Long slog to lower US jobless rate: Bernanke
Reuters in Washington and New York
The US jobless rate is unlikely to reach more normal levels for several years, Federal Reserve Chairman Ben Bernanke said as he again defended the central bank’s forceful easing of monetary policy.
Appearing before a congressional panel for a second straight day, Bernanke downplayed signs of internal divisions at the Fed, saying the policy of quantitative easing, or QE, has the support of a “significant majority” of top central bank officials.
One lawmaker asked Bernanke when the economy might produce enough jobs to bring the unemployment rate, currently at 7.9 per cent, down to 6 per cent - the top of the Fed’s long-term forecast range.
“A reasonable guess for 6 per cent would be around 2016, about three more years,” Bernanke told the House of Representatives Financial Services Committee.
Moreover, as he had in an appearance before the Senate Banking Committee on Tuesday, the Fed chairman countered the notion that the Fed’s loose monetary stance might be fuelling asset bubbles or inflation.
“It’s our view that there’s still a good bit of slack in the economy. I don’t think the economy is overheating,” he said.
Financial markets were again encouraged by Bernanke’s remarks, with stocks rallying for a second day on the Fed chief’s signal of continued stimulus combined with enthusiasm over strong figures on business investment plans.
“He is going to be refilling the punchbowl for a very long time,” said Keith Bliss, senior vice-president at Cuttone & Co in New York.
In response to the financial crisis and deep recession of 2007-2009, the Fed slashed official borrowing costs to effectively zero and bought more than US$2.5 trillion (HK$19.4 trillion) in mortgage and Treasury securities to keep long-term rates low.
It is currently buying US$45 billion (HK$349.1 billion) in Treasuries and US$40 billion (HK$310.3 billion) in mortgage bonds per month, a policy Fed officials backed in an 11-1 vote in January. However, minutes of that meeting released last week showed many officials had concerns over the risks presented by the central bank’s policy course.
Dallas Fed President Richard Fisher, who is among the minority of so-called hawks at the central bank, said later on Wednesday that he would like the Fed to immediately taper the purchases because the US housing market is on sounder footing.
“The fact that the housing market gears have now begun to mesh is why I believe we are running the risk of overkill by continuing our mortgage-backed securities purchase program at the current pace, and I have suggested that we begin tapering those purchases,” Fisher said at Columbia University.
“Personally I would begin tapering Treasuries as well,” he later told reporters. “I would like to start now. I just don’t think the benefits are worth the costs.”
But most Fed officials are eager to continue the extraordinarily easy policies given the high jobless rate and the fact that inflation is below their 2 per cent target, and they do not want to derail a recovery that has faltered in each of the last three years.
Bernanke argued the Fed’s policy easing deserves at least some credit for the ongoing economic recovery, even if growth remains fragile and vulnerable to looming short-run spending cuts from the US government.
Indeed, he argued that current plans for abrupt short-term deficit reduction could be counterproductive, even for the purposes of reducing government debt levels.
“I’m still concerned about the short-run impact on jobs,” he said. “(You) don’t get as much benefit as you think because if you slow the economy that hurts your revenues and that means your deficit reduction is not as big as you think it is.”
A number Republicans on the House committee said they also were concerned about the Fed’s actions.
“For diminishing marginal benefits, the Federal Reserve’s unconventional strategy creates considerable risks,” said Representative Jeb Hensarling, the panel’s chairman. “If the (Fed’s) balance sheet is not unwound at the right time and at the right pace, we could be looking at another deep recession, soaring inflation or skyrocketing interest rates.”
Bernanke tried to soothe such worries, expressed by a number of lawmakers, that the central bank was so far into uncharted policy territory that an exit could be problematic.
Admitting the Fed would face an unprecedented task, Bernanke nonetheless said the central bank has the right tools to exit when the time comes, adding that those measures have been tested and used in other countries.