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Ben Bernanke: High unemployment rate to persist, even as economy revives [VIDEO]

Ben Bernanke said on Capitol Hill Wednesday, the pace of the US economy 'will pick up in coming quarters.' But the unemployment rate will decline slowly, he said, citing 'headwinds.'

By Dave CookStaff writer / July 13, 2011

Federal Reserve Chairman Ben Bernanke testifies before the House Financial Services Committee hearing on 'Monetary Policy and the State of the Economy' on Capitol Hill in Washington on July 13.

Kevin Lamarque/Reuters

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Washington

The pace of the US economy "will pick up in coming quarters," but the relatively high unemployment rate will decline "only slowly" because of "headwinds," Federal Reserve Board Chairman Ben Bernanke said Wednesday.

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The Fed’s latest forecast means that the jobless rate by the end 2012 will be high enough that it could imperil President Obama’s reelection bid.

Delivering his semi-annual report on monetary policy and the state of the economy, Mr. Bernanke told the House Financial Services Committee that the Fed would act to stimulate America's economy if such action were needed.

“The possibility remains that the recent economic weakness may prove more persistent than expected,” Bernanke said. “The Federal Reserve remains prepared to respond should economic developments indicate that an adjustment of monetary policy would be appropriate."

The Fed chairman noted that US economic growth in the first half of 2011 was “modest.” The central bank predicts growth in inflation-adjusted economic output of 2.7 to 2.9 percent for 2011, and 3.3 to 3.7 percent in 2012. The latest forecast, completed in late June, is less optimistic than the Fed's April projection. Bernanke explained that some of his Fed colleagues “saw at least some part of the first-half slowdown as persisting for a while."

Given the expectation of modest economic growth, the Fed is projecting that the nation’s jobless rate will return to normal levels “albeit only slowly,” Bernanke said. The unemployment rate hit 9.2 percent in June, and the Fed expects it will end 2012 in the range of 7.8 percent to 8.2 percent.

The headwinds that Bernanke cited as slowing the economy included slow growth in consumer spending, the depressed condition of the housing market, and cuts in spending by all levels of government.

If the Fed's unemployment forecast proves correct, it could be politically troublesome for Mr. Obama. Ronald Reagan was the only president since World War II to win reelection when the jobless rate was higher than 7.2 percent – though the rate had been falling when he won his second term in the White House in 1984. During the question period, Bernanke characterized the nation's unemployment situation as a “crisis.”

Also under questioning, the Fed chairman said failure to raise the US government’s debt ceiling – a matter currently roiling Congress – would lead to “enormous disarray” in the financial system. Such an event would lead to an immediate “40 percent cut” in bills the government could pay and “throw shock waves into the entire financial system,” he said.

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