Federal Reserve Chairman Ben S. Bernanke said while he’s encouraged by the unemployment rate’s decline to 8.3 percent, continued accommodative monetary policy will be needed to make further progress.
The drop in unemployment may reflect “a reversal of the unusually large layoffs that occurred” in 2008 and 2009, and this process may now be over, Bernanke said in a speech today in Arlington, Virginia. Reducing the jobless rate further will probably require a quicker expansion of business production and consumer demand, which “can be supported by continued accommodative policies,” he said.
Stocks rallied as some investors bet Bernanke’s comments indicate further policy easing is still under consideration. The Federal Open Market Committee on March 13 raised its assessment of the economy while repeating that interest rates are likely to stay low at least through late 2014.
“The bar is, and has been, pretty low for additional action,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “The narrative is, while we have had some improvement, it is not that great, and it’s not clear it is going to last. Now is not the time to be thinking about taking back any of the accommodation.”
The Standard & Poor’s 500 Index (SPX) increased 1.4 percent to 1,416.51 at 4 p.m. in New York, returning to its highest level in almost four years. Treasury 30-year bond yields rose the most in a week as Bernanke’s comments boosted bets inflation will accelerate. The yield climbed three basis points, or 0.03 percentage point, to 3.34 percent.
“A wide range of indicators suggests that the job market has been improving, which is a welcome development indeed,” Bernanke said to the National Association for Business Economics. “Still, conditions remain far from normal, as shown, for example, by the high level of long-term unemployment and the fact that jobs and hours worked remain well below pre-crisis peaks, even without adjusting for growth in the labor force.”
Recent “better news” on the U.S. economy has also included a “slight bit of encouraging news here and there in the housing market” and strength in manufacturing, Bernanke said in response to audience questions.
Those improvements could contribute to higher consumer confidence and lead to a self-sustaining recovery, he said. “We haven’t seen that in a persuasive way yet,” Bernanke said.
The Fed chairman also said the slow growth in wages was consistent with his belief that weak demand was most responsible for high unemployment.
Unit Labor Costs
“There is not much indication of excess pressure” on worker salaries, he said. “Unit labor costs have been quite subdued. Obviously, that suggests wages are not a major concern for inflation.” Still, the Fed must be worried about commodity prices, he said.
He said that unemployment insurance has a “fairly small” impact on the jobless rate. “I would not attribute the extent of long term unemployment or the high level to unemployment insurance,” he said.
First-time claims for unemployment insurance decreased by 5,000 to 348,000 in the week ended March 17, the fewest since February 2008. About 1.2 million jobs were created in the past six months, the most since the same period ended May 2006, Labor Department figures show. The unemployment rate held in February at a three-year-low of 8.3 percent.
“We cannot yet be sure that the recent pace of improvement in the labor market will be sustained,” Bernanke said, adding he was particularly concerned about the number people out of work for six months or longer.
While some Fed officials have argued that structural reasons, such as a poor match between jobs and worker skills, are to blame for an increasing part of unemployment, Bernanke said he believes otherwise.
“While cyclical and structural forces have doubtless contributed to the increase in long-term unemployment, the continued weakness in aggregate demand is likely the predominant factor,” he said.
Bernanke’s concern over unemployment has been echoed by other Fed officials. While economic reports have improved, it is “far too soon to conclude that we are out of the woods” and “nothing has been decided” on more bond purchases, New York Fed President William C. Dudley said March 19. Chicago Fed President Charles Evans said March 22 that “clearly, more accommodation would be appropriate” with unemployment too high.
Some officials are more optimistic. James Bullard, president of the St. Louis Fed, and Atlanta’s Dennis Lockhart said last week that the improving U.S. economy is reducing the need for additional easing.
“As the U.S. economy continues to rebound and repair,” additional steps “may create an overcommitment to ultra-easy monetary policy,” Bullard said in a speech in Hong Kong. Lockhart said in Washington that “we should hold the balance sheet where it is for the time being and watch how the economy evolves.”
Bernanke, 58, a former economics professor at Princeton University, has drawn lessons from the Great Depression in taking unconventional actions following the 2008 financial crisis. The Fed has held interest rates near zero since 2008 and purchased $2.3 trillion in bonds to spur growth after unemployment rose to as high as 10 percent in 2009.
The U.S. economy expanded at a 3 percent annual rate in the fourth quarter, the fastest pace in more than a year, as households spent more freely. Growth will probably slow to 2 percent this quarter, according to the median of 72 economists’ forecasts in a Bloomberg News survey from March 9 to March 13.
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