Down, that would be of concern. We have called attention to some inght downward movements survey measures. We are watching that. I still judge that Inflation Expectations are reasonably wellanchored. Inflationve tolerated shortfalls that we thought would disappear over the medium term. Just as we did overshoots of inflation that we also judged to be transitory. But we do need to monitor inflation very carefully because if Energy Prices and the dollar prices,stabilize import our expectation is headline and core inflation would move up, and if we failed to see that occurring in a manner that we expect, of course, we would need totake further action reconsider the outlook and to put in place appropriate policy. What with that action look like . Wereellen if the economy disappointing, our actions would not really be based on inflation. We would take employment into account. I cannot give you a simple answer. But we would pursue a more accommodative policy, because we do certainly are a cure are committed to achieving over the long term. Phil dudley has talked about the need for the fed to adjust policy based on the responsiveness of Financial Markets as you begin to increase rates. You did not talk about that today. Is it a point you agree with and if so, how will you judge whether Financial Markets are accepting and transmitting these changes . Ms. Yellen there are a this isf ways that transmitted. The behavior of longterm Interest Rates, shortterm Interest Rates matter, the value of asset crisis, and the exchange rate, these are transmission channels. We would not be focused on shortterm financial volatility, thewe are there on anticipated changes in financial conditions that were persistent and we judged to affect the outlook, we would have had to take those into account. Watch financial develops. The longerterm economic outlook, are we saying percent persistent changes in Market Conditions that would have a bearing, a significant bearing on the outlook that we would need to take into account informality appropriate policy. Yes, we would but it is not shortterm volatility in markets. See changesd not you would have to move more quickly. [inaudible] is not an this unanticipated policy move create we have been trying to explain what our policy strategy is. It is not as though i am expecting to see a marked Immediate Reaction in Financial Markets on expectations about fed policy. They have been built into the structure of Financial Market prices. But we obviously will track carefully the behavior of those short and longerterm Interest Rates. The dollar and asset prices, and if they move in persistent and , that are outys of line with the expectations that we have, then we will take those into account. Thank you. Rebecca jarvis, abc news. A historically, most economic expenses fade after this long. How confident are you that our economy will not slip back into recession in the near term . Ms. Yellen let me start by saying that i feel confident about the fundamentals driving the health ofmy, u. S. Households and domestic spending. There are pressures on some sectors of the economy, particularly manufacturing and the Energy Sector reflecting Global Developments and developments in Commodity Markets and energy markets. But the Underlying Health of the u. S. Economy i consider to be quite sound. I think it is a myth that expansions dive old age. I do not think they die of old age. The fact that this has been quite a long expansion does not its dayso believe that are numbered. The economy does get hit by shocks, and there are positive shocks and negative shocks. And so there is a significant o dd probability in one year that the economy will suffer some shock that we do not know about that will put it into recession. I am not sure exactly how high that probability is in any year am a but maybe at least on the order of 10 . Yes, there is some probability that could happen and of course, we would appropriately respond. But it is not something that is stated to happen because we have had a long expansion and i do not see anything in the underlying strength of the economy that would lead me to be concerned about that outcome. An outcomevent of like that in the most negative of scenarios, are there other policy measures outside of Interest Rates, outside of traditional quantitative easing that you and the fed have discussed and complicated contemplated for another environment like something which we saw throughout the great recession, have you talked about anything that would be more direct to the economy . Ms. Yellen during the years in were, the economy was recovering from the great recession, and we put further policy and measures in place, we studied our policy options quite carefully. As you know, Communications Policy to affect Market Expectations about the path of Interest Rates played an importante that role. That is something we did in conjunction with asset purchases. Obviously, we lowered our overnight Interest Rate effectively 20. To zero. The ecb and others that have taken their overnight rate into negative territory, that is something that i do not contemplate that we will need to wethis but it is something could study. Of course, we have Balance Sheet