WASHINGTON — Comfortable talking with economic teachers, Federal Reserve Board Chair Ben Bernanke was frank in his assessment of the economy Wednesday, saying the Fed had done quite a bit to help the recovery but that it is important that the central bank continues its efforts to lower the unemployment rate.
"As you know my term comes to an end in a few months, and I wish I was leaving with the unemployment rate at 5% instead of 7%," Bernanke said while answering questions from teachers in Washington and via a webcast. The unemployment rate in October was 7.3% down from more than 10% at the height of the recession.
"But we have done, I think, a good bit to support this recovery," Bernanke said. "And it's important we continue to provide the necessary support to put people back to work and keep inflation from falling too low."
He didn't elaborate on what that sentiment meant for the Fed's quantitative easing program, or when it might scale back on the $85 billion in monthly purchase of Treasuries and agency mortgage backed securities.
But the former Princeton professor was blunt with the teachers about the state of the economy — "right now, we're still in an incomplete recovery from the deep recession" — and where he expected the economy to get to. On the unemployment rate, Bernanke said, "we do think that we can get to 5-6%."
He added that "7% is not where we're going to be. I hope sooner rather than later, we get back to a more normal unemployment rate somewhere in the 5%-6% range," although he hastened to add "that's an estimate and it could be a little higher, could be a little lower."
Talking about how the Fed impacts the economy through raising and lowering interest rates, Bernanke said, "When economy is growing too slowly, like it is today — growing at a pace below its potential, with unemployment too high, inflation very low — the Fed tries to heat up the economy, tries to make it go more quickly by lowering interest rates."
Going into further details on the weakness of in the labor market, he said the unemployment rate "is still coming down very slowly" adding that "wages have not grown very quickly. A lot of people have been out of work for six months or more."
He pointed out this was a reason for the Fed's highly accommodative monetary policy. "With the labor market being weak, it's understandable that family incomes aren't where we'd like them to be," he said. "And that's the reason the Fed is aggressively trying to promote job creation, job growth, put people back to work."
Bernanke said, "I don't think 7% is as good as it gets," he said. "I think the unemployment rate will go down, I think the labor market will get stronger."
Responding to a question about the impact of low interest rates on savings, Bernanke said, "Unfortunately, low interest rates, for the time being, are a fact of life."
Bernanke and the Fed have said they will keep interest rates low until unemployment reaches 6.5% and inflation heads back to its 2% target.
He said, "I expect interest rates will rise over time, but right now I would agree with the student that interest rates are quite low." He quickly added, though, that it is still important for students to save.
Asked what he hoped his legacy would be at the Federal Reserve, Bernanke said, "It's been an eventful eight years, there's no doubt about that."
He told the teachers the financial system "is much healthier than it was, obviously, a few years ago," and pointed out that the Fed has been "innovative, I think, in finding ways to provide support for monetary policy to help the economy recover. Not as quickly as we would like, but at least surely going in the right direction."
He also praised the Fed's effort to get banks to raise capital levels and improve liquidity, as well as working with other regulators on orderly liquidation resolutions.
Bernanke said one of his "personal objectives" at the Fed had been to increase transparency "to give greater clarity about our policies, why we're taking decisions we're taking, how our decisions are intended to work, and so on."
The improved communication, "I think increases confidence," he said. "I think it makes policy work better and it also improves our accountability to Congress and the American people."
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