked about in my testimony, 
sequestration is only part of an overall pattern by which there 
has been considerable fiscal restraint in the short term not 
involving just sequestration but tax increases, and elimination 
of the payroll tax cut, and numerous other things which 
collectively according to the CBO are creating quite a bit of 
headwind for the economy.
    Now I fully realize the importance of budgetary 
responsibility, but I would argue that it is not responsible to 
focus all of the restraint on the very near term and do nothing 
about the long term, which is where most of the problem exists.
    So I do not take a view on past cuts versus budget 
spending. That is really Congress' prerogative. But I do think 
that we would all be better off with no loss to fiscal 
sustainability or market confidence if we had somewhat less 
restraint in the very near term--this year and next year say--
and more aggressive action to address these very real long-term 
issues which threaten, within a decade or so, to begin to put 
our fiscal budget on an unsustainable path.
    Vice Chair Klobuchar. So having a more long-term approach 
with a long-term budget, with spending reductions as well as 
revenue changes, would be better?
    Chairman Bernanke. It is a long-term problem, and I would 
advocate looking at it from a long-term perspective. I worry 
sometimes that the 10-year window may artificially constrain 
the thinking about the appropriate horizon for budgetary 
discussions.
    Vice Chair Klobuchar. Well we are not even at the five-year 
window. So I would note again that there are many of us here in 
the Senate, including now Senator McCain and Senator Collins, 
that would like to see a budget conference committee so we can 
really work on these things and try to work them out.
    You were talking with Chairman Brady about the Fed's work. 
There have been proposals to change the Fed's dual goals of 
maximum employment and price stability to a single focus on 
price stability. How would that change the Fed's policymaking?
    Chairman Bernanke. Well first let me say that of course 
Congress sets the mandate for the Federal Reserve, and so 
Congress has the right to set the mandate of course any way it 
likes. My own personal view is that we have been able to help 
on the employment side, and that the dual mandate has served us 
well since the mid-1970s when it was first incorporated. So I 
would recommend that you stay with that. But again, Congress 
certainly is able to make that decision if it wishes.
    I would point out that even though we have a dual mandate, 
that inflation if anything is a little bit too low. Inflation 
has been very low. The dollar has been strong. We have not in 
any way failed on that responsibility.
    So I think it is consistent with our mandate and with our 
current policy to maintain price stability, and that is what we 
have been achieving.
    Vice Chair Klobuchar. In fact, do central banks in other 
countries that just have a single goal and not the dual 
mandate, do they have a better track record in terms of 
inflation and other things?
    Chairman Bernanke. No, I don't think so. I think in 
practice they do respond to cyclical conditions, as well as to 
inflation. That is certainly the case in a number of major 
central banks. But again, I think our inflation record is as 
good as really any major central banks. So it has not really 
been a sacrifice in that respect.
    Vice Chair Klobuchar. Last month we held a hearing here 
examining the persistently high rates of long-term unemployment 
during the Recession and the recovery. Close to 4 in 10 
unemployed workers have been without a job for 6 months or 
longer. You made reference to it in your testimony.
    Long durations of unemployment of course have lasting 
adverse impacts on earnings, health, and even the achievement 
of the children of the unemployed. Are you seeing signs of 
rising structural unemployment? And is the high long-term 
unemployment rate a sign of structural challenges?
    Chairman Bernanke. Well it is a significant concern, and we 
are seeing evidence, for example, that employers are reluctant 
to look at people who have been out of work for a long time, 
even if they appear to be qualified, just on the assumption 
that if you have not had a job for six months there must be 
something wrong with you.
    Vice Chair Klobuchar. Actually, the former advisor to Mitt 
Romney, who spoke here, who did a very good job, talked about 
that as a scar on these workers; that it is so difficult for 
them to go out there with this record at this point.
    Chairman Bernanke. That's right. So we think at this point 
that this is not an irreversible problem. But we are concerned 
about the long-run effects on employability of people who have 
been out of work for a long time. And if they are employed 
again, what will their wages be? Likely much lower.
    Vice Chair Klobuchar. Is the Fed equally able to address 
cyclical and structural unemployment? Or are structural 
unemployment problems different, and are they better addressed 
through job training, education, things we should be doing in 
Congress?
    Chairman Bernanke. Monetary policy--and this again relates 
to my answer to Chairman Brady--is not able to address long-run 
employment issues very well. I mean, our goal is to address 
cyclical unemployment primarily.
    That being said, cyclical unemployment that lasts long 
enough becomes structural unemployment as people lose skills 
and so on, and that is one reason for the urgency of trying to 
get people back to work as quickly as possible.
    Vice Chair Klobuchar. I mentioned how low interest rates 
have helped spur the economy by promoting investment by 
businesses and households, and low mortgage interest rates have 
helped with this growing housing market for the first time in 
many years, but lower interest rates as you and I discussed 
have also hurt older Americans who live off fixed incomes and 
are relying on the safe return they can get from the savings 
they keep in government bonds.
    Could you talk about the impact you think low interest 
rates are having on U.S. households?
    Chairman Bernanke. Well generally I think that low interest 
rates are helping households. I am very aware of the return 
issue you just mentioned, and I will come back to that in just 
a second. But it is also true that low interest rates are 
making it easier for people to buy homes, are increasing the 
price of homes, are increasing construction jobs and other jobs 
related to housing, have supported automobile purchases, and 
manufacturing, and are generally adding both to employment and 
to the wealth of Americans. And so in that respect I think that 
this is very much a Main Street policy. That is certainly our 
intention.
    With respect to savers, savers have many hats. They are 
workers. They may own a small business. A healthy economy helps 
them in those capacities. And as I said in my testimony, what 
we would like to do is get higher returns in a sustainable way.
    A weak economy will not produce high returns. In Japan, for 
example, interest rates have been 1 percent or lower for 15 
years. The only way to get interest rates up is to get the 
economy growing again so that returns will be adequate, not 
just for fixed income instruments but for other kinds of assets 
as well.
    Chairman Brady. Thank you, Vice Chairman. The time is 
expired. Mr. Campbell is recognized for five minutes.
    Representative Campbell. Thank you, Mr. Chairman, and Mr. 
Chairman.
    You mentioned in your opening remarks about financial 
stability concerns driven by the quest for higher yields, and 
some of the risks that that could cause given the low yields in 
fixed-income instruments.
    Has your concern about these financial stability concerns 
increased recently?
    Chairman Bernanke. I would say that it has increased a bit. 
We have greatly increased our monitoring and our attention to 
these issues, and we pay very close attention to essentially 
all asset classes and all major types of financial 
institutions, even those we don't regulate. We are trying to 
ascertain both whether there is a sign of frothiness or bubbles 
and, moreover, what exposure there is in the sense of high 
leverage or other kinds of vulnerabilities that would mean that 
if a frothy asset price were to reverse, what implications 
would that have for the broader economy.
    So we are paying close attention to that. And we are doing 
our best, both through monitoring but also through our 
supervision/regulation/coordination with other agencies and so 
on to address these problems. Some of these issues were 
discussed in the FSOC's annual report, which Secretary Lew has 
been testifying about.
    So this is an issue, and it is something that we take into 
account. As was mentioned in the statement, we look at the 
costs and the efficacy of our program. And I think the most 
significant cost is probably financial stability concerns.
    On the other hand, it is a very difficult tradeoff because, 
as I mentioned, a weak economy means lower interest rates, 
which creates some of the same problems. And, more over, a weak 
economy means worsening credit quality, for example. And that 
too has financial stability implications.
    So there are tradeoffs and difficult judgments to make. But 
I just want to assure you that we are quite aware of this issue 
and are watching it very carefully. And it does factor into our 
thinking about the appropriate amount of accommodation and the 
appropriate exit strategy.
    Representative Campbell. Speaking of exit strategy, 
yesterday Federal Reserve Bank President William Dudley said 
that the Federal Reserve should consider holding on to 
mortgage-backed securities until maturity rather than selling 
them at whatever point an exit strategy might be necessary.
    Maybe I read wrong, but I thought I heard in your responses 
to Chairman Brady's questions that perhaps you agree with that 
viewpoint? And if so--because when the Fed entered the QE a 
couple of years ago that was not the plan for the exit 
strategy. The plan for the exit strategy was to begin selling 
these securities at some point.
    Where are you? Where is the FOMC on this?
    Chairman Bernanke. Well, you are correct that we have not 
updated the exit strategy we put out two years ago, which 
included sales of MBS. And as I said, we've not done that yet 
and so the Committee has not officially communicated our plans 
there. But I will say that we have done a lot of work on this, 
and I personally believe that we could exit without selling any 
MBS because most of them will run off in a reasonable period.
    But that decision has not yet been taken, and we will 
certainly let people know it when it is taken.
    Representative Campbell. If you do that, aren't you subject 
to an argument that that is outright monetization, in that that 
debt will never have been sold to the public effectively? That 
you are increasing the monetary base this way?
    Chairman Bernanke. No, because monetization means that we 
permanently finance the government using money. What we plan to 
do is ultimately to get our balance sheet back down to a more 
normal level, and, in particular, to get excess reserves which 
are currently nearly $2 trillion back to a more normal $25 
billion or so at some point. It seems like the likely outcome 
there.
    My point is that we can do that by allowing assets, and 
particularly MBS, simply to run off and mature, rather than 
selling them. Either way, it gets them off our balance sheet.
    Representative Campbell. In my final 45 seconds here, Bank 
of Japan yesterday reiterated their QE, if you will, and there 
is significant buying. The yen has been depreciating about 5 
percent against the dollar. How do you see this in terms of the 
potential currency war, the race to the bottom, our QE, their 
QE; are all world central banks leaning towards trying to--in a 
war here of depreciating currencies?
