NEW YORK – The economic recovery should be a little stronger in 2011 than in 2010 and “a self-sustaining recovery in consumer and business spending may be taking hold,” but federal deficits threaten the economy, Federal Reserve Board Chairman Ben S. Bernanke told the Senate Committee on the Budget Friday.
“It is widely understood that the federal government is on an unsustainable fiscal path. Yet, as a nation, we have done little to address this critical threat to our economy. Doing nothing will not be an option indefinitely; the longer we wait to act, the greater the risks and the more wrenching the inevitable changes to the budget will be,” Bernanke said, according to prepared text of his remarks, which was released by the Fed.
The recovery is proceeding “at a pace that has been insufficient to reduce the rate of unemployment significantly,” but “a self-sustaining recovery” may be starting and should be “moderately stronger in 2011 than it was in 2010,” he added.
Labor woes continue, indications are that job openings and hiring plans appear stronger going forward, it should be a “considerable time” before unemployment drops to a “more normal level.” Also, Bernanke expressed concern that about 40% of those unemployed have been out of work for more than six months, which “not only imposes exceptional hardships on the jobless and their families, but it also erodes the skills of those workers and may inflict lasting damage on their employment and earnings prospects.”
Based on projections by FOMC members, Bernanke said it could take four to five years for the employment level to return to “normal” levels.
Inflation is expected to remain subdued. Bernanke noted, “... in circumstances like those we face now, very low inflation or deflation does not necessarily imply any increase in household purchasing power. Rather, because of the associated deterioration in economic performance, very low inflation or deflation arising from economic slack is generally linked with reductions rather than gains in living standards.”
Bernanke said that high jobless rates and low inflation would usually cause the FOMC to cut its target for the federal funds rate, which can’t be done, so the FOMC has turned to alternative methods of to provide monetary accommodation.
