Federal Reserve Chairman Ben S. Bernanke said the U.S. needs to see faster job growth for a sufficient time before policy makers can be assured the economic recovery has taken hold.
“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 said today in a speech at the National Press Club in Washington. “Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established.”
Bernanke said economic growth will pick up this year and the Fed’s purchases of $600 billion in Treasuries are “providing significant support to job creation and the economy.” At the same time, his emphasis on labor-market weakness means the central bank is likely to leave stimulus in place for a while, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York.
“The Fed is still in a very growth-supportive policy stance,” said Feroli, a former Fed researcher. “I don’t think they make any premature feints toward heading to the exit.”
Bernanke, 57, gave no indication whether he’ll maintain or adjust monetary stimulus after the Fed finishes the asset buying in June. Policy makers have held the main interest rate near zero since December 2008.
“It bears emphasizing that we have the necessary tools to smoothly and effectively exit from the asset purchase program at the appropriate time,” he said.
The Fed chief repeated his call for Congress to come up with a plan to control the federal budget deficit and the projected surge in health-care costs that will fuel spending if left unchecked. He said twice in his speech that the fiscal challenge is “daunting.”
“Acting now to develop 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,” he said.
Bernanke cautioned lawmakers about the costs of not raising the debt ceiling, saying in reply to an audience question that such action could put the U.S. “into a position of defaulting on its debt and the implications of that, for our financial system, for our fiscal policy, for our economy, would be catastrophic.”
The chances of such an outcome are “very remote but it’s not something you want to play around with,” he said.
The government will hit the $14.29 trillion legal limit on U.S. borrowing by the end of May, a little later than initially projected because tax revenue have been more robust than expected, the Treasury Department said in a statement yesterday.
Bernanke’s comments are his first since policy makers agreed at a Jan. 25-26 meeting to press on with their bond-buying plan. He is also scheduled to testify Feb. 9 at the House Budget Committee.
A report today from the Institute for Supply Management showed service industries in the U.S. expanded in January at the fastest pace since August 2005. Other recent data have shown gains in manufacturing and retail sales.
“The economic recovery that began in the middle of 2009 appears to have strengthened in recent months, although, to date, growth has not been fast enough to bring about a significant improvement in the job market,” Bernanke said.
Added to Payrolls
A Labor Department report scheduled to be released tomorrow will probably show that employers added 145,000 people to payrolls last month, and the jobless rate rose to 9.5 percent, based on the median estimates of economists surveyed by Bloomberg News.
Job gains at companies last year “were barely sufficient to accommodate the inflow of recent graduates and other new entrants to the labor force and, therefore, not enough to significantly reduce the overall unemployment rate,” Bernanke said. Private employers added an average of 112,000 jobs a month last year.
Bernanke may seek overall payroll gains of at least 200,000 a month for six months before becoming more comfortable with the recovery, Feroli said.
In response to a question after the speech, Bernanke said “the economy has to grow about 2.5 percent in real terms just to accommodate people coming into the labor force.”
In the second quarter of 2010, the economy grew 1.7 percent, followed by 2.6 percent growth in the third quarter and 3.2 percent in the fourth quarter, according to a report from the Commerce Department last week.
“Looking forward to 2011 we think it will be above 2.5 percent and therefore we expect to see unemployment declining over time,” Bernanke said.
Fed policy makers are showing little alarm over the rise in food and energy prices. The central bank’s Jan. 26 statement acknowledged rising commodity prices while saying that longer-term inflation expectations were stable and “underlying inflation” was still on the decline.
While prices of some “highly visible” items such as gasoline have “significantly” increased recently, “overall inflation remains quite low” and wage growth has slowed, Bernanke said. “These downward trends in wage and price inflation are not surprising, given the substantial slack in the economy,” Bernanke said.
A measure of long-term inflation expectations, the 10-year breakeven rate between nominal and inflation-indexed bonds, was 2.34 percent yesterday, down from a high this year of 2.41 percent on Jan. 5.
The inflation gauge most closely watched by the Fed, the Commerce Department’s core personal consumption expenditures price index excluding food and energy, rose 0.7 percent in December from a year earlier, the smallest advance since records began in 1959.
Bernanke attributed rising food and energy prices primarily to increasing demand, saying that for commodities “the most important development globally is the fact that the world economy is growing more quickly particularly in emerging markets.”
Bernanke said rising prices were not the primary cause of turmoil in Egypt. The protests against Egyptian President Hosni Mubarak are having limited impact on global financial markets, where investors see few parallels with Iran’s 1979 revolution or the contagion that followed Thailand’s meltdown 13 years ago.
Today’s appearance extends Bernanke’s public defense of the asset purchases, dubbed QE2 for the second round of quantitative easing. The plan sparked a backlash from Republican leaders in Congress who said it may weaken the dollar. The dollar has gained 1.6 percent against a basket of six currencies since Nov. 3, the day the Fed announced its expanded asset purchases.