    Chairman Bernanke. The G-7 has given a statement with which 
we agree, which is that monetary policies which are directed 
primarily at the domestic economy and are not specifically 
designed to affect relative exchange rates, are acceptable 
because whatever effect they may have on exchange rates they 
also affect domestic demand in Japan which is good for the 
global economy because it creates more trade and more activity 
around the world.
    So we are supportive of Japan's policies, and I would make 
two observations. One is that under their current plan the Bank 
of Japan's balance sheet as a share of GDP will be three times 
larger than the Fed's. Just to give you a sense of proportion.
    And secondly, though, that the actions they have taken seem 
to be having fairly dramatic effects both on financial markets 
but also on--so far as we can tell--on some aspects of the real 
economy. And I take that as a bit more evidence that these 
policies do have effects on the economy.
    Representative Campbell. Thank you.
    Chairman Brady. Thank you.
    Representative Delaney is recognized for five minutes.
    Representative Delaney. Thank you, Chairman Brady.
    And thank you, Chairman Bernanke, not only for your 
leadership, which was really incomparable across the financial 
crisis in particular, but also for your testimony today which I 
thought was very well crafted in terms of laying out the limits 
on the economic recovery we can see absent certain actions from 
Congress and the Administration.
    In other words, the cost of this inaction is not nothing, 
and we are seeing that in the results in the economy. And it 
seems to me you were fairly specific with the two things we 
should do.
    The first thing is we should focus on the long-term fiscal 
challenge--the years, what I'll call 2011 through 2020 
challenges--which can only be addressed through appropriate but 
comprehensive reforms to our entitlement programs, and reforms 
to our tax systems.
    But then also in the short term, to be more intelligent 
about the cuts that we make, about our tax policy, and about 
the investments we make as a country.
    And then, absent our doing that, you face challenges, and 
the country faces challenges. Your challenges are you have to 
continue to use monetary policy to make a difference against 
unemployment.
    And so, while I agree with Chairman Brady that monetary 
policy has limits, it seems to me its limits have to always be 
defined in the context of what else is going on and what other 
actions are taken.
    In other words, the limits I would think of your monetary 
policy would be different if Congress was acting in a different 
way. And so my question really ties into what Senator Klobuchar 
was talking about with employment.
    Because if we deconstruct our employment challenges between 
cyclical unemployment and structural unemployment, how do you 
think about the effects of monetary policy? Obviously monetary 
policy can be more responsive to cyclical unemployment than it 
can to structural unemployment, which requires policy 
initiatives--true long-term policy initiatives it seems to me--
how do you think about the target for unemployment in light of 
what you are seeing between cyclical unemployment and 
structural unemployment?
    Chairman Bernanke. Well, to respond to your first comment, 
I think a more balanced monetary fiscal mix would be better. 
Monetary policy cannot offset what is happening in the fiscal 
sphere, and it would be better if there was a more equal burden 
sharing between the different parts of the government in that 
respect.
    It is very difficult to assess exactly what the long-run 
natural, or structural rate of unemployment is. As I said 
before, for the most part the Federal Reserve cannot influence 
the long-run structural rate of unemployment except insofar as 
cyclical unemployment becomes structural unemployment. So we 
are focused primarily on our estimates of cyclical 
unemployment, and, in particular, our forward guidance gives a 
way station of 6.5 percent which is a point at which we will 
consider beginning the tightening process. That does not mean 
we think that is the lowest rate that can be achieved, but we 
have to begin a process before we get to that lowest rate or 
else we will risk overheating the economy.
    We have a protection, which is a second condition, which is 
that if we see inflation beginning to rise, which would suggest 
that structural unemployment is higher than we estimate, then 
we would perhaps raise rates earlier. So that is how we protect 
ourselves.
    Representative Delaney. And then as we think about the 
unwinding question, and if we look at some of the external 
factors that we are observing--rates obviously low, as we all 
know; markets quite strong without any observation that there's 
a bubble because price-to-earnings ratio, et cetera, are at 
historical averages; corporate balance sheets in very good 
shape; consumer balance sheets in much better shape than 
they've been for a long time; opportunity to have low-cost 
energy over the long term--if we were to actually do something 
significant in terms of the fiscal condition of the country, in 
your opinion how much would that improve the fundamentals 
around employment that would allow you to have more flexibility 
in your ability to unwind?
    So if a grand bargain were to happen, how much greater 
flexibility do you think that provides you?
    Chairman Bernanke. Well, you addressed in that last comment 
the point I wanted to make. Which is, I view this as a two-
handed thing, a two-part policy. Which is, on the one hand 
slowing the pace of tightening in the very near term, but at 
the same time doing things that will create greater confidence 
about fiscal sustainability in the long run.
    I think that combination would be confidence-inspiring in 
the public and markets. It would help strengthen the economy 
certainly. And it would take some of the burden off of monetary 
policy. And I agree with Chairman Brady that monetary policy is 
not omnipotent. We are pushing pretty hard at this point, and 
there are a lot of headwinds. And it would make it certainly 
easier for us to unwind.
    Representative Delaney. Great. Thank you, Mr. Chairman.
    Chairman Brady. Representative Hanna is recognized for five 
minutes.
    Representative Hanna. Thank you, Chairman.
    Chairman Bernanke, all jobs are not equal. In fact, in the 
last 20 or so years about 98 percent of the jobs that have been 
created have been service-oriented jobs, not STEM--science, 
technology, engineering, and math.
    We have a skills gap. We have a growth gap. We have what 
seems to be an intractable employment gap, a shrinking middle 
class, and on top of all of that a lack of real growth in real 
income.
    In a speech you gave the other day at BARD--and I don't 
attribute this to you, you are attributing it to someone else--
you said: The IT revolution, as important as it surely is, 
likely will not generate transformative economic effects that 
flow from the earlier technological revolutions. As a result, 
these observers argue, economic growth and change in coming 
decades will likely not be noticeably slower than the pace to 
which Americans have become accustomed.
    Apparently Dr. Kevin Hassett agrees with you, or agrees 
with that statement of the American Enterprise Institute. 
Though the structural factors such as mismatch between skill 
sets, arguably STEM, that the employed have in the skills that 
employers need also plays a significant role, which leads us 
back to education.
    My question is in three parts. How much of today's 
unemployment is cyclical, and how much is structural?
    If a significant portion of today's unemployment is 
structural, then how does a highly accommodative monetary 
policy that the Fed is pursuing boost employment, cyclically or 
structurally over the long term?
    And if a significant portion of today's unemployment is 
structural, do we expose ourselves to significant risk of price 
inflation in the near term by continuing a highly accommodative 
monetary policy until the employment rate drops below 6\1/2\ 
percent?
    Chairman Bernanke. So on the first question, how much is 
structural, again nobody knows precisely. It has to be 
estimated. The FOMC makes its own estimates, and the numbers we 
have come up with are between 5.2 and 6 percent.
    So if we have 7\1/2\ percent unemployment now, we are 
saying there's still probably a couple of percentage points of 
cyclical unemployment which can be addressed by monetary 
policy. The rest probably cannot be addressed by monetary 
policy, except to the extent that cyclical unemployment left 
untreated will become structural unemployment.
    In terms of longer run growth, the comments that you read 
were pessimistic comments about the IT revolution. Let me be 
clear that I laid out this view that, as you mentioned, of 
pessimism, and I was agnostic about that. I think that there 
are a lot of differences between the world today and the world 
in the 19th Century when other inventions were being made.
    And what is important about the difference, the most 
important differences have to do with the amount of research 
and development funding, the skills available, the markets that 
make it very profitable to be first to market with a new 
innovation. And since research, development, and technological 
progress are the engines of long-term growth, I think that as a 
country we need to think about our policies in that area and 
try to do what we can to address shortages of STEM workers, 
mismatches, assure that talented people from all over the world 
can come to the United States and participate in technical 
innovation.
    So I think this is a very important area, and I am the 
first to admit that it is outside the realm of what the Fed can 
do. It is really something that only Congress can address.
    Representative Hanna. Thank you very much. I yield back.
    Chairman Brady. Thank you.
    Senator Sanders is recognized.
    Senator Sanders. Thank you, Mr. Chairman.
    And, Mr. Chairman, thanks for being with us. There are 
three or four issues that I have been working on that I would 
appreciate your commenting on.
    Number one, I continue to worry about the growing 
inequality of wealth and income in this country. We have the 
absurd situation where the top 1 percent now owns 38 percent of 
the wealth in America. The bottom 60 percent own 2.3 percent. 
And in the last recent years, almost all new income went to the 
top 1 percent.
    Now as part of that, I also worry about concentration of 
ownership, particularly with what is going on in Wall Street. 
We bailed out the large financial institutions because they 
were too big to fail, and yet all 10 of them today are larger 
than they were when we bailed them out.
    There is a growing feeling among many economists, including 
the president of the Dallas Fed, that maybe the time is now to 
start breaking up these large financial institutions, the top 
six of which have assets equivalent to two-thirds of the GDP of 
the United States of America.
    So I would like you in a second to comment: Is now the time 
to break up large financial institutions which have an 
unbelievable amount of assets and are, in my view, in danger at 
some point in the future of once again being in a position of 
having to be bailed out?
    Issue number two deals with the structure of the Fed, laws 
that the Fed did not make but Congress made. As you know, we 
have 12 regional Feds, Reserve Banks, which have 9 members 
each. Many of my colleagues may not even know this, but as a 
result of Congressional law: of the 9 members, 3 come from the 
financial institutions themselves, 3 others are appointed by 
the financial institutions, and 3 come from appointments by the 
Fed.
    We have had absurd situations where Jamie Dimon, the CEO of 
the largest financial institution in America, sat on the New 
York Fed whose job is supposedly to regulate Wall Street, and 
many of us think that is the fox guarding the henhouse.
    I will be introducing--reintroducing--legislation to end 
what I consider to be an absurdity of having 6 out of 9 members 
of Regional Feds coming from the financial institutions.
