Ben Bernanke is poised to lead the U.S. Federal Reserve in a new attack on America’s unemployment rate.
Mr. Bernanke, the central bank’s chairman, said Friday he considered the jobless situation in the United States to be “grave,” in a speech that signalled the Fed is preparing to launch new stimulus measures to boost growth.
“The economic situation is obviously far from satisfactory,” Mr. Bernanke told some of the world’s leading economists, assembled for a conference in Jackson Hole, Wyo.
Describing economic growth as “tepid,” Mr. Bernanke added that “unless the economy begins to grow more quickly than it has recently, the unemployment rate is likely to remain far above levels consistent with maximum employment for some time.”
Equally significant was Mr. Bernanke’s assertion that the unconventional policy weapons left in the Fed’s arsenal could be used without causing undue harm, a rebuke to a growing sentiment that monetary policy is a spent force.
“The costs of non-traditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant,” he said.
Mr. Bernanke’s remarks show the Fed sees further policy action as necessary to boost the long-stagnant jobs market despite some encouraging recent signs in the economy, such as improved readings on the housing sector.
Wall Street economists and investors had been anticipating Mr. Bernanke’s address at the Kansas City Fed’s annual economic symposium for weeks because in recent years the remarks have foreshadowed the Fed’s next steps.
The consensus after the remarks was that Mr. Bernanke will deliver further stimulus in two weeks when the Fed’s policy committee holds its next session.
“The Fed is going to ease further,” Michael Gregory, an economist at BMO Nesbitt Burns in Toronto, told clients in a note.
Stocks rallied in the U.S. and Canada, while bond yields tumbled and the U.S. dollar fell against other major currencies.
The drop in the greenback was taken as an indication that the prospect of further Fed stimulus encouraged some investors to leave the relative safety of dollar-denominated assets.
Mr. Bernanke refrained from talking directly about what he thinks the Fed should do in September, but there were clues he is leaning toward doing something sooner rather than later.
He noted that the unemployment rate, at 8.3 per cent, is two percentage points higher than what most Fed officials take to be its normal, longer-term level. That’s important because the U.S. central bank’s mandate from Congress demands that it seek to achieve “maximum employment” along with price stability.
Mr. Bernanke reminded his audience that he has previously said that it will take economic growth in excess of the U.S.’s longer-term trend rate of about 2.5 per cent to materially reduce joblessness. The U.S. economy grew at an annual rate of 1.7 per cent in the second quarter, according to an estimate this week by the Commerce Department.
Mr. Bernanke’s comments reinforce the minutes of the policy committee’s last meeting, a two-day session that concluded Aug. 1. While officials opted against new measures, the minutes said “many” policy makers felt that action would be needed “fairly soon” without a significant change in economic conditions.
Economic data generally have been stronger this month, but probably not strong enough to persuade the Fed that businesses are about to go on a hiring spree. Next week brings key reports on manufacturing and non-manufacturing production, and – crucially – the August employment survey. Most economists predict hiring eased slightly from the 163,000 non-farm jobs created in July.
The consensus on the Fed’s intentions breaks down over what steps policy makers will take at their Sept. 12-13 meeting.
In his speech, Mr. Bernanke expressed confidence in two unorthodox measures the Fed has tried since dropping its benchmark interest rate to zero more than three years ago.
One is the Fed’s conditional promise to keep borrowing costs extremely low until at least the end of 2014. The other is quantitative easing, or what Mr. Bernanke calls large-scale asset purchases. In separate programs, the Fed has created more than $2-trillion (U.S.) to purchase housing debt and Treasury bonds. “A balanced reading of the evidence supports the conclusion that central bank securities purchases have provided meaningful support to the economic recovery while mitigating deflationary risks,” Mr. Bernanke said.
Most of the closest Fed watchers say the Fed at a minimum will extend its pledge in September to keep rates low, probably to the end of 2015. Quantitative easing is considered more potent, but it also is more controversial. If next week’s economic indicators continue to show improvement, it could opt to hold back on a third round of QE.