Bernanke sees 'subdued' inflation but persistent unemployment

The Fed's Ben Bernanke said Wednesday the US economy will grow this year but not fast enough to make big inroads in the unemployment rate. He signaled that interest rates are likely to remain low.

J. Scott Applewhite/AP
Federal Reserve Chairman Ben Bernanke testifies on Capitol Hill in Washington, on June 9, before the House Budget Committee hearing about the progress of the recovering economy.

The US economy is poised for growth but at a rate that promises only a "slow reduction" in unemployment, Federal Reserve Chairman Ben Bernanke said Wednesday.

His comments, given in testimony to the House Budget Committee, suggest that it may be a long while before the Fed feels the urge to boost short-term interest rates because of inflation fears.

"Consumer spending is likely to increase at a moderate pace going forward, supported by a gradual pickup in employment and income, greater consumer confidence, and some improvement in credit conditions," Mr. Bernanke said. The Fed is forecasting economic growth of 3.5 percent for this calendar year and "a somewhat faster pace next year."

In normal times, that wouldn't be a bad pace of growth. But in the wake of a deep recession, with 7.4 million fewer jobs in the US today than in 2007, Bernanke warned that this recovery "would probably be associated with only a slow reduction in the unemployment rate over time. In this environment, inflation is likely to remain subdued."

Translation: Don't expect a hike in interest rates any time soon.

At the same time, Bernanke said in a TV interview this week that the Fed won't wait until the job market has fully recovered to prerecession levels before boosting interest rates. That reflects the Fed's commitment to watch both sides of a dual mandate from Congress: to guard against inflation as well as to seek maximum employment.

The Fed's forecast of slow employment growth is a tough message for the 15 million Americans who are officially unemployed. Although many economists praise the Bernanke Fed for staving off a possible depression in 2008, some argue that policymakers could do more to rev up the pace of recovery.

"We need more demand" in the US economy, says Nicholas Rowe, an economist at Carleton University in Ottawa, Canada. "The question," he says, is "where is it going to come from."

Bernanke said the private sector is beginning to take the lead, after a year of intensive monetary and fiscal stimulus from the government. But he acknowledged that a consumer- and business-led recovery now looks disappointing.

Some economists say more fiscal stimulus is needed. They are skeptical that the Fed can provide much more help, given that the Fed's short-term borrowing rate is already at or near zero percent. The central bank can and should do more, say some economists, including Mr. Rowe.

"The real way to get out of this problem ought to be not through fiscal policy but through monetary policy," he says.

That wouldn't be easy. One daring idea would be for the central bank to attempt to buoy America's financial spirits by purchasing shares in the S&P 500 stock index.

Beyond the debate over that controversial idea, Rowe's basic argument is that the Fed should reframe US monetary policy as being about more than just interest rates. If the Fed can do that successfully, he argues, it might be able to give the economy a better push forward.

One sign that such a push may be needed: The US money supply (measured by the Fed's "M2" indicator) has essentially stayed flat over the past year, despite the Fed's zero interest rate.


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