Bernanke Sees Slow Drop in Unemployment Amid Recovery
Federal Reserve Chairman Ben S. Bernanke
Joshua Roberts/Bloomberg
Ben S. Bernanke, chairman of the U.S. Federal Reserve.
Ben S. Bernanke, chairman of the U.S. Federal Reserve. Photographer: Joshua Roberts/Bloomberg
Jan. 7 (Bloomberg) -- U.S. Senator Charles Grassley, an Iowa Republican, discusses the outlook for today's testimony by Federal Reserve Chairman Ben S. Bernanke and the federal budget deficit. Grassley speaks from Washington with Betty Liu on Bloomberg Television's "In the Loop." (Source: Bloomberg)
Jan. 7 (Bloomberg) -- David Walker, chief executive officer of Comeback America Initiative, discusses the U.S. economy. Walker, a former U.S. comptroller general, talks with Margaret Brennan on Bloomberg Television's "InBusiness." (Source: Bloomberg)
Jan. 7 (Bloomberg) -- Former Federal Reserve Governor Randall Kroszner discusses the December employment report, the outlook for the U.S. unemployment rate and Fed policy. Payrolls increased 103,000, compared with the median forecast of 150,000 in a Bloomberg News survey, Labor Department figures showed today in Washington. Kroszner speaks with Betty Liu and Michael McKee on Bloomberg Television’s “In the Loop.” (Source: Bloomberg)
Jan. 7 (Bloomberg) -- Dino Kos, managing director at Portales Partners LLC, discusses the December U.S. employment report, Federal Reserve Chairman Ben S. Bernanke’s testimony before the Senate Budget Committee and the outlook for Fed policy. Payrolls increased 103,000, compared with the median forecast of 150,000 in a Bloomberg News survey, Labor Department figures showed today in Washington. Kos speaks with Betty Liu on Bloomberg Television’s “In the Loop.” (Source: Bloomberg)
Federal Reserve Chairman Ben S. Bernanke said the unemployment rate will probably fall slowly even with a pickup in U.S. growth this year, signaling no change in the central bank’s monetary stimulus.
At the pace of improvement projected by Fed officials, “it could take four to five more years for the job market to normalize fully,” Bernanke said today in testimony to the Senate Budget Committee. Bernanke also stepped up the urgency of his call for a plan to reduce the federal budget deficit, saying “prompt adoption” of one could have economic benefits in the long and short run.
The Fed chief is defending his unorthodox program of buying $600 billion of Treasuries through June to meet the Fed’s mandates for full employment and stable prices. He spoke an hour after the Labor Department reported that employers added 103,000 workers to payrolls last month, less than the 150,000 gain forecast by economists in a Bloomberg survey.
“It’s about what we expected,” Bernanke said of the jobs report during a question-and-answer period. “If we continue at this pace, we’re not going to see sustained declines in the unemployment rate.” His prepared testimony was submitted before the government data were released.
Stocks fell after the jobs report and the testimony. The Standard & Poor’s 500 Index slipped 0.7 percent to 1,265.09 at 1:04 p.m. in New York. The yield on the 10-year Treasury note fell to 3.31 percent from 3.40 percent late yesterday.
Fewer People
Today’s Labor Department report also showed the jobless rate fell to 9.4 percent from 9.8 percent, reflecting gains in jobs and fewer people in the labor force.
“In a situation in which unemployment is high and expected to remain so and inflation is unusually low,” the Federal Open Market Committee “would normally respond by reducing its target for the federal funds rate,” Bernanke said in his first public remarks on Capitol Hill since September.
Instead, with the rate close to zero since December 2008, the Fed is buying securities in an effort to keep market borrowing costs low, he said.
The central bank is building on the first round of $1.7 trillion in debt purchases that “appeared to be successful in influencing longer-term interest rates, raising the prices of equities and other assets, and improving credit conditions more broadly, thereby helping stabilize the economy and support the recovery,” he said.