    The last question that I would like to ask is the fact that 
from the end of 2007 until April of 2013, financial 
institutions have increased the amount of excess reserves held 
at the Fed from $1.5 billion to more than $1.7 trillion. And 
one of the reasons why that has occurred is that, since 2008 
the Fed has provided interest to financial institutions to keep 
this money at the Fed.
    So what we see is huge financial institutions parking huge 
amounts of money at the Fed getting a small amount of interest. 
I think it would be much more productive for our economy if 
that money was out going to small businesses and into the 
productive economy, rather than sitting at the Fed.
    And the legislation that I am working on would address this 
problem by prohibiting the Fed from providing interest to banks 
on their excess reserves, and require the Feds to impose a 2 
percent fee on the excess reserves of the largest banks in 
America, those with more than $50 billion in assets. In other 
words, get the money out rather than parking it in the Fed.
    So those are three issues that I am working on that I would 
love to have your comments on. Thank you, very much.
    Chairman Bernanke. Senator, on the last one, the amount of 
excess reserves in the banking system is completely out of the 
control of the banks. The Fed puts those reserves in the 
system. The banks can pass them around from each other, but the 
total is just given. They can't do anything about that. It's 
like a hot potato.
    The quarter percent interest that we're paying them, which 
we're doing for technical reasons, is not preventing money from 
going out to small business or any other business. After all, 
CNI loans are paying about 4 percentage points now. Prime rate 
is I think about 3\1/2\. So if they can find--if banks can find 
attractive loans, they are certainly going to make those loans 
rather than hold the excess reserves.
    In addition, getting rid of the interest in excess reserves 
capacity would force us, when we come time to tighten, it would 
force us to sell assets very quickly in a very disruptive way 
instead of using that tool to tighten interest rates and avoid 
inflation. So it would be very counterproductive. And we can 
discuss that I'm sure at more length.
    Senator Sanders. Yes. Breaking up the large banks?
    Chairman Bernanke. That is a very complex question. I think 
that many of the suggestions to break them up have either 
involved relatively small changes, or a form of Glass-Steagall. 
I think Glass-Steagall is not the solution because, as we saw 
in the crisis, investment banks, commercial banks separately 
got into serious trouble.
    I would support--so I think that we are doing a lot of 
things, which I don't have time to go through, through Dodd-
Frank, through Boswell III, through Orderly Liquidation 
Authority, and other authorities to move in the right direction 
towards addressing too-big-to-fail.
    And as I have said, if we do not feel after some additional 
work here that we have addressed that problem, I would 
certainly be supportive of additional steps. I think the best 
direction is probably requiring the largest firms to hold more 
capital proportionally, and that would force them both to be 
safer, to have a more level playing field, and if their 
economic returns did not justify the higher capital costs to 
induce them to break themselves up.
    Senator Sanders. Structure of the Fed, the Regional Fed.
    Chairman Bernanke. Structure of the Fed, I am very open to 
discussing those with you. I just want to assure you as 
strongly as I can that the primary role of the board members 
is, first, to give us market insight, business insight, let us 
know what is going on in the economy.
    They are also helpful on some operational issues. But there 
is a complete and utterly impermeable wall between the board 
members and any supervisory matter. And I assure you of that. 
And so there really is no conflict.
    That being said, I can see why you might want to have 
different people represented on that board--more union members, 
for example, and I think that is a perfectly reasonable thing 
to talk about.
    Chairman Brady. Thank you. All time has expired.
    Representative Paulsen.
    Representative Paulsen. Thank you, Mr. Chairman.
    Chairman Bernanke, I wonder if you can just comment on what 
are the primary factors that you are monitoring to gauge the 
economic risks of your current policies? In other words, given 
that the effectiveness of Federal Reserve policy has been at 
least somewhat muted over the last few years by a strong 
deleveraging cycle, how important do you consider the expansion 
of bank lending, or the results of the Fed's own senior loan 
officer opinion survey as a gauge of future inflation?
    And also what other factors, other than just pure inflation 
measures, do you look at as potential precursors to an 
expansion of economic risks due to these policies?
    Chairman Bernanke. Well we have seen a number of things 
which are suggestive that the effects of the financial crisis 
are being mitigated to some extent.
    As you mentioned, consumers are deleveraging. Their debt 
burdens and their interest burdens are going down, and their 
balance sheets are healthier than they have been. A smaller 
number of people are underwater on their mortgages, for 
example.
    Banks are much healthier. In our regulatory role, we have 
been doing these stress tests and we found that the largest 
banks have now roughly doubled the amount of capital that they 
had four years ago. And as that survey you mentioned indicates, 
their willingness to lend is improving in many areas, not in 
all. There are still issues in mortgage lending. But credit 
availability is improving.
    So a number of factors related to the financial crisis do 
seem to be moderating, and that is hopeful for further progress 
in the real economy.
    On inflation, you know, we use econometric models. We look 
at market data. We look at commodity prices, commodity futures 
prices. We simply don't see at this point much sign of 
inflation. In fact, inflation is a little bit on the low side 
historically.
    And if you look at market indicators, the very fact that 
the United States can borrow at 30 years at under 3 percent is 
indicative of the idea that investors are not anticipating a 
major inflation problem in this country.
    So we are very attentive to that. That is half our mandate. 
But at the moment inflation, if anything, seems a little bit on 
the low side.
    Representative Paulsen. And knowing that's the case, why do 
you think businesses are not investing so much in the economy? 
Interest rates are at really low rates, especially long-term 
interest rates. And so I don't talk to any businesses, again in 
Minnesota, that are saying interest rates need to be lower for 
us to invest. But at what point--you know, can you comment, 
like whether it's the tax increases. You talked about the 
payroll tax in your testimony expiring. You talked about the 
tax increases maybe at the end of the year having an effect.
    But at what point are the tax hikes, do you believe, on 
high-end earners or as a part of the new taxes associated with 
the implementation of the Affordable Care Act, and in Minnesota 
Senator Klobuchar and I, we both see the effects of the Medical 
Device Tax, at what point do you think those taxes are having 
an impact now in terms of a drag on the economy?
    Chairman Bernanke. Well firms had been investing in hiring. 
In a way, that is consistent with the overall slow pace of 
growth. I mean, they are not seeing the rapid growth that would 
induce them to expand capacity quickly.
    Given the amount of growth that they see, they have been 
investing, and employment growth, as unsatisfactory as it is, 
is probably a little stronger than you would have guessed given 
how much GDP growth there is, how much output growth there is.
    Firms do not respond very strongly to interest rates 
directly in their investment decisions. A lot of literature 
suggests that. But they do respond to final demand. How many 
orders they have. And so indirectly the way monetary policy 
stimulates capital investment is by generating more consumer 
demand through the fact that lower interest rates do affect 
consumer spending, or raise house prices, or other asset 
prices. And we have been seeing the last few reports on 
consumer spending have been surprisingly strong, and we have 
seen improvement.
    Just the other day we saw a very substantial improvement in 
consumer optimism. So that is where the monetary policy's best 
channel for affecting investment. If firms see more demand 
coming in the door, then they will expand capital and labor.
    Representative Paulsen. And do you see a drag on the 
economy with some of the tax hikes that have happened at the 
end of the year?
    Chairman Bernanke. I mentioned a list of things, including 
tax increases, elimination of the payroll tax cut, other 
things. I am not pronouncing on the desirability of any one of 
those specific policies. I am just saying, taking them all 
together they have the effect of being a drag on economic 
growth, perhaps more than necessary.
    Representative Paulsen. I yield back, Mr. Chairman.
    Chairman Brady. Thank you. Senator Coats is recognized for 
five minutes.
    Senator Coats. Thank you, Mr. Chairman.
    Chairman Bernanke, sometime earlier you and I had a 
conversation and I asked you the question about why the United 
States was doing relatively better than its neighbors across 
the seas than others. And you said, well, it's because we have 
the best-looking horse in the glue factory.
    I am wondering where that horse is now. Is our horse still 
in the glue factory? Is he in the pasture just outside the glue 
factory? Or is he back on the farm?
    Chairman Bernanke. Well it is clearly the case that we are 
not yet where we want to be. We have 7\1/2\ percent 
unemployment. We have a very low ratio of employment to 
population, and a lot of people leaving the labor force. GDP 
growth has exceeded now where we were before the crisis, but we 
are still well below the trend of growth.
    That being said, I was struck at the latest meetings of the 
IMF and the G-20 in Washington recently when the IMF economists 
were talking about a three-speed global recovery, by which they 
meant the fastest growth still taking place in some of the 
emerging markets like China, but the United States now breaking 
away to some extent from the pack--notably from Europe and 
Japan--and we have had better performance.
    In the case of Europe, it was about less than four years 
ago that the U.S. and the Euro area had the same unemployment 
rate. Today, our unemployment rate is 7\1/2\ and the European 
unemployment rate is above 12. So we really have done better 
than some other countries, for a variety of reasons, not just 
monetary policy or any single factor.
    But we are moving in the right direction but, you know, I 
don't think we can be yet satisfied given where the labor 
market is, and given that we still have unused capacity in this 
economy.
    Senator Coats. You cautioned in your statement that too 
much restraint too quickly continues to be the headwind that we 
may not want to get into, but we have not addressed our longer 
term problems.
    Then you mentioned that you thought the 10-year window 
might be too short to do that. Some of us are looking now at 
something like more than 30 years, relative to where our growth 
will be relative to our debt. And particularly the enormous 
spike in mandated mandatory spending and the impact of that on 
interest rates and the economy and so forth.
    You suggested before that you have used a lot of the tools, 
most of the tools that the Fed has to get us through this 
period of time, but ultimately that responsibility falls here 
and with the Administration. And we have yet to I think summon 
the political will to address that long-term problem.
