NEW YORK – Despite recent improvement in the economy, the jobs picture has been slow to improve, Federal Reserve Board Chairman Ben S. Bernanke said today, adding that the federal budget deficit needs to be addressed.
Echoing comments he made last week before the National Press Club, Bernanke told the House Committee on the Budget the recovery seems to be strengthening despite the high unemployment rate.
“Although the growth rate of economic activity appears likely to pick up this year, the unemployment rate probably will remain elevated for some time,” Bernanke testified, according to prepared text released by the Fed. “In addition, inflation is expected to persist below the levels that Federal Reserve policymakers have judged to be consistent over the longer term with our statutory mandate to foster maximum employment and price stability. Under such conditions, the Federal Reserve would typically ease monetary policy by reducing its target for the federal funds rate. However, the target range for the federal funds rate has been near zero since December 2008, leaving essentially no room for further reductions. As a consequence, since then we have been using alternative tools to provide additional monetary accommodation.”
A self-sustaining recovery, spurred by consumer and business spending could be emerging, as “recent gains in consumer spending appear 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. Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established.”
Despite higher gas prices, Bernanke said, “overall inflation is still quite low and longer-term inflation expectations have remained stable.”
Bernanke rehashed his concerns about the federal budget deficit and how it “will remain on an unsustainable path,” without “significant changes in fiscal programs.”
He reiterated the Fed “will review the asset purchase program regularly in light of incoming information and will adjust it as needed to promote maximum employment and stable prices. In particular, we remain unwaveringly committed to price stability, and we are confident that we have the tools to be able to smoothly and effectively exit from the current highly accommodative policy stance at the appropriate time.”
He noted that the Fed developed tools to allow it “to drain or immobilize bank reserves as needed to facilitate the smooth withdrawal of policy accommodation when conditions warrant. If necessary, we could also tighten policy by redeeming or selling securities.”
Turning to fiscal policy, Bernanke again warned “even after economic and financial conditions return to normal, the federal budget will remain on an unsustainable path, with the budget gap becoming increasingly large over time, unless the Congress enacts significant changes in fiscal programs.”
The challenges, he said, “are especially daunting because they are mostly the product of powerful underlying trends, not short-term or temporary factors. The two most important driving forces behind the budget deficit are the aging of the population and rapidly rising health-care costs.”
If debt and deficits actually grow at the projected rates, “the economic and financial effects would be severe. Sustained high rates of government borrowing would both drain funds away from private investment and increase our debt to foreigners, with adverse long-run effects on U.S. output, incomes, and standards of living,” Bernanke said. “Moreover, diminishing investor confidence that deficits will be brought under control would ultimately lead to sharply rising interest rates on government debt and, potentially, to broader financial turmoil. In a vicious circle, high and rising interest rates would cause debt-service payments on the federal debt to grow even faster, resulting in further increases in the debt-to-GDP ratio and making fiscal adjustment all the more difficult.”