policies. There might be a range of direct policies that we could use as well, but this is something we have thought about on a range of options. Sam flemming drum the financial times. Balanceask about the sheet policy you are adopting . You said you want to keep a large Balance Sheet until normalization is underway. Can you explain why you anticipate that being appropriate, what does well under nate underweight mean in terms of normalization . And what do you mean that the fed sheet might need to have a larger Balance Sheet over term . Ms. Yellen in our normalization principles which are in effect, we committee stated that eventually want to operate with a much smaller Balance Sheet that we have at present. We would reduce the size of the Balance Sheet to essentially whatever size we needed to in an Monetary Policy effective and efficient way. A lot has changed since prefinancial crisis in terms of the Financial System, and we are studying, we are engaging in a project at this time to consider what our long run operating framework should look like, so i cannot tell you exactly what size of Balance Sheet we will determine is the best to operate effectivefficient and manner. Tinyght be more than the quantity of reserves we have had. We have also said that we will, we expect to reduce the size of by Balance Sheet over time ceasing entirely reinvestments. Beyond that, we have not given Additional Guidance other than to say that the timing of reductions and reinvestment will depend on economic and financial conditions. I suppose Additional Guidance we are giving today when we say well under way, they want to see if i mentioned, there are a number of considerations the out no made further decision factors that will be relevant, one factor that was talked about is the desirability of having some scope to respond to a shock to the economy by lowering the federal funds rate. They would be nice to have a buffer in terms of having raised the federal funds rate. To a certain extent to give us some meaningful scope to respond. In mind anyny level of the funds rate, it would depart depend on the entire economic outlook, how robust the economy is but that is an important consideration for the committee. It means this is not something that we expect to be turning to to cease reinvestment very quickly. Fox doesbarnes at this. On financial Market Conditions, is there a problem developing in the high yield sector of the bond market, the junk bond sector question mark as you know last week, mutual fund, third and avenue 3rd avenue presumptions. Ted because of the selloff in this kind of want. Did you discuss in the meeting any risk to the Financial System, a Systemic Risk because of the conditions in the junk and market bond market . Soldions of dollars were heavily because of low rates. Did the low interest policy sow the seeds for this development . Thank you. Theyellen risk spreads and High Yield Bond Fund at have been widening since last year. Partly reflecting falling oil partlyonly partly, but and reductions in High Yield Bond Fund have been increasing in recent months. Third Avenue Focused Credit Fund unusualer a rather fund. It had concentrated positions in especially risky and illiquid bonds that it had been facing very significant redemption pressures. My understanding is the sec is in touch with 3rd avenue. You should know the sec has to addressme reforms what structural problem of liquidity mismatch in openend mutual funds. Believe thatue to financial conditions are supportive of economic growth. Continueeen and will to track developments in Financial Markets very carefully. We havesay that i think a far more resilient Financial System now that we had prior to the financial crisis, and highly capital banks that are well situated support corporate lending. I would also point out that many corporations during these years have reduced their Interest Payments and extended their get profiles. Profiles. We will be evaluating this carefully. We will come back again. You said earlier that extensions do not die of old age. The other half of that is that Central Banks kill them off instead. I am how worried you are about the possibility that the fed will have to turn around after hiking rates. Other Central Banks that have tried to raise rates have done just that. How damaging could that be to the feds credibility . Ms. Yellen when you say central inks often kill them, i think the usual reason that that has been true when that has been true is that Central Banks have begun to late to tighten policy. They have allowed inflation to get out of control and at that point they have had to tighten policy. Directly and very substantially and it has caused a downturn. The downturn has served to lower inflation. My for being mind the question on you, i would point out that it is because we do not want to cause a recession through that type of dynamic at some future date. That it is prudent to begin early and gradually. It is true that some Central Banks have raised rates and later turned around. Not in every case is that reflective of holocene mistake. Policy mistake area sometimes when they raised rates it has not been the wrong thing to do but conditions have changed in the way they have had