    My take is that that begins in earnest in a relatively 
short period of time, maybe two or three or four years. And so 
to me it would make sense that we begin to address it now.
    Chairman Klobuchar Vice Chair mentioned some of that 
earlier. Could you expand a little bit more on that about what 
you think our responsibility is? Because I am starting to hear 
things like the Fed is buying us time, so therefore we do not 
need to take action right now.
    Is the Fed being an enabler for an addiction that Congress 
cannot overcome?
    Chairman Bernanke. Well the Fed is doing what Congress told 
it to do, which is we are doing our best to try and promote 
maximum employment and price stability.
    Congress needs to take a longer view. It is true that 
interest rates are quite low today, and therefore the interest 
burden today is quite low. But when the CBO scores budget plans 
out for a decade or two decades, it assumes that interest rates 
are going to rise, which we hope they will because that will be 
a suggestion that the economy is recovering and coming back to 
normal.
    So in looking at those 5, and 10, and 20 year budget plans, 
they assume higher interest rates. And you are going to have to 
deal with higher interest rates at some point, we hope, as the 
economy strengthens. And so I very much support your suggestion 
of having a longer horizon.
    I would note the 1983, or whatever it was, Social Security 
Commission that my predecessor chaired, that the reforms that 
were introduced then are still now being phased in. So 30 years 
later. So for some of these changes with very long lead times, 
they will make them much easier to achieve.
    Senator Coats. And lastly, your concern about the low 
amount of interest return and the risk taking, or the reaching 
for yield, is this creating another potential bubble? There is 
a big surge in the market here that seems to be not in force by 
underlying fundamentals, but I would like your take on that.
    Chairman Bernanke. Well we are watching it carefully, and 
of course nobody can ever say with certainty what an asset 
price should be. But to this point, our sense is that major 
asset prices like stock prices and corporate bond prices are 
not inconsistent with the fundamentals.
    For example, it was mentioned earlier that price/earnings 
ratios and the like are fairly normal in the stock market.
    In addition, in thinking about risk to financial stability, 
you also have to look at things like leverage, credit growth, 
and other indicators that suggest not only is there some 
mispricing going on, but that mispricing has the possibility of 
greatly damaging the broader financial system. And we are not 
seeing that at this point.
    So at this point, of course it is always again dangerous to 
predict, but our sense is that those issues are still 
relatively modest. But they require very close attention, and 
we will continue to do that.
    Senator Coats. We are glad you are doing that because we do 
not want a repeat of what happened before.
    Chairman Bernanke. Absolutely not.
    Senator Coats. Thank you, Mr. Chairman.
    Chairman Brady. Thank you. Representative Sanchez is 
recognized for five minutes.
    Representative Sanchez. Thank you, Mr. Chairman.
    And, Mr. Chairman, thanks again for being before us. I 
think we have had many years when you were the President's 
economic advisor, and now as Chairman.
    So I know that now you are sitting as the Chairman, but I 
have questions overall about our economy and I would really 
like to get your idea on something in particular.
    I remember when Chairman Greenspan was before us, and I 
talked to him about--I spoke to what I saw at the time, a 
frenzy in the housing market, and right around the time he 
called it just a ``frothing'' in a particular set of markets. 
And of course since having left said, ``I completely missed 
what was going on.''
    So I want to go back to housing, because I think housing is 
such an incredible piece of the American's budget, the American 
family's budget, their sense of wealth creation. Because in 
many ways it is the first step, and it is traditionally what we 
have used to make small businesses, or to put kids through 
college, et cetera.
    So this is what I see going on now. Around the Nation in a 
lot of markets, in particular in California, housing prices are 
going up. So everybody is cheering and everything. But what I 
see is foreign money coming in. Money is being bought as 
investments. Banks sloughing off large amounts of homes and 
putting them into hedge funds. These funds are holding on to 
these and renting them out, anticipating at some point I'm 
sure, 5 or 10 years down the road, to get appreciation out of 
those assets.
    Rental markets are tightening. Rents are going through the 
roof. And your average working family, at least where I live, 
is not able to buy a home because of these, if you will, 
``haves'' who have the money and the cash to come in and buy 
the home, and in return not flip it as we saw in the last 
speculation housing market, but actually hold it at a higher 
rate for rent to these families who now are becoming, unless we 
change something, permanent renters.
    So the housing market is getting better, but not for the 
middle class or the higher lower income class. And it's almost 
chaining them, I would say, into the inability to find their 
way to home ownership.
    So do you see that going on? Do your people see that going 
on in the different markets? And secondly, what can the 
Congress do to ensure not the other way where we went wrong 
that too many people who should not have been buying in bought 
in, but that what we would normally call the middle class, and 
people who should be attempting to buy a home, not get caught 
in this cycle of ``I didn't get in and I didn't get a home''?
    Chairman Bernanke. Well just a few comments.
    First, with prices having fallen about 30 percent and with 
very, very low mortgage interest rates, affordability right now 
is the highest it has been in decades. So there are people who 
are able to buy now who could not have bought under other 
circumstances--although mortgage lending, I agree, is tight for 
the people in the lower part of the cycle distribution. I agree 
with that.
    On the rent side, many people who have lost homes or 
otherwise not become home owners, stopped being homeowners, 
have gone to renting. And rents have gone up, as you said. So 
it is probably a good market response that houses that were 
previously owned are now being available for rent. That is 
adding supply to the rental market and will probably take some 
pressure off of rents and reduce the rents that people have to 
pay who are forced to rent.
    Representative Sanchez. Well excuse me a minute, Mr. 
Chairman. Those people who had mortgage rates who were paying 
mortgages and, you know, we know that a good amount of these 
people lost their job, and that is why they were not able to 
continue their payments. But in most cases, what I see in my 
markets are lower mortgage payments that they were making, 
versus higher rental payments that are now being caused again 
because the family is not getting credit, or the family cannot 
get credit, or even those who qualify with credit, you know, 
cash offers in particular foreign markets, are, you know, 
wiping them off from being able to own them.
    So what I see for a family unit is a higher cost of 
housing, effectively, than what they had pre this whole 
problem.
    Chairman Bernanke. Well again, if you can get a mortgage--
which I understand your question--the payments are low, and 
affordability is high. I agree with you--if this is your 
question, I agree with you that mortgage lending is still too 
tight.
    There are a number of reasons for that: excessive 
conservatism on the part of the banks; some uncertainty about 
regulation. You know, there is still work to be done to clarify 
the securitization rules, for example. The need for GSE reform, 
and other things. Fear of put-backs that the banks still have.
    So I think over time, particularly as house prices go up a 
bit, that mortgage lending will become a little bit more 
accessible to a broader range of people. But right now it is 
still relatively tight. So I agree with that.
    Chairman Brady. Thank you, Chairman. All time has expired. 
Senator Lee.
    Senator Lee. Thank you very much, Mr. Chairman.
    And thank you, Chairman Bernanke. Mr. Bernanke, does 
quantitative easing on the margin tend to encourage private 
sector debt? Or does it at least tend at the margin to 
discourage private sector deleveraging?
    Chairman Bernanke. Well on the one hand with low interest 
rates, we do want people to spend normally. We want them to be 
able to afford a house or a car, and that is part of what puts 
the economy back to work.
    But on the other hand, as the economy strengthens, jobs are 
created. They get more income. And interest rates are lower. So 
those factors overall help people deleverage. And as you look 
at the data, you will see that consumers have deleveraged quite 
a bit over the past few years.
    Senator Lee. Does quantitative easing facilitate or 
otherwise promote the accumulation of government debt?
    Chairman Bernanke. By whom?
    Senator Lee. At least at the margin?
    Chairman Bernanke. By private citizens?
    Senator Lee. No, no. Does quantitative easing have an 
impact on the accumulation of government debt? Does it at least 
at the margins make it easier for government to acquire a lot 
of debt?
    Chairman Bernanke. To issue a lot of debt, you mean?
    Senator Lee. Yes.
    Chairman Bernanke. Well it does keep interest rates a bit 
lower in the short term, although again what we are trying to 
do is get a stronger economy which will support higher interest 
rates going forward.
    And as I have mentioned, any kind of budgeting process that 
looks ahead even more than one year has to take into account 
the CBO's estimates that interest rates will be rising over the 
next few years and factor that in when you make your budgetary 
calculations.
    So I don't see how raising interest rates prematurely and 
causing the economy to relapse back into recession would be 
helpful to fiscal policy. I think it is important for Congress 
to look at the 5- and 10-year window and look at how interest 
rates are expected to move, and make decisions based on that.
    Senator Lee. To the extent quantitative easing does have 
these impacts that I've described, it does so basically by way 
of encouraging consumption. Isn't that sort of the aim of it?
    Chairman Bernanke. Right. There's not enough demand in the 
economy, so it does encourage consumption, yes.
    Senator Lee. Okay. Was net equity extraction from homes and 
increased leverage a problem the last time the Fed had very low 
rates for a really prolonged period of time, let's say in the 
mid-2000s?
    Chairman Bernanke. There was a lot of equity extraction 
from homes during that period. How much was due to the Fed 
policy, how much was due to lax lending policies, how much was 
due to regulation, is a debated question.
    Senator Lee. And did the excessive leverage, whatever its 
cause, tend to exacerbate the crisis that arose in 2008?
    Chairman Bernanke. Yes.
    Senator Lee. Did the Fed identify the weakness in housing 
in the mid-2000s and react to it?
    Chairman Bernanke. Well, we saw--we saw, and this goes back 
to my discussion with Representative Sanchez--we saw that the 
relationship between house prices and rents was very--that 
house prices were very high relative to rents. House prices 
were historically very high.
    And so therefore it was always considered a possibility 
that house prices would come down. And in fact when I became 
Chairman in 2006, house prices were already coming down. So, 
yes, we certainly saw that as a possibility. What we did not 
anticipate was how much damage that would do to our core 
financial institutions, as it did. And that led to the crisis.
