Federal Reserve chairman Ben Bernanke has given investors some excellent guidance on how the U.S. central bank will decide whether further economic stimulus is needed.
Taking questions on Capitol Hill from the Joint Economic Committee, Mr. Bernanke said the "essential question" facing the Fed's policy body is whether the economy is growing fast enough to lower the unemployment rate.
The Fed is mandated to achieve "maximum employment." That equates to unemployment of about 5.5 per cent. The jobless rate in May was 8.2 per cent.
That's a big gap, yet one that was closing rapidly until recently. (The unemployment rate fell to 8.1 per cent in April from 9.9 per cent two years earlier.) Mr. Bernanke is uncertain how much of that decline had to do with a stronger economy. He said in his testimony that the drop likely relates to a "catch up" by employers who fired too many people too quickly at the start of the financial crisis. A mild winter also likely pulled forward some construction hiring that would otherwise have occurred in the spring, he said.
Those special factors probably have passed. "We may be at the end of the catch-up period," Mr. Bernanke said. That means the further improvements in hiring will be contingent on the strength of the economy. "We'll need to see growth at or above trend," Mr. Bernanke said. Trend is roughly 2.5 per cent. (The Federal Open Market Committee's consensus estimate for longer run U.S. economic growth is 2.3 per cent to 2.6 per cent.)
Mr. Bernanke said he believes the Fed still has the ability to boost economic growth. The decision to deploy a third round of asset purchases, extending the Fed's conditional commitment to leaving interest rates near zero through 2014, or any other measure the Fed might take will be weighed against negative side effects those measures might create, Mr. Bernanke said. "At this point, I can't say that anything is off the table," he said.
The Fed's policy committee next meets on June 19-20. That committee's chairman made it clear Thursday that any action in two weeks will be contingent on that group's assessment of whether the U.S. economy can achieve a growth rate in excess of 2 per cent annually. Expectations for QE3 or another form of stimulus should correlate to expectations for the U.S. economy.
"The key question we will be facing is, `Will economic growth be sufficient to achieve further progress in the labour market?'" Mr. Bernanke said. "Our mandate suggests we should be seeking further improvement."