Tags: Bernanke | Growth | Inflation Still Missing Fed Goals

Bernanke: 'Low' Inflation Proves Economy Still Needs Fed's Help

Thursday, 03 February 2011 12:45 PM

Federal Reserve Chairman Ben 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 awhile 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.”

While Bernanke said economic growth will pick up this year and the Fed’s purchases of $600 billion in Treasurys are “providing significant support to job creation and the economy,” he gave no indication whether he’ll maintain or adjust monetary stimulus after the Fed finishes the asset buying in June. Bernanke has 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,” Bernanke, 57, said in prepared remarks.

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.”

‘Credible Program’

“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’s comments are his first since policy makers agreed at a Jan. 25-26 meeting to press on with their bond- buying plan. After the speech, Bernanke will face the most extensive media questioning since his last appearance at the venue in February 2009. He is also scheduled to testify Feb. 9 at the House Budget Committee.

A report earlier 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 data in 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.

Jobs Report

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.

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.

‘Substantial Slack’

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 omitted any mention of political 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.

Republican Backlash

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.

“A wide range of market indicators supports the view that the Federal Reserve’s securities purchases have been effective at easing financial conditions,” Bernanke said, citing higher stock prices, lower volatility in stocks, narrower corporate- borrowing premiums and “more normal” levels of inflation expectations.

Bernanke previously tried to rebuff criticism in a Washington Post opinion article and in a televised interview for CBS Corp.’s “60 Minutes.”

Group of Seven

The former Princeton University economist is the only central bank chief from among Group of Seven nations who doesn’t give press conferences to explain actions and projections. European Central Bank President Jean-Claude Trichet and Bank of Japan Governor Masaaki Shirakawa meet with the media after every policy meeting, while Bank of England Governor Mervyn King speaks once a quarter.

Fed officials are weighing whether Bernanke should hold regular press conferences and where to draw the line between confidential policy discussions and officials’ public comments, according to minutes of Fed meetings from October and November.

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Federal Reserve Chairman Ben 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 awhile and with employers reportedly still...
Bernanke,Growth,Inflation Still Missing Fed Goals
Thursday, 03 February 2011 12:45 PM
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