    Senator Lee. Yes. These things are hard to anticipate.
    Chairman Bernanke. Yes.
    Senator Lee. Would it be fair to say that debt can create 
risks that are, by their very nature, difficult to anticipate? 
And once they arise, also are difficult to address?
    Chairman Bernanke. Excessive leverage can create 
instability; that's correct. But as I said, what we are seeing 
in households, and particularly in corporations, is a lot of 
deleveraging. Much stronger balance sheets. More equity in the 
case of banks and firms than we saw prior to the crisis.
    Senator Lee. So what would you say to those who might be 
concerned that we could be facing a similar crisis coming up as 
we saw in the mid-2000s?
    Chairman Bernanke. Well first, again the indicators like 
asset prices, house prices, leverage, credit growth, all those 
things look very different today than they did before the 
crisis.
    Secondly, there is a whole lot of reform going on. Very bad 
mortgages were being made, as you know. And there has been a 
considerable amount of tightening up of the laws protecting 
consumers.
    There have been considerable increases in the amount of 
capital that banks have to hold, and so on. So a lot has been 
done. And I am not saying that this work is completely done, 
but we have certainly done a lot to make the system more 
resilient.
    Senator Lee. Thank you very much. I see my time has 
expired. Thank you, Chairman Brady.
    Chairman Brady. Thank you. Senator Toomey is recognized for 
five minutes.
    Senator Toomey. Thank you, Mr. Chairman, and thank you, 
Chairman Bernanke for joining us again.
    Just a quick sort of follow up on the nature of very 
accommodative monetary policy. Isn't it true as a general 
matter that very accommodative monetary policy has the 
tendency, to the extent that it is successful at all, to bring 
economic activity that would otherwise occur in the future 
closer to the present day, rather than to increase the total 
amount of economic activity that occurs over the long run?
    Chairman Bernanke. To some extent that is correct. But we 
have a situation now where, for example, home building is well 
below what can be sustained in the longer term. And so the more 
quickly we can get back to that more normal level, the more 
quickly our economy will be at something close to full 
employment.
    Senator Toomey. Be that as it may, I just think it is an 
important point to consider that accommodative monetary policy 
is not really a net growth strategy. It probably has a bigger 
impact on the timing of economic activity than the total 
amount.
    Chairman Bernanke. We are trying to mitigate the effects of 
the Recession, but we cannot affect long-term growth very much. 
That's right.
    Senator Toomey. Right. Another point, just a quick follow 
up on Senator Coats and Senator Lee who alluded to asset 
bubbles that have occurred in the past. I think it is clear to 
virtually everyone that we had a residential housing bubble in 
the last decade, and I just worry that this extremely 
accommodative and unprecedented policy can manifest itself in 
unpredictable ways.
    And when we see the recent surge in housing prices, 
extraordinarily low yield on junk bonds, huge rally in 
equities, high agricultural land prices, it is not--as you 
point out, it is very hard to know at any point in time exactly 
what an asset ought to be worth, but it worries me that this is 
going to manifest itself in unpredictable ways.
    The last point I would just want to raise is you have 
discussed the general strategy for exiting when that day comes, 
but always with an implication that there will be this orderly 
transition. And I just know you're aware of this, but I think 
it is important to underscore that it is hard to predict how 
the markets will respond when the biggest holder of fixed-
income securities in the history of the world decides it has to 
sell them. And you might decide you have to sell them. I know 
you may decide you can just let them run off, but that may not 
be enough. And I just think there are very significant risks 
that we are taking by accumulating a portfolio of this scale.
    Do you want to just comment on that briefly?
    Chairman Bernanke. Well, I do not disagree that this is not 
easy and requires good communication. We have improved our 
communication----
    Senator Toomey. By the way, I would like to commend you for 
that. You have provided I think more transparency, more 
communication, and more guidance than the Fed has, to my 
knowledge, ever provided certainly in recent history and I do 
think that is constructive.
    Chairman Bernanke. Thank you.
    I guess I would just say that there is no risk-free 
strategy here. I mean, inflation is 1 percent. Unemployment is 
still high. So we could tighten monetary policy and address 
some of the issues that you have in mind. I think it would also 
include a big market correction if we moved very quickly and 
unexpectedly.
    Senator Toomey. Which might suggest that the reason the 
market is where it is is because of the monetary policy rather 
than the underlying fundamentals.
    Chairman Bernanke. Well, but it may be because the market 
thinks that monetary policy is creating more profits and 
growth.
    Senator Toomey. That is possible. A quick follow up to 
comments you have made in the past about the swaps push-out 
provision in Dodd-Frank. I have legislation to allow that, much 
but not all, much of that activity that is currently required 
to be pushed out to the curb back in the banks, which I think 
is a better way for financial institutions to manage risk and a 
better way for end-users to be able to use these products.
    Do you still share the view that it is a good idea to 
repeal parts of the swap push-out?
    Chairman Bernanke. Yes. The Federal Reserve had concerns 
about this prior to the enactment of the law, and we still have 
concerns about it.
    Senator Toomey. The last thing I want to mention is, there 
are August 9th, 2011, minutes of an FOMC meeting that contain 
notes on an August 1 videoconference in which there is a 
reference--and I am going to read. I will quote from a portion 
of it. It refers to, quote:
    ``Plans that the Federal Reserve and the Treasury have 
developed regarding the processing of federal payments, 
potential implications for bank supervision and regulatory 
policies, and possible actions that the Federal Reserve could 
take if disruptions to market functioning posed a threat to the 
Federal Reserve's economic objectives.''
    Of course this was in the context of the debt-limit 
impasse. So clearly there were plans regarding how to deal with 
the processing of Fed payments, for instance, and other things. 
Could you give us a sense of what those plans consist of, and 
what you can tell us about those plans?
    Chairman Bernanke. Well my memory won't be complete, but we 
looked at our systems and our ability to make payments to 
principal and interest holders. For the most part, we found 
that we were able to do that, with a few possible exceptions, 
people holding savings bonds and a few things that are not as 
easily connected to the system.
    We also had some discussion of the kind of policy we would 
have with banks--for example, discount window lending; would we 
accept defaulted Treasury; and all kinds of things that were 
contingency planning in case that this were to happen.
    What we did not do was directly engage the private sector 
for any contingency planning. We were mostly looking at our 
internal systems. We are the agent of course of the Treasury, 
and it is our job to do whatever they tell us to do. And we 
were just working through our capacity both as an agent 
managing the payment system, and also as a bank supervisor to 
deal with a possible default if the debt ceiling was not 
raised.
    Senator Toomey. Okay, I see my time has expired. Thank you, 
Mr. Chairman.
    Chairman Brady. Thank you. Former Chairman, Senator Bob 
Casey is recognized for five minutes.
    Senator Casey. Mr. Chairman, thank you. Vice Chair 
Klobuchar, thank you for making this opportunity available to 
us.
    And Chairman Bernanke, we are grateful for your presence 
here and your testimony and, I have to say, as well, for the 
work you have done to deal with a set of economic circumstances 
that we have rarely faced in American history. So you brought 
not just a lot of focus, but also a lot of passion, and we 
appreciate that.
    I really wanted to focus just on one issue. I am not sure 
it has been raised yet, but if it has I think it always bears 
even more examination. The issue is tax reform.
    If there is one area of real consensus in Washington and 
across the country, there is a lot of consensus--and here it 
happens to be bipartisan--that we have got to simplify the Tax 
Code. We have got to make it a much more workable tax system 
for individuals and for businesses; all kinds of ways to do 
that.
    The hard part is getting consensus in order to move 
forward. The good news here--I do not want to overstate this 
but it is important to assert it--is that we have had two 
chairmen, Chairman Baucus in the Finance Committee the last 
several years, and Chairman Camp, the House Ways and Means, 
working together individually and their staffs to try to tackle 
this, and processes or mechanics are underway in both places.
    For example, every Thursday in the Finance Committee we sit 
down around the table and for at least an hour or more go 
through elements of the Tax Code. That is all the good news. 
And I think it is moving in the right direction.
    The challenge is getting consensus. The question I have for 
you--and maybe one or two--the basic question is: Can you give 
an opinion, or assess the impact, I am assuming it will be 
positive but I would like to hear about this, on passage of a 
substantial bipartisan reform of the Tax Code?
    Chairman Bernanke. Well first I would just make the 
observation that such a major action taken in a bipartisan 
basis would itself be confidence-inspiring.
    I think most everybody on both sides of the aisle agrees 
that the Tax Code is extremely complex and distorts economic 
decisions in a lot of ways. So I think if it were done in a way 
that simplified it, made it more economically efficient and 
rational, I think that would be very positive. And I hope that 
you and your colleagues can make progress on that.
    Senator Casey. Is there any one part of the Tax Code that 
is of particular significance in terms of the adverse impact it 
has on either business activity or economic growth? I realize 
there may be more than one, but if there is one that you think 
is particularly difficult to manage?
    Chairman Bernanke. Well the very difficult problem you face 
is the following: Most economists would argue that an efficient 
Tax Code is one that has a relatively broad base and low 
marginal rates.
    But low marginal rates is easy, but ``broad base'' means 
restricting or limiting popular deductions and credits. So that 
is the goal. But the political challenge is to figure out how 
to do that.
    And as you know, in the income tax, for example, the 
personal income tax, the biggest deductions are housing, 
charitable, state and local government, and the health care 
exemption, which are all obviously very popular and have their 
own purposes.
    So finding a way to deal with that issue I think is the 
most challenging part but has the biggest payoff, if you can 
find ways to again broaden the base and lower the tax rate.
    Senator Casey. And I hear about it a lot, and I know we all 
do, this sense that businesses have that there are various, or 
I would say a big measure, or substantial areas of uncertainty: 
one is the Tax Code, another is the economy generally. Frankly, 
one of the areas of uncertainty is what the Congress will or 
will not do, or hasn't done.
