Bernanke told the House Budget Committee today that while the declines in the jobless rate in December and January “do provide some grounds for optimism,” he cautioned that “with output growth likely to be moderate for a while and with employers reportedly still reluctant to add to their payrolls, it will be several years before the unemployment rate has returned to a more normal level.”
Bernanke and the Federal Open Market Committee are waiting for further proof of a durable pickup in the job market as they press forward with their plan to buy $600 billion in Treasury securities to boost the pace of recovery. In its Jan. 26 statement, the panel said the recovery “has been insufficient to bring about a significant improvement in labor market conditions.”
The extent to which the recovery is established and inflation is pointing higher or lower will help determine whether the Fed expands or pulls back on the stimulus, Bernanke said in response to questions.
“If we’re still in a situation where the recovery does not seem established and deflation risk remains a concern, then we would have to think about additional measures,” Bernanke said. If the economy grows “very quickly” and inflation keeps rising, then the Fed would have to reverse the purchases, he said.
If the recovery is sustainable and inflation is under control, then further action wouldn’t be needed, Bernanke said. Policy makers “take very seriously” their commitment to review the program at each meeting. The FOMC next meets March 15.
Bernanke’s remarks, his first since a Labor Department report on Feb. 4 showed the jobless rate unexpectedly fell to 9 percent in January, were similar to comments he made last week at the National Press Club and testimony last month to the Senate Budget Committee.
“Although the growth rate of economic activity appears likely to pick up this year, the unemployment rate probably will remain elevated for some time,” Bernanke said in today’s testimony.
Joblessness rose above 9 percent in May 2009, beginning the longest period of unemployment at that level or higher since monthly records began in 1948.
Last week’s Labor Department report also showed employers added 36,000 workers, short of the 146,000 median gain projected in a Bloomberg News survey of economists, as winter storms deterred hiring.
Since late last month Bernanke and his colleagues have expanded the focus of monetary policy beyond the jobless rate.
The Fed chairman said on Feb. 3 that he needs to see “a sustained period of stronger job creation” before he deems the recovery firmly established, a statement he repeated to the House.
On Nov. 3, the central bank announced that it would embark on a second round of asset purchases to help boost the recovery and achieve the Fed’s mandates. The program, slated to last through June, follows $1.7 trillion of purchases of mortgage and government debt through last March.
Challenge on Stimulus
Republicans on the panel challenged Bernanke on the effects of the stimulus. The panel’s chairman, Representative Paul Ryan of Wisconsin, reiterated his criticism of the Fed’s Treasury purchases, saying they risk asset-price bubbles and faster inflation. The increase in long-term bond yields this week “certainly adds to these concerns and fuels some of this speculation,” he said.
The yield on the two-year Treasury note fell to 0.81 percent at 4:59 p.m. in New York from 0.85 percent yesterday. The 10-year Treasury’s yield fell to 3.65 percent from 3.74 percent. It has risen from 2.57 percent on Nov. 3, an increase that Bernanke today attributed to signs of an improving economy.
Representative Scott Garrett, a New Jersey Republican, pressed Bernanke to reconcile his positions that Fed monetary policy didn’t fuel a housing bubble last decade with the stance that the Fed can help home prices now with its asset purchases.
Home prices are not “responding at all” to the Fed’s policy, and the bubble was “far greater than could be explained” by the central bank’s interest-rate actions, Bernanke said in response.
Ryan has said he supports legislation proposed by fellow Republicans, Tennessee Senator Bob Corker and Indiana Representative Mike Pence, that would remove the Fed’s employment mandate and have it focus solely on keeping prices stable.
Maryland Representative Chris Van Hollen, the committee’s senior Democrat, commended Bernanke’s actions. He said it’s “astounding” that some Republicans are proposing to narrow the Fed’s legislative mandate.
Bernanke said “inflation is expected to persist below the levels that Fed policy makers have judged to be consistent” with their dual mandate from congress for stable prices and maximum employment.
The Fed’s preferred gauge of inflation, the personal consumption expenditures index excluding food and energy, rose 0.7 percent in December from a year earlier, the lowest level in more than 50 years.
The low rate of core inflation has coincided with a surge in the price of commodities, such as gasoline, which at $3.12 a gallon has risen 18 percent from its price a year ago, according to an index from the American Automobile Association.
As in his appearance before the National Press Club, Bernanke said the low rate of core inflation provided a better guide to where overall inflation was headed. He noted that wages, which increased 1.7 percent on an average hourly basis last year, have acted as a constraint on inflation.
Employers added fewer than 100,000 workers to payrolls a month on average last year, the proportion of the working-age population in the labor force has fallen to the lowest level since 1984, and 6.2 million people have been looking for a job for more than half a year.
The U.S. economy will create 2 million jobs in 2011, twice as many as last year, said Scott Brown, the most accurate forecaster of the jobless rate over the past two years according to Bloomberg News calculations.
Unemployment will end the year at 8.6 percent, projected Brown, chief economist at Raymond James & Associates Inc., less than the 8.8 percent median forecast of 61 economists surveyed by Bloomberg from Feb. 2 to Feb. 8. It dropped to 9 percent in January from 9.4 percent the prior month.
Economists in the survey don’t expect the Fed to raise its key interest rate from almost zero until the first quarter of 2012.
Joshua Zumbrun in Washington at email@example.com.
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