Federal Reserve Chairman Ben BernankeAlex Wong/Getty Images
The U.S. Federal Reserve foresees elevated joblessness well into 2013, suggesting the U.S. central bank will keep borrowing costs low for an exceptionally long period as it struggles to achieve its employment mandate.
Chairman Ben Bernanke and the other members of the Fed's policy committee cut their economic growth forecast for the next two years by almost half a percentage point at a two-day meeting that ended Wednesday in Washington.
The revision wasn't worrying enough to prompt the Federal Open Market Committee into extending the Fed's $600-billion (U.S.) asset-purchase program, which the FOMC confirmed will end at the end of the month as planned.
Yet Mr. Bernanke made clear at a press conference after the meeting that the majority of policy makers at the Fed are in no hurry to remove the considerable amount of monetary stimulus that remains.
The Fed's policy makers reduced their consensus estimate for economic growth this year to between 2.7 per cent and 2.9 per cent, compared with the previous forecast of 3.1 per cent to 3.3 per cent, which was only a month old.
Fed officials underestimated the impact that surging commodity prices would have on consumption, and the disruption to global trade caused by the earthquake, tsunami and nuclear disaster in Japan.
The new forecast for economic growth is only marginally stronger than what the Fed assumes is the economy's longer-run rate of expansion. That's a problem because the economy must grow at a much faster rate than the trend line to significantly lower unemployment. The Fed now says the jobless rate could be as high as 8.2 per cent next year, compared with its unofficial target of a figure closer to 5.5 per cent.
"We're still some years away from full employment," Mr. Bernanke said. "That's of course very frustrating. It means that many people will be out of work for a very extended time. That can have significant long-term consequences that concern me very much."
Mr. Bernanke's obvious anxiety about the present distracted from the Fed's official contention that the economy will get back on track in the second half of the year.
While conceding that growth is weaker than expected, the FOMC said in its statement the recovery continues to advance at a "moderate" pace. The Fed's leaders said the economy will pick up in the months ahead, and that the unemployment rate will resume its descent. The Fed believes inflation will cool now that oil prices have retrenched.
Mr. Bernanke was hoping for something other than moderate economic growth when he led the Fed on another round of asset purchases in November. The strategy, which sees the central bank create money to buy bonds and other financial products, is known as quantitative easing, and Mr. Bernanke's second foray quickly became know as QE2. Including the initial effort, the Fed has purchased more than $2-trillion in bonds and asset-backed securities since the depths of the financial crisis.
QE2 was a magnet for criticism from Capitol Hill, Wall Street and abroad. At home, some investors and politicians worried that Mr. Bernanke was sowing the seeds for inflation. The persistently high unemployment rate was seen as evidence of failure. Overseas, Mr. Bernanke's fellow policy makers said the Fed was really trying to weaken the dollar at the expense of the U.S.'s trading partners. They also blamed QE2 for stoking the price of commodities, which tend to be priced in dollars.
Recently, Mr. Bernanke has sought to defend his policies. Earlier this month, he suggested anyone who thought QE2 was going to turn around the economy on its own was dreaming, telling an audience in Atlanta that monetary policy is not a panacea.
On Wednesday, Mr. Bernanke characterized the program as a mild success, reminding reporters that there was a serious risk of deflation when he first telegraphed his intention to add stimulus in August of last year. That threat is now gone, as prices now are growing at a rate that eliminates the risk of a broad decline that would shake business confidence. While still timid, non-farm hiring is nonetheless stronger than it was a year ago, averaging 180,000 over the previous four months, compared with an average of 40,000 over the four months before Mr. Bernanke first started talking about QE2 last August.
"The case for monetary action was pretty clear in my mind," Mr. Bernanke said. "We are in a different position today. Certainly not where we would like to be, but closer to the dual mandate objectives than we were at that time."
Comments of that kind suggest the Fed is finished with quantitative easing. That was the majority view of Wall Street analysts after Mr. Bernanke's press conference, but some were unsure, suggesting talk of QE3 isn't about to go away.
Daryl Jones, director of research at Hedgeye Risk Management in New Haven, Conn., said he thinks the Fed has a poor grasp on where the economy is headed and as a result has left the door open to further stimulus. Mr. Jones said he is skeptical the economy will rebound in the second half, citing weak consumption and slower global growth, which will leave the Fed little choice but to respond.
"If someone could lay out to me a key reason why the economy will accelerate, I would buy it," Mr. Jones said. "But I just don't see it."