to reverse policy to respond to shocks. There areenying that situations where Central Banks have moved to early too ear ly. We have considered the risk of that, we have weighed that risk in making todays decisions. I do not think we have to do it. The committee has said where watching economic developments closely and we will adjust policy in whatever way is necessary to support the attainment of our objectives. Can you explain what if anything might be different in the next few weeks or a few months for them because of this Interest Rate hike question mark rate hike . The first thing americans should realize that the feds decision today reflects our confidence in the u. S. Economy. That we believe we have seen substantial improvement in labor Market Conditions, and, while things might be uneven across of the country and different industrial sectors, we see an economy that is on a path of sustainable improvement, so and thinking about the labor prospects and their prospects going forward, i hope they will take this decision as one that signals the fomcs confidence that conditions will continue to strengthen and job and job market prospects will be good. It is a very small move. It will be reflected in some changes in borrowing rates, longerterm Interest Rates, loans that are linked to longerterm Interest Rates are likely to move very much. E, for example, some corporate loans are linked to the prime rate which is likely to move up with the fed funds rate and those Interest Rates will adjust. There are some consumer borrowing rates. Credit card rates that are linked to shortterm rates that might move up slightly. Very low ratesve and we have made a very small move. How concerned are you with Interest Rate risk and banks now that you have ended the zero the. 25a and began percent rate era . Is that a factor in decisions going forward, it is is it something you are concerned about . Ms. Yellen Interest Rate risk at banks is something we have been monitoring carefully for quite a long time. The community and smaller banking organizations that we work with, part of our supervision has been ensuring that they manage appropriately for Interest Rate risk, and the larger banking organizations that are subject to the stress test and capital planning, the scenarios that we have presented in each of the last three years, look at their ability to muchtand what would be sharper increases in interest than we are envisioning would happen. We are making sure it will sharpen increases unlike our expectations that they would be well positioned to handle it and that their capital positions are sufficient for them to whether it, so this has in very much in our mind. Saying that the Things Holding back inflation are transitory and yet every day there seems to be new impulses driveutside that could prices lower. My question is, if any years time, inflation remains where it is today, we do see that as a defeat for your theory and is that part of the reason why the language has been upgraded in the statement to say that you want to see actual progress toward your target . Ms. Yellen we have said that we will carefully monitor both actual and expected progress. I think that standard fit policy has been to look through shocks that are transitory, occasionally, there are sequences of transitory shocks. We have had some further declines in Energy Prices, and as i said previously, i do expect there is a bottom to that. I expect we will be seeing it. We analyze inflation data and conclude that clearly, transitory influences are holding down inflation, i do not want to say that we would respond to that. But if we can concluded that there were structural factors or that there were a problem with our theory or some global that we are force, simply persistently holding down inflation in a way that was not transitory and i do not want to simplistic meaning to what we would need to see to conclude that in the inflation data. Wewe concluded that, certainly would take action to make sure we adjusted policy so that we attain our 2 objective. We would need to feel that what we were saying in the data suggested a sustained departure from our 2 objective that we needed to address. There has been a lot of talk today and a lot of discussion about the Downside Risks facing globalnomy from the environment. But you say in your statement that the risks are nearly balanced so could you talk more about the upside risks that you see to the economy, and just briefly, some fed officials have been emphasizing lately the median cpis from dallas and cleveland. How much weight do you put on this measures . Ms. Yellen we look at a range that bear on the inflation outlook and the median cpi has been somewhat more stable and running close to 2 pce, but there is a systematic gap between these two measures and their objective our objective is to percent on the pce price index. There is no simple translation. We do have a pce inflation objective. The upside risks. There are upside risks to the economy. We tend to focus on the Downside Risk. It is right to do so. We want to be careful of that Downside Risk. In much healthier financial condition. Their prospects have improved. We see them buying a lot of cars. Housing has