Treasury Yields
Without referring to the rise in Treasury yields since the November decision to expand stimulus, Bernanke said in a footnote that “longer-term interest rates are also influenced by market expectations of the future path for short-term interest rates, which in turn depend on the outlook for the economy and so for the target federal funds rate.”
Asked by Senator Jeff Sessions of Alabama, the panel’s senior Republican, about a bond market “nervous” over effects of Fed asset purchases, Bernanke said the Fed needs to find the “right moment” to start tightening credit. A “credible” plan to reduce the federal deficit would avert inflation in the long run, he said.
Bernanke, 57, met privately in November with Senate Banking Committee members to defuse criticism of the easing, saying the plan will spur job growth while not impairing the Fed’s ability to control inflation.
Allies in Congress
Bernanke lost allies in Congress last month with the retirement of senators including New Hampshire Republican Judd Gregg, formerly the senior Republican on the budget panel, and Connecticut Democrat Christopher Dodd, who led the banking committee for four years. Republicans took control of the House and narrowed Democrats’ Senate majority in the midterm elections.
Republican leaders have criticized the stimulus. Since its Nov. 3 approval by Bernanke and his colleagues, stocks have risen, the dollar has strengthened and U.S. economic indicators have improved.
House Speaker John Boehner of Ohio, then the minority leader, and three other Republicans voiced “deep concerns” in a Nov. 17 letter to Bernanke about a policy that they said may undermine the dollar and create asset price bubbles.
In December, former Fed Governor Laurence Meyer of Macroeconomic Advisers LLC said chances had increased of a 5 percent pace of U.S. growth in late 2011. The central bank will probably stop at $600 billion in purchases instead of raising the total to $1 trillion, he said.
‘Inevitable Changes’
Bernanke said that the longer lawmakers wait to deal with the federal budget deficit, “the greater the risks and the more wrenching the inevitable changes to the budget will be.”
“By contrast, the prompt adoption of a credible program to reduce future deficits would not only enhance economic growth and stability in the long run, but could also yield substantial near-term benefits in terms of lower long-term interest rates and increased consumer and business confidence,” Bernanke said.
Republicans have promised to seek cuts to reduce a budget deficit that may widen to $1.34 trillion for fiscal 2011, Credit Suisse Group AG strategists estimated on Dec. 7, a day after the president announced a deal with Republicans on extending Bush- era tax rates. The shortfalls were $1.29 trillion in fiscal 2010 and $1.42 trillion in fiscal 2009.
In October, Bernanke gave one of his most detailed prescriptions for reducing the deficit, urging lawmakers to consider adopting rules that limit federal spending or debt to help put the U.S. on a more sustainable fiscal path.
Probable Expansion
The U.S. economy probably expanded at a 2.5 percent pace in the fourth quarter, according to the median estimate of 65 analysts in a Bloomberg News survey last month. That compares with 2.6 percent in the third quarter and 1.7 percent in the three months through June.
“The pace of economic recovery seems likely to be moderately stronger in 2011 than it was in 2010,” Bernanke said.
Responding to other questions during the 2 1/2-hour hearing, Bernanke said it would be “helpful” if China allowed its currency to appreciate against the U.S. dollar.
While the Fed’s monetary policy is “appropriate” for the U.S., it’s “not appropriate” for China, which has a “counterproductive” currency policy, Bernanke said.
The Fed chief also said he wasn’t sure that China is “backsliding” on trade policy, because “there have been issues all along with intellectual property and government procurements and a wide variety of assets.”
China last month cut its export quotas for rare earths by 35 percent in the first round of permits for 2011, threatening to extend a global shortage of the minerals needed for smartphones, hybrid cars and guided missiles.
In addition, the Fed doesn’t have authority, and it wouldn’t be appropriate, for the central bank to provide financial assistance to U.S. states facing budget crunches, Bernanke said.
To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net
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