    And it is my belief if we can get a bipartisan tax reform 
agreement, it would remove at least one element of uncertainty. 
I know my time has almost expired, and as a former Chair I want 
to be on the right side of Chairman Brady.
    [Laughter.]
    Chairman Brady. Thank you, sir. Representative Duffy is 
recognized for five minutes.
    Representative Duffy. Thank you, Mr. Chairman.
    To follow up on Mr. Casey's questioning just briefly, not 
only are we here to hopefully get bipartisan support for reform 
of our Tax Code but hopefully we will have bipartisan support 
for fair implementation of our Tax Code. But that is not this 
hearing.
    Thanks for coming, Mr. Chairman. You testified with regard 
to the need to in essence keep the spigots going with regard to 
monetary and fiscal policy; that you are going to continue to 
print money, drive interest rates down; that we should continue 
to borrow and spend on our end in the short term to help grow 
the economy and work on our debt in the long term.
    I am sure you are well aware of these numbers, but if you 
look at how much we have spent since 2008, the Federal 
Government in 2008 spent $2.9 trillion. In 2009, during the 
course of the Stimulus Bill, we spent $3.5 trillion. So the 
year of the Stimulus Bill, $3.5 trillion, a half a trillion 
dollar jump.
    This year, the CBO projects us to spend $3.4 trillion. So 
we are almost spending this year the same amount we spent in 
the year of the $800 billion Stimulus Bill. But your testimony 
today is that the cuts have been too significant. We need to 
actually spend more in conjunction with your printing.
    Could you explain that a little further for me? Why do we 
need to spend more when we are already a half a trillion 
dollars more in spending from fiscal year 2008?
    Chairman Bernanke. Well first I did not say ``spending.'' I 
talked about the whole package, which included tax increases 
and elimination of the payroll tax cut. I'm saying put all that 
together and it is a drag on the economy. Since the stimulus 
the government has been tightening its belt pretty 
significantly. I mentioned in my testimony that there are 
800,000 fewer government employees today than there were a few 
years ago. And I am not advocating. I am not here to advocate a 
major new stimulus program.
    I am simply saying that a rebalancing between a somewhat 
slower tightening in the near term, and more aggressive and 
systematic attempt to address the longer term imbalances where 
the big problems really are, I think that would be better.
    And please don't misunderstand me. I am not in any way 
denying the importance of fiscal responsibility. I just think 
it is not the best way to go about it to focus entirely on the 
short term and ignore the long term.
    Representative Duffy. And I would agree with you on that 
point. One of the problems in this town is that we see the 
long-term implications of the course that we are on. And you 
are well aware of the politics in these two chambers and with 
the White House. And you have seen our side.
    I think aggressively talking about the long-term 
implications of our aging population and the impact on 
Medicare, and that I think you would agree is the driver of our 
debt. Yes? You would agree with that, right?
    Chairman Bernanke. On the spending side, health care costs 
and aging are very important, yes.
    Representative Duffy. And what program does that spending 
come from?
    Chairman Bernanke. Medicare and Medicaid.
    Representative Duffy. Right. So you know that on our side 
of the aisle we are trying to actually reform it and make it 
sustainable. And one of the frustrations is we are not able to 
get buy-in with others to actually join us in that effort.
    It is one thing to say, listen, I don't like the 
Republicans' plan, but then the other side has to put out a 
plan that actually makes it sustainable, too. Wouldn't you 
agree?
    Chairman Bernanke. I'm sorry?
    Representative Duffy. That makes Medicare sustainable in 
the long term.
    Chairman Bernanke. We certainly want to do that, yes.
    Representative Duffy. Yes. And both sides should put out 
plans that make Medicare sustainable so they can negotiate. 
Correct?
    Chairman Bernanke. Well I don't want to get into 
negotiations, but----
    Representative Duffy. I'm talking policy-wise.
    Chairman Bernanke. From a policy perspective, yes, we want 
Medicare to be sustainable and we want the budget overall to be 
sustainable.
    Representative Duffy. And we want two sides to put out 
plans that make Medicare sustainable, right?
    Chairman Bernanke. There needs to be, obviously, some 
bipartisan way of negotiating whatever it is you're going to 
do.
    Representative Duffy. And to negotiate that, both sides put 
out plans. One of my concerns with your testimony, when you 
talk about the headwinds, is you didn't talk about regulations. 
When I talk to my small business owners, people back in 
Wisconsin, they are concerned about the things you mentioned 
but they are also concerned about the rules, the regulations, 
the red tape. Government is getting in their way when they're 
looking at expanding and growing their business.
    When you have someone who is looking at starting a 
business, they will cite rules and regulations, and government 
interference as a problem. And I guess I see that as one of the 
headwinds as well, and that wasn't referenced. I wonder if you 
see that as a concern?
    Chairman Bernanke. It is a concern. Smart regulation is 
very important. I wonder, though, whether these regulations are 
ones that have just been imposed, or whether they are things 
that have been in place for a long time?
    And talking about headwinds, I was looking at factors that 
were specific to this recovery as opposed to the longer term 
growth issues.
    Representative Duffy. And just quickly, I know your term is 
up in January?
    Chairman Bernanke. Right.
    Representative Duffy. If offered a second term by the 
President, would you accept?
    Chairman Bernanke. I'm not prepared to answer that question 
now.
    Representative Duffy. Okay. Some of us are concerned about 
the policies that have been implemented and the long-term 
impacts that won't take effect in the next six months but will 
impact us three, four, five, and six years down the road.
    Thanks for your testimony.
    Chairman Brady. Thank you, Representative Duffy, for 
waiting till the very last moment to slip that question in.
    [Laughter.]
    Vice Chair Klobuchar. Yeah.
    Chairman Brady. Chairman Bernanke, thank you for being 
here. I think the Fed played a critical role in calming the 
financial crisis. I do not know that I agree with the assertion 
that everything good in the economy, including corporate 
earnings, has occurred because of adroit monetary policy. I 
think the economy is more complex in the private sector, more 
resilient on its own. I just believe that at this point in the 
recovery, while it is very fragile, it really is the fiscal 
roadblocks, aside from Europe and some other issues, are really 
key to getting this economy going.
    We are going to continue to explore monetary policy, exit 
strategy, timing, and other issues in future hearings. Mr. 
Chairman, thank you for being here today.
    Chairman Bernanke. Thank you, sir.
    (Whereupon, at 11:45 a.m., Wednesday, May 22, 2013, the 
hearing was adjourned.)
                       SUBMISSIONS FOR THE RECORD

   Prepared Statement of Hon. Kevin Brady, Chairman, Joint Economic 
                               Committee
    Chairman Bernanke, welcome again to the Joint Economic Committee.
    Thank you for your service as Chairman of the Federal Reserve. You 
deserve great credit for the leadership that calmed America's financial 
crisis in 2008.
    Four and half years after that crisis and nearly four years after 
the recession ended, the Fed is still engaging in extraordinary 
monetary actions and may continue doing so well into the future. Today, 
this Committee will examine how these actions have affected jobs and 
middle class Americans, and how and when the Fed will exit its current 
accommodative policies.
    America's economy is improving, but faces significant challenges. 
We are experiencing the worst economic recovery since World War II. The 
``growth gap'' between this recovery and an average post-war recovery 
is large and growing. We are missing 4.1 million private sector jobs 
and $1.2 trillion from real GDP.
    More troubling is that many economists are predicting a ``new 
normal'' for America where long-term growth is diminished. The 
Congressional Budget Office recently reduced its estimate for future 
growth in real potential GDP from 3.2 percent to 2.2 percent. A one-
percentage point difference may not sound like much, but it is huge. A 
one-percent growth gap means a $30 trillion smaller economy in 2062--in 
constant dollars.
    The unemployment rate has declined, which is very encouraging, but 
there are red flags that we shouldn't ignore.
    Twenty million Americans cannot find a full-time job. Millions 
more--from recent college graduates to workers in their prime earning 
years--have simply given up looking for work. Long-term unemployment 
remains historically high, and the labor force participation rate is at 
a 35-year low.
    While it's encouraging that since the recession hit bottom over 6 
million Americans have found work, more than that--over 8 million 
Americans--have been forced onto food stamps. Regrettably, one-in-six 
Americans must now rely on food stamps.
    With strong earnings reports and Fed's accommodative monetary 
policy, there's no question that Wall Street is roaring, but Main 
Street continues to struggle. Since the recession ended, in real terms, 
the S&P 500 Total Return Index has risen by 74.2 percent, while 
disposable income per person has only advanced a mere 2.3 percent.
    That means that over the last four years the real disposable income 
for Joe Sixpack increased a mere $745. In an average recovery since 
1960, he would have $3,604 more in his pocket by now.
    Extraordinarily low interest rates have clearly boosted housing 
prices and housing construction with positive economic effects. 
However, those same low rates are punishing seniors, savers, pension 
funds and insurance products. Families may now feel more secure about 
their house, but less secure about their income and job prospects.
    As for the Fed's unemployment rate targeting, quantitative easing 
has run out of steam. Long-term interest rates are already at a near 
70-year low. Banks have $1.9 trillion in excess reserves at the Fed, 
and non-financial corporations have $1.5 trillion sitting on the 
sidelines. More liquidity and lower long-term rates cannot solve the 
problems that are holding back job creation in America.
    Business investment in new buildings, equipment and software--which 
drive job creation--remains the missing ingredient in this recovery.
    Monetary policy, no matter how thoughtfully applied, has its 
limits. It cannot fix poor Washington budget, regulatory and tax 
policies that are deterring business investment and the jobs that come 
with it.
    I don't question the intention of current Fed policy to fulfill its 
dual mandate, but I question the policy's effects on employment and 
worry about its future risks.