been recovering very the demographics would point to considerable upside for residential investment. My main forecast is for gradual recovery, but there is upside risk their. There. We have seen that the decline in drilling has been depressing investment spending but there is upside risk, too. The Global Economy, we tend to focus, there are many countries that are undergoing very difficult adjustments or slowing growth, especially with declining commodity prices, but even recently we have seen growth in emerging markets strengthen. It is not only Downside Risks, but we do Pay Attention to Downside Risk that the Committee Says they regard the risks overall as balanced. You have often said that the fed will be given depended but you have said in the past that you want to avoid being mechanical. Warrant ta seem to how will you avoid the perception, the Market Perception that you are falling into a pattern or becoming mechanical . Ms. Yellen we will try to avoid that. Le we have set gradual said gradual does not mean comingcal, equally timed equally sized Interest Rate changes. That is not what the committee means by it. Economy is that the will progress in a manner that is not sufficiently even, that decide to make evenly spaced tykes. We want to do what is appropriate and i recognize that is a danger. I do want to assure you that we will be debit dependent. If the outlook evolves, we will respond appropriately. I strongly doubt that it will mean equally spaced tykes and it is not the intention of the committee to follow any mechanical formula of that type. You just mentioned that it may be possible that structural factors are holding down inflation as well and the dynamic that is happening in topline inflation is happening in core as well. Wasmedian projection revised down and this is happening in other Central Banks as well. Additionally, markets seem much lower inflation in the future than centralbank models do. Within the fed, how are you adapting your models to look at new reality and what are you learning as you do that . Ms. Yellen the reason, the main reason we revised down our projection ever so slightly, it is hardly revised for core inflation is because we have seen further appreciation of the dollar that is holding down import prices that spills over into core inflation. Eye on estimation is that core inflation will pick up. There are various idiosyncratic factors that affect core inflation. For example, nonmarket price increases which are a little bit hard to understand. We have been running at a slow pace. There are factors that have been affecting inflation in medical care prices but that may change over time so there is some idiosyncratic factors. I personally do not think we are in a world where inflation is being determined in a different way than it has historically. I see import prices and Energy Headline holding down but also core. I do believe it will pick up. As we have said, is that theory do not seend we inflation is unfolding in the way the committee expect, we will make adjustments over time and policy. You have a background as an academic. Are you looking into these models to see whether or not they need to be adapted . Ms. Yellen we have many people who are in studying inflation models. Let me express some humility about them. I do not think that they are perfect. Policy is based on economic forecasts. There are theories about how the economy works that govern many aspects of economic forecasting. Whether it is Consumer Spending or residential investment or inflation, the underlying theories are not perfect, and they are subject to uncertainty. This is true in all aspects of forecasting, which is why we change our forecasts and our models, we throughout models that are persistently networking. We are always trying to develop better models. Of anot aware, i will say, different model of inflation that would be superior to the one that we employee. That we employ we have to verify inflation is moving in the manner that we expect and if it is not, we need to adjust policy accordingly. Are you concerned about the negative impact your decision could have on emerging markets, are you do you fear it could trigger imbalances abroad . Ms. Yellen we are constantly monitoring foreign economic developments, including those in emerging markets. In the Global Economy with integrated Group Product and Capital Markets that are that the fates are linked and the performance at the u. S. Economy has important spillovers into emerging markets and vice versa. We have been trying very carefully with we have made a commitment to emerging markets policymakers that we would do to communicate as clearly as we could about our policy intentions to avoid spillovers that might result from abrupt or unanticipated policy moves. I think this move has been expected and well communicated. At least i hope that it has. I do not think it is a surprise. Action takes place in the context of a u. S. Economy that is doing well, and is a source of strength to the emerging markets and other economies around the globe, and so that is there can be negative spillovers through capital flows but remember there are also positive spillovers from a strong u. S. Economy. Manyneral view