The failure to bring joblessness closer to Fed officials’ longer-run goal of 5.2 percent to 6 percent has prompted Bernanke and his lieutenants to emphasize the need for economic growth over price stability, said John Silvia, chief economist at Wells Fargo Securities LLC. Bernanke added to his record monetary stimulus last month and said more action will be needed without “sustained improvement” in the jobs outlook.
“The employment number just isn’t improving; it’s the thing that’s out of whack,” Silvia said in a telephone interview from his Charlotte, North Carolina, office. “Yes, you’ve got a dual mandate, but like everything else in life sometimes you’ve got to focus on one more than the other.”
Bernanke, who is delivering his semi-annual monetary-policy report to Congress today and tomorrow, said June 20 that policy makers are focusing “primarily” on the outlook for jobs in deciding whether to ease further. The Federal Open Market Committee last month prolonged its maturity-extension program, known as Operation Twist, through the end of the year by $267 billion.
In his testimony today, Bernanke said progress in reducing unemployment probably will be “frustratingly slow,” and he repeated that the central bank is ready to take more action to boost the recovery. Recent economic data have had a “generally disappointing tone,” he said, adding that the U.S. probably expanded at an annual rate of less than 2 percent in the second quarter.
Unemployment climbed to 8.2 percent in May and held there last month after declining to 8.1 percent in April from a peak of 10 percent in October 2009, according to data from the Labor Department. Fed officials in June raised their projections for the rate, predicting 8 percent to 8.2 percent at year-end compared with their April estimate of 7.8 percent to 8 percent. For 2013, they see 7.5 percent to 8 percent, up from 7.3 percent to 7.7 percent.
“When people look back at the Bernanke years, I doubt they’ll be critical of him if the unemployment rate is falling but just not as fast as people would like, because there’s a recognition that this was a deep recession,” said Dean Maki, chief U.S. economist in New York at Barclays Plc. “If the unemployment rate simply stopped falling and did not fall for the rest of his term, that would be more of a problem for his legacy.”
Economists Carmen Reinhart and Kenneth Rogoff found a “deep and lasting effect” of financial crises on output, employment and asset prices in their 2009 book “This Time Is Different: Eight Centuries of Financial Folly.” The authors traced similarities among such crises in 66 countries dating back to medieval times, including sovereign defaults, banking panics and inflationary surges.
Given that the 18-month recession followed the same pattern, “it would be unfair” to blame the Fed for prolonged high joblessness, as the central bank “has been very aggressive and very innovative,” said Dana Saporta, U.S. economist in New York at Credit Suisse Group AG.
Reinhart and Rogoff didn’t return calls seeking comment.
Bernanke, chairman of the Fed since 2006, has proved to be modern history’s most activist U.S. central-bank chief in fighting the worst financial crisis since the Great Depression and trying to jump-start the economy.
He rescued Bear Stearns Cos. and American International Group Inc. (AIG) in 2008 by taking mortgage assets onto the Fed’s balance sheet, bolstered money-market mutual funds and provided emergency loans to investment banks. The Fed has conducted stress tests since 2009, putting the balance sheets of the nation’s biggest banks through scenarios of economic turmoil.
The Fed chief lowered the target for the federal funds rate to near zero in December 2008, purchased $2.3 trillion in securities during two rounds of so-called quantitative easing and announced in September the program to swap short-term holdings for longer-maturity debt in an effort to cut interest rates further.
Bernanke also has used communications as an easing tool since the central bank can’t reduce its benchmark rate any further. In January, the Fed said it plans to keep borrowing costs near record lows through at least late 2014.
The unprecedented monetary easing hasn’t prevented a slowdown in growth: The U.S. expanded at a 1.9 percent pace in the first quarter, down from 3 percent in the last three months of 2011. The economy grew by 1.8 percent in the second quarter as the deepening sovereign-debt crisis in Europe weighed on the U.S., according to the median estimate of 69 economists surveyed July 6 to July 10 by Bloomberg News.
Bernanke’s actions also have sparked criticism from both ends of the spectrum: Republicans including House Speaker John Boehner of Ohio warn the stimulus risks accelerating prices, while Nobel-prize winning economist Paul Krugman argues Bernanke hasn’t done enough to create jobs and should tolerate higher inflation.
No Rate Boost
Charles Evans, president of the Federal Reserve Bank of Chicago, has advocated increasing the central bank’s emphasis on bringing down unemployment by saying policy makers won’t boost interest rates until either unemployment falls below 7 percent or inflation rises above 3 percent.
Evans “would be getting more traction right now, because it does appear the Fed can pursue an easier policy without threatening an inflation problem,” Silvia said.
The personal-consumption-expenditures price index climbed 1.5 percent for the 12 months through May and has averaged 1.8 percent since the recession ended in June 2009.
Bond traders predict prices will continue accelerating at a similar pace, as the break-even rate for five-year Treasury Inflation Protected Securities was 1.8 percentage points on July 16. The rate, a yield difference between the inflation-linked debt and comparable maturity Treasuries, is a measure of the outlook for consumer prices over the life of the securities.
While the Fed in January joined other central banks including the Bank of Mexico and theReserve Bank of New Zealand in adopting an inflation goal, it differs from many of its counterparts because it also must follow a congressional mandate to promote full employment, or the maximum amount of jobs created before companies bid up wages.
The Fed said in a January statement that it would “not be appropriate” to fix a goal for the unemployment rate because the elements that determine maximum employment “change over time and may not be directly measurable.” Policy makers estimate the range for their longer-run goal could be from 4.9 percent to 6.3 percent. The central tendency, excluding the three highest and lowest estimates, is 5.2 percent to 6 percent.
Some policy makers within the Fed have argued that monetary stimulus isn’t effective at creating jobs, suggesting that people who lost work during the recession don’t have the skills to qualify for openings being created. Philadelphia Fed President Charles Plosser said May 1 that “solutions to this problem are not amenable to monetary-policy fixes.”
It does “become a bit harder when the battle is against a more general economic malaise, given the Fed’s more limited tools,” said Saporta, who predicts the Fed will announce a third round of asset purchases in September. “Each iteration” of stimulus “seems to be less potent.”
If there’s “no sign of improvement whatsoever” in job growth in July and August, then the Fed probably will “think hard” about QE3 in September, Maki said, adding that monthly payroll increases over 100,000 probably would negate the need for such stimulus.
The economy added 80,000 jobs in June, missing the 100,000 median estimate of economists in a Bloomberg News survey, after a revised 77,000 in May and 68,000 in April, the slowest pace in almost a year. Bernanke said in April that employment growth of 100,000 a month is needed for “stability” in the job market, and payroll increases of about 150,000 to 200,000 are consistent with the Fed’s forecasts for joblessness.
“The QEs, the Twists, it’s all been aimed at the employment mandate,” Maki said. “What is changing right now is that the headline inflation figures have dropped and that gives them a little more leeway not to think there’s a significant trade-off between their goals at this time.”