NEW YORK – While recovery continues, perhaps a little stronger than it has been, the low inflation rate combined with high unemployment would normally push the Federal Open Market Committee to cut rates, if they weren’t already near zero, Federal Reserve Board Chairman Ben S. Bernanke said Thursday.
“In sum, although economic growth will probably increase this year, we expect the unemployment rate to remain stubbornly above, and inflation to remain persistently below, the levels that Federal Reserve policymakers have judged to be consistent over the longer term with our mandate from the Congress to foster maximum employment and price stability,” Bernanke told the National Press Club, according to prepared remarks released by the Fed. “Under such conditions, the Federal Reserve would typically ease monetary policy by reducing the target for its short-term policy interest rate, the federal funds rate.”
Bernanke defended the asset purchase program, noting, the Fed continues to review it and policymakers “have the necessary tools to smoothly and effectively exit from the asset purchase program at the appropriate time.” If needed, Bernanke said, policy could be tightened by redeeming or selling securities.
The recovery began with the “stabilization of the financial system, the effects of expansionary monetary and fiscal policies, and a strong boost to production from businesses rebuilding their depleted inventories,” he said. However, rebuilding inventory can only take the economy so far. “Fiscal stimulus diminished and as Europe’s debt problems roiled global financial markets.”
A self-sustaining recovery, spurred by consumer and business spending could be emerging, as “recent gains in consumer spending look to have been reasonably broad based.”
While employment improvement has been dismal, initial claims have been trending down and job openings and businesses’ hiring plans have risen. But, Bernanke reiterated that since employers don’t want to expand payrolls, “it will be several years before the unemployment rate has returned to a more normal level.”
The proof of a recovery in employment will be “a sustained period of stronger job creation.”
Despite higher gas prices, Bernanke said, “overall inflation remains quite low.”
Bernanke rehashed his concerns about the federal budget deficit and how it “will remain on an unsustainable path,” without “significant changes in fiscal programs.”
Should government debt and deficits grow at the pace expected, he warned, “the economic and financial effects would be severe,” including draining funds from private investment, raising our debts to foreigners and slashing U.S. output, incomes, and standards of living.
