By - Jan 8, 2011 5:44 AM GMT+0800
Ben S. Bernanke, chairman of the U.S. Federal Reserve. Photographer: Joshua Roberts/Bloomberg
Jan. 7 (Bloomberg) -- David Semmens, U.S. economist at Standard Chartered Bank, talks about the U.S. labor market. Employers in the U.S. added fewer jobs than forecast in December, confirming Federal Reserve Chairman Ben S. Bernanke’s view that it will take years for the labor market to heal. Semmens speaks with Pimm Fox on Bloomberg Television's "Taking Stock." (Source: Bloomberg)
Federal Reserve Chairman Ben S. Bernanke and two other policy makers forecast faster U.S. growth this year that still won’t reduce unemployment quickly, signaling the Fed will complete its monetary-stimulus plans.
A “moderately stronger” expansion in 2011, helped by consumer and business spending, doesn’t immediately change the “persistently high unemployment” that threatens the recovery, Bernanke said today in testimony to the Senate Budget Committee. Fed Governor Elizabeth Duke, speaking in Baltimore, and Chicago Fed President Charles Evans in Denver also voiced concerns about the labor market.
The joblessness, while helping to keep inflation low, may reinforce the decision of Fed officials to buy $600 billion in Treasuries through June. The central bankers spoke in the hours after the Labor Department reported that employers added 103,000 workers to payrolls last month, less than the 150,000 gain forecast by economists in a Bloomberg survey.
“When you look at the inflation data, there is really no justification for them to remove the monetary stimulus that they have been providing,” said David Semmens, U.S. economist at Standard Chartered Bank in New York. “High unemployment is going to keep inflation relatively low.”
Today’s Labor Department report also showed the jobless rate fell to 9.4 percent from 9.8 percent, the lowest level since May 2009, reflecting gains in jobs and fewer people in the labor force.
No ‘Sustained Declines’
“It’s about what we expected,” Bernanke, 57, said of the jobs report in response to a senator’s question. “If we continue at this pace, we’re not going to see sustained declines in the unemployment rate.” His prepared testimony was submitted before the government data were released.
The labor market is improving “modestly at best,” Bernanke said in the hearing, his first congressional testimony since September. Duke told Maryland bankers that progress is “painfully slow,” while Evans said at an economics conference that the U.S. has a “considerable ways to go” toward full employment.
At the pace of improvement projected by Fed officials, “it could take four to five more years for the job market to normalize fully,” Bernanke said.
Since the Nov. 3 stimulus decision aimed at keeping interest rates low, yields on 10-year Treasuries have increased to 3.32 percent from 2.57 percent.
Without referring to that change, Bernanke said in a text footnote that “longer-term interest rates are also influenced by market expectations of the future path for short-term interest rates, which in turn depend on the outlook for the economy and so for the target federal funds rate.”
Investor Optimism
Duke and Evans were more direct. Duke, 58, a former Virginia community banker, said the rate increase reflects investor optimism about the economy and reduced expectations for easy money from the Fed.
“Other events have intervened” since the meeting, and “it is reasonable to attribute a portion of this increase to lower probabilities of deflationary tail events,” said Evans, 52, an economist and former Chicago Fed research director.
“They’re sort of in this intellectual Catch-22, that if they talk up the economy, they’re worried about the higher impact of rates,” said John Ryding, chief economist at RDQ Economics LLC in New York and a former Fed researcher. “Their inclination perhaps is just to play down the economic improvements.”
Economy Grew
The U.S. economy probably expanded at a 2.5 percent pace in the fourth quarter, according to the median estimate of 65 analysts in a Bloomberg News survey last month. That compares with 2.6 percent in the third quarter and 1.7 percent in the three months through June.
The central bank is building on the first round of $1.7 trillion in debt purchases that “appeared to be successful in influencing longer-term interest rates, raising the prices of equities and other assets, and improving credit conditions more broadly, thereby helping stabilize the economy and support the recovery,” Bernanke said.
Republican leaders have criticized the stimulus. Since its Nov. 3 approval by Bernanke and his colleagues, stocks have risen, the dollar has strengthened and U.S. economic indicators have improved.
Asked today by Senator Jeff Sessions of Alabama, the panel’s senior Republican, about a bond market “nervous” over effects of Fed asset purchases, Bernanke said the Fed needs to find the “right moment” to start tightening credit. A “credible” plan to reduce the federal deficit would avert inflation in the long run, he said.
Stocks Declined
Stocks fell after the jobs report and the Bernanke testimony. The Standard & Poor’s 500 Index slipped 0.2 percent to 1,271.50 in New York. The yield on the 10-year Treasury note fell to 3.32 percent from 3.40 percent late yesterday.
The U.S. government and the Fed’s less predictable and more interventionist policies since the start of the financial crisis could harm future economic performance, Stanford University Professor John B. Taylor, the creator of the Taylor rule for guiding monetary policy, said at the same Denver conference as Evans.
“I am concerned about the direction of policy,” Taylor, who has criticized the Fed stimulus, said in the text of a speech.
House Speaker John Boehner of Ohio, then the minority leader, and three other Republicans voiced “deep concerns” in a Nov. 17 letter to Bernanke about a policy that they said may undermine the dollar and create asset price bubbles.
To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net
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