Federal Reserve Chairman Ben S. Bernanke said the decline in the unemployment rate is likely to be slow even with a pickup in U.S. growth this year, signaling no change in the central bank’s monetary stimulus.
At the pace of improvement projected by Fed officials, “it could take four to five more years for the job market to normalize fully,” Bernanke said today in prepared testimony to the Senate Budget Committee. Bernanke also stepped up the urgency of his call for a plan to reduce the federal budget deficit, saying “prompt adoption” of one could have economic benefits in the long and short run. The Fed chief is defending his unorthodox program of buying $600 billion of Treasuries through June to meet the Fed’s mandates for full employment and stable prices. He spoke an hour after the government reported U.S. employers added 103,000 workers to payrolls last month, less than forecast by economists. The jobless rate fell to 9.4 percent from 9.8 percent, reflecting gains in jobs and fewer people in the labor force.
“In a situation in which unemployment is high and expected to remain so and inflation is unusually low,” the Federal Open Market Committee “would normally respond by reducing its target for the federal funds rate,” Bernanke said in his first public remarks on Capitol Hill since September.
Instead, with the rate close to zero since December 2008, the Fed is buying securities in an effort to keep market borrowing costs low, he said, building on the first round of $1.7 trillion in debt purchases that “appeared to be successful in influencing longer-term interest rates, raising the prices of equities and other assets, and improving credit conditions more broadly, thereby helping stabilize the economy and support the recovery.”
Without referring to the rise in Treasury yields since the November decision to expand stimulus, Bernanke said in a footnote that “longer-term interest rates are also influenced by market expectations of the future path for short-term interest rates, which in turn depend on the outlook for the economy and so for the target federal funds rate.”
In another footnote, Bernanke said the testimony was submitted prior to today’s Labor Department report on employment.
Bernanke, 57, met privately in November with Senate Banking Committee members to defuse criticism of the easing, saying the plan will spur job growth while not impairing the Fed’s ability to control inflation.
Allies in Congress
Bernanke lost allies in Congress last month with the retirement of senators including New Hampshire Republican Judd Gregg, formerly the senior Republican on the budget panel, and Connecticut Democrat Christopher Dodd, who led the banking committee for four years. Republicans took control of the House and narrowed Democrats’ Senate majority in the midterm elections.
House Speaker John Boehner of Ohio, then the minority leader, and three other Republicans voiced “deep concerns” in a Nov. 17 letter to Bernanke about a policy that they said may undermine the dollar and create asset price bubbles.
In December, former Fed Governor Laurence Meyer of Macroeconomic Advisers LLC said chances had increased of a 5 percent pace of U.S. growth in late 2011. The central bank will probably stop at $600 billion in purchases instead of raising the total to $1 trillion, he said.
Bernanke said that the longer lawmakers wait to deal with the federal budget deficit, “the greater the risks and the more wrenching the inevitable changes to the budget will be.”
“By contrast, the prompt adoption of 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,” Bernanke said.
Republicans have promised to seek cuts to reduce a budget deficit that may widen to $1.34 trillion for fiscal 2011, Credit Suisse Group AG strategists estimated on Dec. 7, a day after the president announced a deal with Republicans on extending Bush- era tax rates. The shortfalls were $1.29 trillion in fiscal 2010 and $1.42 trillion in fiscal 2009.
In October, Bernanke gave one of his most detailed prescriptions for reducing the deficit, urging lawmakers to consider adopting rules that limit federal spending or debt to help put the U.S. on a more sustainable fiscal path.
Extending Tax Cuts
In July, Bernanke told lawmakers that extending at least some of the tax cuts beyond last month would help strengthen a U.S. economy still in need of stimulus and recommended offsetting the move with increased revenue or lower spending.
The U.S. economy probably expanded at a 2.5 percent pace in the fourth quarter, according to the median estimate of 65 analysts in a Bloomberg News survey last month. That compares with 2.6 percent in the third quarter and 1.7 percent in the three months through June.
“The pace of economic recovery seems likely to be moderately stronger in 2011 than it was in 2010,” Bernanke said.
Reports yesterday showed that the best holiday shopping season in five years lost luster after sales at U.S. retailers including Gap Inc. and Target Corp. fell short of analysts’ projections. Sales at stores open more than a year rose 3.2 percent in December, according to Retail Metrics Inc. That compared with the 3.5 percent average of estimates compiled by the firm and a 5.5 percent increase in November.
The Federal Open Market Committee next meets Jan. 25-26, when four regional Fed presidents are scheduled to rotate into voting slots for the year: Chicago’s Charles Evans, Richard Fisher of Dallas, Narayana Kocherlakota of Minnesota and Philadelphia’s Charles Plosser.
To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net
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