    In the near term, these extraordinary monetary actions have become 
an enabler of bad fiscal policy: allowing President Obama and Congress 
to avoid the tough and necessary decisions that would clear the 
roadblocks to a stronger economy: such as addressing America's long-
term financial sustainability, creating a pro-growth tax code, re-
balancing regulation, and addressing the harmful economic effects of 
the President's Affordable Care Act.
    In the long term, the Fed's extraordinary monetary actions pose 
three risks to our economy:

      First, the Fed may be inflating new asset price bubbles.
      Second, large excess reserves at the Fed could become the 
fuel for future inflation when economic growth accelerates unless the 
Fed acts swiftly to contract its balance sheet.
      Third, the Fed's expansive balance sheet creates a 
perverse incentive for future financial repression, an economic term, 
which means channeling domestic savings to the federal government to 
lower its interest costs.

        Since 2009, the Fed has purchased the equivalent of 24 percent 
        of all newly issued Treasuries. When growth picks up, the Fed 
        cannot raise its target rate for federal funds and sell long-
        term Treasuries without recognizing substantial losses on its 
        balance sheet, creating uncertainty.

        To avoid that, the Fed will likely boost the interest rate paid 
        to banks on their reserves and increase reserve requirements, 
        which restrict economic growth by limiting bank loans to small 
        businesses and families. The net effect is ``financial 
        repression''--redirecting credit from the private sector 
        through the Fed to the Treasury--to help contain federal 
        interest costs.

    Given these risks and the limits to monetary policy in the current 
economic recovery, the Federal Reserve should begin now to carefully 
exit from its extraordinary monetary actions and return to a more 
predictable, rules-based monetary policy that focuses on maintaining 
the purchasing power of the U.S. dollar over time.
    Begin now with clear communication to the market, that will lessen 
uncertainty and form the best long-term foundation for maximum economic 
growth for America.
    We intend to explore the Fed's exit strategy in detail today.
    Chairman Bernanke, I look forward to your testimony.
                               __________
 Prepared Statement of Hon. Amy Klobuchar, Vice Chair, Joint Economic 
                               Committee
    Chairman Bernanke, thank you for being here. I look forward to your 
testimony on the state of the economy and your thoughts on the short-
term and long-run issues facing the U.S. economy.
    The economy has added private-sector jobs for 38 straight months. 
During this time, 6.8 million private-sector jobs have been created. 
Key economic indicators are also showing strength--the housing market 
is recovering, and credit conditions continue to improve. But we know 
there is more work to do.
    My hope is that this hearing will allow us to talk about potential 
solutions that can move the country forward. And because of the Fed's 
two objectives for the nation's monetary policy--maximum employment and 
stable prices--I'm eager to hear your thoughts, Chairman Bernanke, on 
what the Fed is doing to stimulate lending and economic activity.
    One issue that I know we are all concerned about is getting our 
fiscal house in order.
    In the past two years, Congress has made some progress in reducing 
the deficit. We've already achieved $2.4 trillion in deficit reduction 
and the goal of $4 trillion is within our grasp.
    Last week, the Congressional Budget Office reported that the 
deficit will fall to $642 billion this year, $200 billion less than 
what the CBO projected just three months ago. The better numbers 
reflect good news in housing and larger than expected increases in tax 
revenues. But I believe that resting on these numbers would be a 
mistake. I think we're closer to reaching a new deficit agreement than 
many people believe.
    There is bipartisan agreement on this. At a hearing this Committee 
held in March, former Republican Senator Judd Gregg shared a quote from 
the Foreign Minister of Australia, who said, ``The United States is one 
debt deal away from leading the entire world out of [its] economic 
doldrums.'' I think that's exactly right.
    But, it's only going to happen if we work in a bipartisan manner to 
get a deal done. I believe that the budget the Senate passed, which I 
voted for, is the right approach.
    It's balanced--with targeted spending cuts to replace sequestration 
and new revenues from closing loopholes and ending wasteful spending in 
the tax code that would stabilize our debt-to-GDP ratio at around 70%.
    You have warned, Chairman Bernanke, that cutting too much too soon 
could lead to a sharp contraction. I quote you a lot on that because 
for any woman who has gone through labor it is a highly memorable 
description. It is one of the reasons I believe deficit reduction must 
be paired with economic growth.
    Our ultimate goal isn't simply a balanced budget; it's a budget 
that has balance. As we work towards that goal, we must avoid a repeat 
of the debt ceiling brinkmanship in the summer of 2011 that rattled 
financial markets, led to a downgrade of the U.S. credit rating and 
unnecessarily harmed our economy.
    When I asked you about the debt ceiling showdown at a JEC hearing 
in the fall of 2011, you answered bluntly that it's ``no way to run a 
railroad.''
    I agree. We must do better this time. And we must continue pressing 
policies that will help the economy: immigration reform, a long-term 
farm bill, work-skills training for our own students, regulatory reform 
and comprehensive tax reform. Part of this is, of course, smart Federal 
Reserve policies.
    Since the financial crisis began in 2007, the Fed has used many 
tools to bolster the economy. It has kept short-term interest rates 
near zero since late 2008, and has taken action to keep longer-term 
interest rates and mortgage interest rates low.
    As you and I have discussed, this makes it hard on savers, yet in 
the past three years, Americans have saved more than 4 percent of their 
incomes.
    The Fed has also taken steps to open up its policy-making process, 
expand communication, provide more specific guidance and enhance the 
transparency of monetary policy.
    Finally, there has been an ongoing discussion about changing the 
Fed's goals to focus solely on price stability--and we held a good 
hearing on this issue.
    In my view, now is not the time for the Fed to take its eye off 
promoting employment. My hope is that Democrats and Republicans can 
come together to find solutions that put more Americans back to work.
    The unemployment rate, while heading in the right direction, 
remains at 7.5 percent, well above the 6.5 percent level the Fed 
committed to reaching before changing course on interest rates.
    At the same time, inflation is well below the Fed target of 2 
percent. It's at about 1 percent over the past 12 months.
    I believe we've turned the corner and our economy is getting 
stronger. We have had almost three and a half years of private-sector 
job growth.
    While this is good news, we have much more to do. I look forward to 
discussing how we can build on this economic progress. Chairman 
Bernanke, thank you for being here and for your testimony this morning.
                               __________
Prepared Statement of Ben S. Bernanke, Chairman, 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 economic 
outlook and economic policy.
                      current economic conditions
    Economic growth has continued at a moderate pace so far this year. 
Real gross domestic product (GDP) is estimated to have risen at an 
annual rate of 2\1/2\ percent in the first quarter after increasing 
1\3/4\ percent during 2012. Economic growth in the first quarter was 
supported by continued expansion in demand by U.S. households and 
businesses, which more than offset the drag from declines in government 
spending, especially defense spending.
    Conditions in the job market have shown some improvement recently. 
The unemployment rate, at 7.5 percent in April, has declined more than 
\1/2\ percentage point since last summer. Moreover, gains in total 
nonfarm payroll employment have averaged more than 200,000 jobs per 
month over the past six months, compared with average monthly gains of 
less than 140,000 during the prior six months. In all, payroll 
employment has now expanded by about 6 million jobs since its low 
point, and the unemployment rate has fallen 2\1/2\ percentage points 
since its peak.
    Despite this improvement, the job market remains weak overall: The 
unemployment rate is still well above its longer-run normal level, 
rates of long-term unemployment are historically high, and the labor 
force participation rate has continued to move down. Moreover, nearly 8 
million people are working part time even though they would prefer 
full-time work. High rates of unemployment and underemployment are 
extraordinarily costly: Not only do they impose hardships on the 
affected individuals and their families, they also damage the 
productive potential of the economy as a whole by eroding workers' 
skills and--particularly relevant during this commencement season--by 
preventing many young people from gaining workplace skills and 
experience in the first place. The loss of output and earnings 
associated with high unemployment also reduces government revenues and 
increases spending on income-support programs, thereby leading to 
larger budget deficits and higher levels of public debt than would 
otherwise occur.
    Consumer price inflation has been low. The price index for personal 
consumption expenditures rose only 1 percent over the 12 months ending 
in March, down from about 2\1/4\ percent during the previous 12 months. 
This slow rate of inflation partly reflects recent declines in consumer 
energy prices, but price inflation for other consumer goods and 
services has also been subdued. Nevertheless, measures of longer-term 
inflation expectations have remained stable and continue to run in the 
narrow ranges seen over the past several years. Over the next few 
years, inflation appears likely to run at or below the 2 percent rate 
that the Federal Open Market Committee (FOMC) judges to be most 
consistent with the Federal Reserve's statutory mandate to foster 
maximum employment and stable prices.
    Over the nearly four years since the recovery began, the economy 
has been held back by a number of headwinds. Some of these headwinds 
have begun to dissipate recently, in part because of the Federal 
Reserve's highly accommodative monetary policy. Notably, the housing 
market has strengthened over the past year, supported by low mortgage 
rates and improved sentiment on the part of potential buyers. Increased 
housing activity is fostering job creation in construction and related 
industries, such as real estate brokerage and home furnishings, while 
higher home prices are bolstering household finances, which helps 
support the growth of private consumption.
    Severe fiscal and financial strains in Europe, by weighing on U.S. 
exports and financial markets, have also restrained U.S. economic 
growth over the past couple of years. However, since last summer, 
financial conditions in the euro area have improved somewhat, which 
should help mitigate the economic slowdown there while also reducing 
the headwinds faced by the U.S. economy. Also, credit conditions in the 
United States have eased for some types of loans, as bank capital and 
asset quality have strengthened.
