Bernanke Holds to 2014 Low-Rate Vow Even as Unemployment Falls

Federal Reserve Chairman Ben S. Bernanke
Ben S. Bernanke, chairman of the Federal Reserve. Photographer: Andrew Harrer/Bloomberg

Federal Reserve Chairman Ben S. Bernanke is holding to his pledge to keep borrowing costs close to zero at least through late 2014 even after unemployment unexpectedly fell to a three-year low.

Bernanke told the Senate Budget Committee in Washington yesterday that the decline in the jobless rate to 8.3 percent in January veils weaknesses in the U.S. labor market. Fed officials last month said they didn’t expect such progress until the fourth quarter.

“It is very important to look not just at the unemployment rate, which reflects only people who are actively seeking work,” Bernanke said in response to a lawmaker’s question during his testimony. “There are also a lot of people who are either out of the labor force because they don’t think they can find work” or who have taken part-time jobs.

The comments suggest Bernanke won’t alter his 2014 rate pledge until he sees faster economic growth, strong employment gains over many months or a risk that what he calls “subdued” inflation may speed up, said Dean Maki, chief U.S. economist at Barclays Capital Inc. The Fed chairman has held the benchmark federal funds rate at zero to 0.25 percent since December 2008.

“Bernanke did not give any indication that the Friday job market report is changing the fundamental way they are viewing the economy,” Maki, who is based in New York, said of the Feb. 3 release by the Labor Department. “It is going to take a number of favorable reports before their view on monetary policy shifts.”

Growth Estimates

Fed officials last month estimated that the world’s largest economy will grow 2.2 percent to 2.7 percent this year, according to the central tendency estimate, while the unemployment rate will average 8.2 percent to 8.5 percent in the fourth quarter.

“The 8.3 percent no doubt understates the weakness of the labor market in some broad sense,” Bernanke said, while noting that some job indicators are improving.

“We still have a long way to go before the labor market can be said to be operating normally,” he said in his prepared remarks.

The central bank’s forecast suggests the economy will grow fast enough to absorb new entrants into the workforce, while “not making sharp improvements on the unemployment rate,” Bernanke said.

Stocks rose yesterday as Greece’s government made progress on measures to secure international aid. The Standard & Poor’s 500 Index climbed 0.2 percent to 1,347.05 in New York. The yield on the 10-year Treasury note rose to 1.97 percent from 1.91 percent on Feb. 6.

Five Months

While the jobless rate has dropped for five consecutive months, it remains above the 5.2 percent to 6 percent that Fed officials say is consistent with maximum employment. The percentage of the unemployed who have remained without work for 27 weeks or more rose to 42.9 percent in January from 42.5 percent in December, the Labor Department said.

The Bureau of Labor Statistics said in a report yesterday that the number of unemployed persons per job opening was 3.9 in December 2011. That’s an improvement from 6.1 when the recession ended in June 2009, yet still above 1.8 when the downturn began December 2007.

The number of job openings climbed by 258,000, the biggest gain since February 2011, to 3.38 million. Excluding government agencies, work opportunities at private employers climbed to the highest level since August 2008.

Speaking on fiscal policy, Bernanke urged lawmakers to avoid sudden tightening while securing a long-term program that balances spending and revenue. Congress should develop a “credible, strong plan, but one that phases in over a period so that the economy will not hit a huge pothole,” he said.

Deficit to Shrink

The nonpartisan Congressional Budget Office said last week it expects the deficit to narrow to $1.1 trillion this fiscal year from $1.3 trillion last year. The gap would reach $1.5 trillion by 2022, the CBO estimated, and the debt would rise to levels unseen since the government was paying off its World War II expenses.

Rising government debt threatens to crowd out private capital formation and raises the risk of a fiscal crisis, Bernanke told the committee.

“It is very clear” that “on current, reasonable expectations about policy that the U.S. federal deficit will be unsustainable within 15 or 20 years at the most,” Bernanke said. Congress should clarify the nation’s fiscal plan “as soon as possible.”

“As we have seen in a number of countries recently, interest rates can soar quickly if investors lose confidence in the ability of a government to manage its fiscal policy,” he said.

Spending Cuts

The central bank chief also said lawmakers risk slowing the economic rebound if they let spending cuts and tax cuts take hold next year without some counteracting measures.

“There will be a very sharp change in the stance of the federal government, which by itself -- with no compensating action -- would slow the recovery,” Bernanke said. “As we get closer to Jan. 1, and Congress has not given a clear road map for how it plans to proceed, that would certainly affect planning business decisions, household decisions.”

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