ARLINGTON, Va. - Federal Reserve Chairman Ben Bernanke Monday made clear while there have been recent positive developments in the U.S. economy, he is not yet ready to declare the Fed's mission accomplished and instead remains on the lookout for more "persuasive" signs that the recovery no longer requires assistance.
"I think it remains important for us to remain cautious and see how the economy develops," Bernanke said while taking questions following a speech at the National Association for Business Economics' economic policy conference. "What we are looking for is whether those positive elements are sustained and whether they lead to a self-sustaining recovery."
"We have seen better news lately," Bernanke acknowledged, citing the good news on the jobs front, "slight bits" of encouraging news in the housing market and the "relatively good" recovery in the manufacturing sector.
"So there are certainly some signs of improvement and those are very welcome," he said. "The interesting question at this point" is whether current improvements in the labor market will "continue to feed into consumer confidence -- which we see happening to some extent; will they start to feed into real earnings, including not just hourly wages but total earnings?"
"If that continues then we might begin to see the improvements in the labor market leading to a more self-sustaining recovery," Bernanke said. However, "we haven't really seen that in a persuasive way yet."
As for the recent decline in the number of unemployed Americans, "I think for the most part the change in unemployment during the recession and since the recession remain somewhat puzzling," Bernanke said.
One possible way to explain why the unemployment rate has come down despite slow growth is that "the trend of potential growth has slowed," he said, adding that taking all the evidence into account, "we face very slight adjustments in that direction."
For that to be the explanation, however, would require negative potential growth "and that does not seem plausible," Bernanke said.
Asked about unemployment insurance and how much it influences the decision of the long-term unemployed to continue collecting benefits rather than seek employment, Bernanke it is a very important part of the U.S. support system.
"We think the effect on the unemployment rate of unemployment insurance is fairly small," he said.
"In particular, I would not attribute the extent of long-term unemployment or the very high level of unemployment to unemployment insurance," Bernanke added.
Another theory is that the struggling U.S. housing market could be affecting the unemployment rate, he said, as it might be limiting workers' ability to move in search of jobs.
However, there is not much evidence to support this view, he noted, as data does not show much difference in the unemployment rate of homeowners compared to renters, or those in states where house prices have plummeted vs. states where prices have been more stable.
Still, "there are a lot of things happening in the labor market that we don't fully understand and we need to keep looking at all these different factors," Bernanke said.
As for inflation, Bernanke said with nominal wage growth still at 2% or lower, "there's not much indication of excess pressure on labor markets from the demand side so the slow rate of wage growth is consistent with a relatively weak labor market and a high degree of cyclical unemployment."
Unit labor costs have been "quite subdued," he continued, which suggests wages themselves "are not a major concern for inflation."
On the other hand, "we still need to be concerned about commodity prices and other factors but wages, at this point, remain quite subdued," Bernanke said.
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