                             fiscal policy
    Fiscal policy, at all levels of government, has been and continues 
to be an important determinant of the pace of economic growth. Federal 
fiscal policy, taking into account both discretionary actions and so-
called automatic stabilizers, was, on net, quite expansionary during 
the recession and early in the recovery. However, a substantial part of 
this impetus was offset by spending cuts and tax increases by state and 
local governments, most of which are subject to balanced-budget 
requirements, and by subsequent fiscal tightening at the federal level. 
Notably, over the past four years, state and local governments have cut 
civilian government employment by roughly 700,000 jobs, and total 
government employment has fallen by more than 800,000 jobs over the 
same period. For comparison, over the four years following the trough 
of the 2001 recession, total government employment rose by more than 
500,000 jobs.
    Most recently, the strengthening economy has improved the budgetary 
outlooks of most state and local governments, leading them to reduce 
their pace of fiscal tightening. At the same time, though, fiscal 
policy at the federal level has become significantly more restrictive. 
In particular, the expiration of the payroll tax cut, the enactment of 
tax increases, the effects of the budget caps on discretionary 
spending, the onset of the sequestration, and the declines in defense 
spending for overseas military operations are expected, collectively, 
to exert a substantial drag on the economy this year. The Congressional 
Budget Office (CBO) estimates that the deficit reduction policies in 
current law will slow the pace of real GDP growth by about 1\1/2\ 
percentage points during 2013, relative to what it would have been 
otherwise.\1\ In present circumstances, with short-term interest rates 
already close to zero, monetary policy does not have the capacity to 
fully offset an economic headwind of this magnitude.
---------------------------------------------------------------------------
    \1\ See Congressional Budget Office (2013), The Budget and Economic 
Outlook: Fiscal Years 2013 to 2023 (Washington: CBO, February), 
available at www.cbo.gov/publication/43907.
---------------------------------------------------------------------------
    Although near-term fiscal restraint has increased, much less has 
been done to address the federal government's longer-term fiscal 
imbalances. Indeed, the CBO projects that, under current policies, the 
federal deficit and debt as a percentage of GDP will begin rising again 
in the latter part of this decade and move sharply upward thereafter, 
in large part reflecting the aging of our society and projected 
increases in health-care costs, along with mounting debt service 
payments. To promote economic growth and stability in the longer term, 
it will be essential for fiscal policymakers to put the federal budget 
on a sustainable long-run path. Importantly, the objectives of 
effectively addressing longer-term fiscal imbalances and of minimizing 
the near-term fiscal headwinds facing the economic recovery are not 
incompatible. To achieve both goals simultaneously, the Congress and 
the Administration could consider replacing some of the near-term 
fiscal restraint now in law with policies that reduce the federal 
deficit more gradually in the near term but more substantially in the 
longer run.
                            monetary policy
    With unemployment well above normal levels and inflation subdued, 
fostering our congressionally mandated objectives of maximum employment 
and price stability requires a highly accommodative monetary policy. 
Normally, the Committee would provide policy accommodation by reducing 
its target for the federal funds rate, thus putting downward pressure 
on interest rates generally. However, the federal funds rate and other 
short-term money market rates have been close to zero since late 2008, 
so the Committee has had to use other policy tools.
    The first of these alternative tools is ``forward guidance'' about 
the FOMC's likely future target for the federal funds rate. Since 
December, the Committee's postmeeting statement has indicated that its 
current target range for the federal funds rate, 0 to \1/4\ percent, 
will be appropriate ``at least as long as the unemployment rate remains 
above 6\1/2\ percent, inflation between one and two years ahead is 
projected to be no more than a half percentage point above the 
Committee's 2 percent longer-run goal, and longer-term inflation 
expectations continue to be well anchored.'' This guidance underscores 
the Committee's intention to maintain highly accommodative monetary 
policy as long as needed to support continued progress toward maximum 
employment and price stability.
    The second policy tool now in use is large-scale purchases of 
longer-term Treasury securities and agency mortgage-backed securities 
(MBS). These purchases put downward pressure on longer-term interest 
rates, including mortgage rates. For some months, the FOMC has been 
buying longer-term Treasury securities at a pace of $45 billion per 
month and agency MBS at a pace of $40 billion per month. The Committee 
has said that it will continue its securities purchases until the 
outlook for the labor market has improved substantially in a context of 
price stability. The Committee also has stated that in determining the 
size, pace, and composition of its asset purchases, it will take 
appropriate account of the likely efficacy and costs of such purchases 
as well as the extent of progress toward its economic objectives.
    At its most recent meeting, the Committee made clear that it is 
prepared to increase or reduce the pace of its asset purchases to 
ensure that the stance of monetary policy remains appropriate as the 
outlook for the labor market or inflation changes. Accordingly, in 
considering whether a recalibration of the pace of its purchases is 
warranted, the Committee will continue to assess the degree of progress 
made toward its objectives in light of incoming information. The 
Committee also reiterated, consistent with its forward guidance 
regarding the federal funds rate, that it expects a highly 
accommodative stance of monetary policy to remain appropriate for a 
considerable time after the asset purchase program ends and the 
economic recovery strengthens.
    In the current economic environment, monetary policy is providing 
significant benefits. Low real interest rates have helped support 
spending on durable goods, such as automobiles, and also contributed 
significantly to the recovery in housing sales, construction, and 
prices. Higher prices of houses and other assets, in turn, have 
increased household wealth and consumer confidence, spurring consumer 
spending and contributing to gains in production and employment. 
Importantly, accommodative monetary policy has also helped to offset 
incipient deflationary pressures and kept inflation from falling even 
further below the Committee's 2 percent longer-run objective.
    That said, the Committee is aware that a long period of low 
interest rates has costs and risks. For example, even as low interest 
rates have helped create jobs and supported the prices of homes and 
other assets, savers who rely on interest income from savings accounts 
or government bonds are receiving very low returns. Another cost, one 
that we take very seriously, is the possibility that very low interest 
rates, if maintained too long, could undermine financial stability. For 
example, investors or portfolio managers dissatisfied with low returns 
may ``reach for yield'' by taking on more credit risk, duration risk, 
or leverage. The Federal Reserve is working to address financial 
stability concerns through increased monitoring, a more systemic 
approach to supervising financial firms, and the ongoing implementation 
of reforms to make the financial system more resilient.
    Recognizing the drawbacks of persistently low rates, the FOMC 
actively seeks economic conditions consistent with sustainably higher 
interest rates. Unfortunately, withdrawing policy accommodation at this 
juncture would be highly unlikely to produce such conditions. A 
premature tightening of monetary policy could lead interest rates to 
rise temporarily but would also carry a substantial risk of slowing or 
ending the economic recovery and causing inflation to fall further. 
Such outcomes tend to be associated with extended periods of lower, not 
higher, interest rates, as well as poor returns on other assets. 
Moreover, renewed economic weakness would pose its own risks to 
financial stability.
    Because only a healthy economy can deliver sustainably high real 
rates of return to savers and investors, the best way to achieve higher 
returns in the medium term and beyond is for the Federal Reserve--
consistent with its congressional mandate--to provide policy 
accommodation as needed to foster maximum employment and price 
stability. Of course, we will do so with due regard for the efficacy 
and costs of our policy actions and in a way that is responsive to the 
evolution of the economic outlook.
                               __________
Questions for The Honorable Ben Bernanke, Chairman, Board of Governors 
  of the Federal Reserve System from Senator Daniel Coats (R-Indiana)
    1. Chairman Bernanke, I want to follow up with you concerning the 
Federal Reserve's plans with regard to adopting Basel III capital rules 
for the insurance sector, an action that I believe could lead to 
unintended results. Specifically, as you know, concerns have been 
expressed over the fact that those capital rules are not an appropriate 
fit for insurance companies.
    Are you at the Fed able to appropriately tailor capital standards 
for insurers, and in so doing utilize the long-established state risk-
based capital regime designed for the insurance business model?
    Do you believe federal regulators fully understand the impact Basel 
III capital rules would have on insurance companies, consumers of 
insurance products, and our economy? I strongly urge the Federal 
Reserve to consider those impacts through a thorough Quantitative 
Impact Study. Basel III has been developed over the years for the bank 
model, not for insurers. Insurance consumers--and our economy--deserve 
no less than a full and public understanding of the impact these bank-
like capital rules would have on the life insurance industry prior to 
finalization of the Basel III rule.
    Section 171 of the Dodd-Frank Act, by its terms, requires the 
appropriate Federal banking agencies to establish minimum capital 
requirements for bank holding companies (BHCs) and savings and loan 
holding companies (SLHCs) that ``shall not be less than'' ``nor 
quantitatively lower than'' the generally applicable capital 
requirements for insured depository institutions. Section 171 does not 
contain an exception from these requirements for an insurance company 
that is a BHC or an SLHC, or for a BHC or an SLHC that controls an 
insurance company.
    To allow the Board an additional opportunity to consider prudent 
approaches to establish capital requirements for SLHCs that engage 
substantially in insurance activities within the requirements of the 
terms of section 171, the Board, on July 2, 2013, determined to defer 
application of the new Basel III capital framework to SLHCs with 
significant insurance activities (i.e., those with more than 25 percent 
of their assets derived from insurance underwriting activities other 
than credit insurance) and to SLHCs that are themselves state regulated 
insurance companies. After considering the concerns raised by 
commenters regarding the proposed application of the proposed 
regulatory capital rules to SLHCs with significant insurance 
activities, the Board concluded that it would be appropriate to take 
additional time to evaluate the appropriate capital requirements for 
these companies in light of their business models and risks. Among 
other issues, commenters argued that the final capital rules should 
take into account insurance company liabilities and asset-liability 
matching practices, the risks associated with separate accounts, the 
interaction of consolidated capital requirements with the capital 
requirements of state insurance regulators, and differences in 
accounting practices for banks and insurance companies. The Board is 
carefully considering these issues in determining how to move forward 
in developing a capital framework for these SLHCs, consistent with 
section 171 of the Dodd-Frank Act.
  

                                  
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