Federal Reserve Chairman Ben BernankeAlex Wong/Getty Images
Federal Reserve Chairman Ben Bernanke says the U.S. economy will regain momentum in the second half of the year after a disappointing start to 2011, allaying fears of a slide back into recession and suggesting the U.S. central bank will refrain from further stimulus.
Mr. Bernanke used a speech to a group of international bankers in Atlanta Tuesday to emphasize that the biggest problem facing the U.S. is high unemployment, calling the situation in labour markets "far from normal."
At the same time, Mr. Bernanke devoted considerable time critiquing his critics, arguing that any threat from inflation is dissipating, and that the Fed's decision to create $600-billion (U.S.) to buy securities has had little, if any, impact on global commodity prices.
Wall Street analysts were watching Mr. Bernanke closely to see if a spate of poor economic data had shaken his confidence in the recovery.
The upshot of Mr. Bernanke's remarks is that Fed policy makers likely will end the asset-purchase program at the end of the month as planned, but leave the benchmark interest rate at its current emergency low setting for months to come. The Fed's mandate is to keep prices stable and foster job creation that keeps the unemployment rate around 5.5 per cent. With the unemployment rate at 9.1 per cent, policy makers are dramatically short of fulfilling that side of the mandate.
"Although it is moving in the right direction, the economy is still producing at levels well below its potential; consequently, accommodative monetary policies are still needed," Mr. Bernanke said in the text of his remarks, which were posted on the Fed's website. "Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established."
A report by the Labor Department on Friday showed American employers created a mere 54,000 jobs in May, considerably fewer than most analysts were expecting. The gain was less than is needed to keep up with natural increases in the size of the labour market, let alone reduce the unemployment rate.
Mr. Bernanke noted that the aggregate hours worked by production employees - a measure that includes the number of people employed, part-time work and overtime - remains 6.5 per cent below pre-recession levels, an improvement from the 10-per-cent decline at the deepest trough of the downturn. By comparison, that measure never fell more than 6 per cent during the 1981-82 recession.
"Recent indicators suggest some loss of momentum" in hiring, Mr. Bernanke said.
"I expect hiring to pick up from last month's pace as growth strengthens in the second-half of the year, but, again, the recent data highlight the need to continue monitoring the jobs situation closely."
The Fed's policy committee is scheduled to meet in two weeks in Washington, and Mr. Bernanke's speech Tuesday represented the best opportunity to signal any significant change in thinking.
Sal Guatieri of BMO Nesbitt Burns in Toronto said he detected no surprises in Mr. Bernanke's remarks, suggesting the Fed will wind up its asset-purchase program, commonly referred to as quantitative easing, on schedule at the end of the month. Paul Dales, chief U.S. economist at Capital Economics, also in Toronto, said the Fed chief offered no hint of further stimulus.
The Fed's policy has been highly criticized, attracting condemnation from investors, U.S. lawmakers and international finance ministers. The common refrain from Mr. Bernanke's detractors is the Fed fuelled inflation by pumping so much money into the financial system. He has also been criticized for depressing the value of the dollar, which made commodities priced in the greenback more expensive.
Mr. Bernanke confronted all of these arguments against his policy.
While he said the Fed would remain vigilant in guarding against inflation, he dismissed price increases as a present threat, saying the impact from higher commodity prices will pass. Mr. Bernanke said the dollar's value is influenced by too many factors to blame monetary policy alone for its decline, and he said rising commodity prices are the result of fundamental increases in demand from emerging market countries.
And to those who label the Fed's policies a failure, Mr. Bernanke also had a reminder: The U.S. is recovering from the worst bust since the Great Depression while facing headwinds ranging from Japan's earthquake to volatile commodity markets. "In this context, monetary policy cannot be a panacea," he said.