Bernanke Defends Fed Policy on Job Growth, Inflation

Although the economy has improved in the past year, Federal Reserve Chairman Ben Bernanke told lawmakers that they still must cut the growing budget deficit.  “We still have a long way to go before the labor market can be said to be operating normally,” Bernanke said in testimony to the Senate Budget Committee.  “Particularly troubling is the unusually high level of long-term unemployment.”

According to Bernanke, the 8.3 percent unemployment rate understates the weakness of the labor market.  He reminded the committee that it is necessary to also consider other measures of the labor market, including underemployment.  Although the jobless rate has fallen five months in a row, it is still higher than the 5.2 to six percent that the Fed believes is consistent with maximum employment.  The percentage of the unemployed who have been jobless for 27 weeks or longer rose to 42.9 percent in January, compared with 42.5 percent in December, according to the Department of Labor.

“Over the past two and a half years, the U.S. economy has been gradually recovering from the recent deep recession,” Bernanke said.  “While conditions have certainly improved over this period, the pace of the recovery has been frustratingly slow, particularly from the perspective of the millions of workers who remain unemployed or underemployed.”

At the same time, Bernanke cautioned the Senators against holding back short-term economic growth by cutting the budget too much in the name of controlling the deficit.

The upbeat jobs data – the private sector added 243,000 jobs in January, sending the unemployment rate down to 8.3 percent – caused some Senators to ask about the Fed’s monetary policy as the economy shows more signs of life.  The Federal Open Markets Committee (FOMC) recently said that it expected to keep interest rates at historically low levels through late 2014.  Bernanke said the strategy is a reaction to concerns that low interest rates might set off inflation by noting that prices did not rise significantly during 2011.

Rather, Bernanke said that the Fed is consciously taking a “balanced approach” to spur economic growth with low inflation.  Previously, Bernanke told the House Budget Committee that the Fed would not sacrifice its two percent inflation goal to jump start employment.  ‘Over a period of time we want to move inflation always back toward 2 percent,” Bernanke told Representative Paul Ryan (R-WI), the committee’s chairman.  “We’re always trying to bring inflation back to the target.”

Bernanke offered a strong defense of the Fed’s inflation goal after Ryan suggested it should tolerate higher inflation to assure maximum employment.  “In looking at the two sides of the mandate, the rate of speed, the aggressiveness, may depend to some extent on the balance between the two objectives,” Bernanke said.  “We are always trying to return both objectives back to their mandate.”  Ryan, who has backed legislation to require the Fed focus exclusively on stable prices, said that he is “greatly concerned to hear the Fed recently announce that it would be willing to accept higher-than-desired inflation in order to focus on the other side of its dual mandate.”

Also during his testimony, Bernanke reiterated a promise to prevent Europe’s financial crisis from harming the American economy. “We are in frequent contact with European authorities, and we will continue to monitor the situation closely and take every available step to protect the U.S. financial system and the economy,” Bernanke told the Senate Budget Committee.