Bernanke Q&A: U.S. Needs Accommodative Monetary Policy for Foreseeable Future

CAMBRIDGE, Mass. — Federal Reserve Board Chairman Ben Bernanke said Wednesday that while the U.S. economy is improving, joblessness remains too high and inflation too low to allow the Fed to wind down its easy monetary policy any time soon.

"Put (it) all together and I think you can only conclude that highly accommodative monetary policy for the foreseeable future is what's needed in the U.S. economy," Bernanke said in response to questions following a speech before the National Bureau of Economic Research.

The Fed chief said America's current 7.6% jobless rate not only exceeds the 6.5% threshold the central bank has said it wants to see, but "if anything, (it) overstates the health of our labor markets."

Bernanke noted that workforce-participation rates and "many other indicators of underemployment and long-term unemployment" all point to a job market that is even weaker than the overall unemployment rate suggests.

At the same time, Bernanke said the current 1% core-inflation rate is below the Fed's stated 2% target.

"So, both sides of our mandate - both the employment side and inflation side - are saying that we need to be more accommodative," he said. "We have said that we're trying to achieve a substantial improvement in the outlook for the labor market in the context of price stability. We've made progress on that, but we still have further to go."

Bernanke also reiterated previous comments that markets should not expect the central bank to instantly tighten credit the minute the U.S. jobless rate falls to 6.5%.

"We've said that we will not raise interest rates at least until unemployment hits 6.5% as long as inflation is well behaved," but, he stressed, "again, as I've said before, that 6.5% is a threshold not a trigger. There will not be an automatic increase in interest rates when unemployment hits 6.5%."

Rather, Bernanke said, "given weakness in the labor market - the fact the unemployment rate probably understates the weakness of the labor market - and given where inflation is, I would suspect it may be well some time after we hit 6.5% before rates reach any significant level.

"So again, the overall message is accommodation," the central banker said. "There is some prospective, gradual, possible change in the mix of instruments - but that shouldn't be confused with the overall thrush of the policy, which is highly accommodative."

Bernanke also stressed that the central bank is as concerned about low inflation as it is about potential high inflation, since the Fed has to defend its inflation mandate from above and below, warning that too-low inflation could lead to harmful deflation.

"We think that there are some transitory factors at work which have brought inflation down a bit more than is fundamentally the case (and) we expect inflation to come back up," Bernanke said. "But if that's not the case, we have to say that that would be a good reason to remain accommodative."

He said he sees some improvement in the U.S. housing and auto markets, and "I take that as evidence that monetary policy is working - because those are two of the main channels (in which Fed easing) affects the economy."

Still, it is not yet clear that the U.S. economy has avoided problems from the federal government's "sequestration." Bernanke noted the Congressional Budget Office has estimated the sequester will trim 1.5 percentage points off of 2013 growth, adding: "It's still early to say that we have weathered the fiscal constraint. We're going to continue to watch and see whether growth is resilient going forward."

Asked whether accommodative monetary policy in advance economies could spark a currency war, he repeated that the Fed is not using monetary policy to weaken the U.S. dollar for trade reasons.

"If you look at the dollar, it's doing fairly well," Bernanke said. "It's not exactly falling."

Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.

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