is that emerging markets are in a stronger position than they. Ould have been in the 1990s for example, that they have stronger Macro Economic policies that have taken steps to strengthen their Financial Systems and are better positioned to do with this. Hand, there are vulnerabilities there and there are countries that have been badly affected by declining commodity prices, so we will monitor this very carefully but we have taken care to avoid unnecessary negative spillovers. Wage growth is not quite where you would like it to be. How much is that going to play into your thinking next year as you are trying to decide whether to raise Interest Rates more and when . Ms. Yellen my expectation is that in a strengthening labor market that we would see faster wage growth, and i believe there is whether 2 inflation objective, space for wage growth to be higher than it has been. We may be seeing some incipient signs of faster wage growth. We have seen a pickup in measures of hourly compensation, and some slight firming in recent months in average Hourly Earnings create i hesitate to this is a firm trend. We have been disappointed in the past. Wage growth there are many factors that affect it, it is not definitive in any sense in determining our policy, but it does have a bearing on the inflation outlook. It also has a bearing on assessing how much slack there and ithe labor market, think a number of my colleagues looking at the slow pace of wage that there have seen estimates of the longer run normal Unemployment Rate have come down and i think that is one of the factors that is has prompted those adjustments. Affect views about how much slack there is in the labor market and the inflation outlook. Thank you. Next, the House Foreign Affairs committee on u. S. Relations with pakistan. Live at 7 00 a. M. , your calls and comments on washington journal. This weekend, the cspan historyour explores the and literary culture of worcester, massachusetts. Located 40 miles west of austin, hes to played a key role in t American Revolution located 40 miles west of boston. It was known for its innovators in commerce and industry. On book tv, we learn about henry george who published progress and poverty in 1879. Then we will visit one of the largest depositories in a country of books and pamphlets as it related to the history of the united states. Next, we will talk with author discusse greenwood and her book about the migration of africanamericans to worcester after the civil war. There were antislavery organizations and worcester. There were, as soon as the war breaks out, there are quite a few aid societies that are organized as well. So, its a city that at this time is very progressive and lots of way. On American History tv, we will visit Mechanics Hall. The building is listed in the National Register of historic places. It served as a Learning Center but also served as a platform for social and cultural activities, including womens rights rallies. The Womens Rights Convention happened before the hall opened, but afterwards, most people came here to speak. Worcester was the Central Location and Mechanics Hall is where everything happened. Will tour the Clark University special collections. Of modernather rocketry. Talk about his counter vision to size through his papers, diaries and artifacts. He attributes his first interest in space travel and his first interest in a career in science to a day 1899. He went outside with a saw and a hatchet, and he was meant to trim the dead branches off a cherry tree. And he climbed the tree. He made himself a ladder. And while he was up in the tree, he looked down on the field around him and he thought how wonderful it would be to build some kind of a device that coul d leave the earth and maybe travel to mars. Watch cspans cities tour today on American History tv. The cspan cities tour working with our cable affiliates and visiting cities across the country. Special representative for afghanistan and pakistan, richard olson, testify to the House Foreign Affairs committee. He said pakistan is becoming a more constructive partner but more needs to be done to target terrorist groups operating there. Other topics included Pakistans Nuclear arsenal and u. S. Foreign assistance to pakistan. This is just over two hours. In progress. Vote my intention is to begin the hearing and then we will suspend for the duration of the votes and allow other members of the committee to come forward. In this fashion, myself and can make ourolk, Opening Statements and maybe some of the other members will be able to as well. So this hearing is on the future of u. S. Pakistan relations. The committee has repeatedly urged pakistan to take meaningful action against key islamist terrorist groups operating within its territory. Unfortunately, pakistan which is home to the world fastestgrowing Nuclear Weapons program, has remained a fount of radical islamist thought. It was no surprise that one of the San Bernardino attackers, tashfeen malik, studied and a pakistani school. 9 11 terroristhe attacks transformed u. S. Pakistan relations overnight. After more than a decade under sanctions, pakistan was to be a key ally in combating islamist militancy, becoming a leading