Bernanke: Fed Has Fallen Short on Full Employment Mandate
Federal Reserve Chairman Ben Bernanke said Wednesday the Fed has fallen short on one half of its dual mandate -- promoting full employment. On the other half -- maintaining stable prices -- the Fed has been successful.
The Fed chief also warned that the pace of economic recovery in the U.S. will be “frustratingly slow” for the foreseeable future.
Bernanke then added grist to that prediction by revealing sharply lower Fed forecasts for key data related to economic growth and unemployment for the next two years.
“While we still expect that economic activity and labor market conditions will improve gradually over time, the pace of progress is likely to be frustratingly slow,” he said during a press conference.
“Moreover, there are significant downside risks to the economic outlook, most notably concerns about European fiscal and banking issues that have contributed to strains in global financial markets, which have likely had adverse effects on confidence and growth,” Bernanke added.
In revised quarterly projections, the Fed slashed its forecasts for growth and raised its prediction for unemployment for this year, 2012 and 2013.
The Fed believes the U.S. economy will grow by 2.5% to 2.9% next year, down from the 3.3% to 3.7% they forecast in June. The central back now sees the unemployment rate falling to 8.5% to 8.7% by the end of 2012, rather the 7.8% to 8.2% range predicted earlier.
The Fed said full employment will be achieved only when the jobless rate drops to between 5.2% and 6%. But, according to the Fed forecast, the unemployment rate will still be in a range of 6.8% to 7.7% at the end of 2014.
Earlier Wednesday, at the conclusion of its November meeting, the Fed announced no changes to its fiscal policies. Interest rates will remain at historically low levels at least until mid-2013 and the central bank will maintain its strategy of shifting part of its portfolio from short to long-term debt securities in an effort to bring long-term interest rates even lower.
The Fed remains ready to act again if economic conditions worsen, Bernanke said, although he did not specify what action might be taken.
Another round of quantitative easing has been hinted at but there is strong opposition both in Congress and among a handful of in-house Fed dissenters to the central bank buying up more debt on top of the nearly $3 trillion already purchased since the 2008 financial crisis.
The first two rounds of quantitative easing have been met with limited success at best and skeptics say another round isn’t likely to help much either. Besides, improving liquidity by essentially printing money eventually leads to inflation.
The Fed said economic growth has “strengthened somewhat” during the third quarter, which reflected a reversal from the spring when growth slowed due primarily to temporary factors such as the Japanese earthquake and tsunami in March.
At the press conference, the Fed chairman said the U.S. central bank was “closely” monitoring developments in Europe, where Greece is debating a referendum on a rescue package that could mean years of tough fiscal austerity for the debt-ridden country.
Bernanke also said he understands the origins the Occupy Wall Street movement. “I certainly understand that many people are dissatisfied with the state of the economy,” he said. “I’m dissatisfied with it.”
Told that many of the protestors blame the Fed in part for perceived economic inequalities in the U.S., Bernanke said those criticisms are based on “misconceptions.” Fed policy, he said, is established solely to promote its dual mandate – full employment and stable prices.
The Fed chairman also commented briefly on the bankruptcy of MF Global, the derivatives firm run by former Goldman Sachs (NYSE:GS) chief Jon Corzine and now under investigation: “The New York Federal Reserve bank approved MF Global to be a primary dealer in February. At that time the company met the criteria that was set forth in terms of management, financial condition, etc… to qualify be a primary dealer,” he said.
“We are not the regulators of MF Global. That’s done by the SEC and CFTC. So we do not have ongoing insight into developments at the company,” he added.
Bernanke said he wouldn’t rule out the Fed purchasing mortgage backed securities at some future point to boost the ailing housing market.