Republicans Attack Dual Mandate; Bernanke Defends QE Yet Again, Says Unemployment will "Remain Elevated", Chastises Congress on Fiscal Policy

Like a broken record, Bernanke keeps playing the same tune, this time to the House Budget Committee. Please consider Bernanke Says Unemployment to `Remain Elevated'

Federal Reserve Chairman Ben S. Bernanke said the unemployment rate is likely to remain high “for some time” even after the biggest two-month drop in the jobless rate since 1958.

Bernanke told the House Budget Committee today that while the declines in the jobless rate in December and January “do provide some grounds for optimism,” he cautioned that “with output growth likely to be moderate for a while and with employers reportedly still reluctant to add to their payrolls, it will be several years before the unemployment rate has returned to a more normal level.”

Representative Paul Ryan, the Wisconsin Republican who chairs the budget panel, reiterated his criticism of the Fed’s Treasury purchases, saying they risk asset-price bubbles and faster inflation. The increase in long-term bond yields this week “certainly adds to these concerns and fuels some of this speculation,” he said.

Ryan has said he supports legislation proposed by fellow Republicans, Tennessee Senator Bob Corker and Indiana Representative Mike Pence, that would remove the Fed’s employment mandate and have it focus solely on keeping prices stable.

Bernanke said “inflation is expected to persist below the levels that Fed policy makers have judged to be consistent” with their dual mandate from congress for stable prices and maximum employment.

The Fed’s preferred gauge of inflation, the personal consumption expenditures index excluding food and energy, rose 0.7 percent in December from a year earlier, the lowest level in more than 50 years.

As in his appearance before the National Press Club, Bernanke said the low rate of core inflation provided a better guide to where overall inflation was headed. He noted that wages, which increased 1.7 percent on an average hourly basis last year, have acted as a constraint on inflation.

Full Text of Bernanke's Remarks

Fox News has the full text of Bernanke's Remarks to House Budget Committee for those who are interested. Here are a few snips.

The economic recovery that began in the middle of 2009 appears to have strengthened in the past few months, although the unemployment rate remains high. The initial phase of the recovery, which occurred in the second half of 2009 and in early 2010, was in large part attributable to the stabilization of the financial system, the effects of expansionary monetary and fiscal policies, and the strong boost to production from businesses rebuilding their depleted inventories.

More recently, however, we have seen increased evidence that a self-sustaining recovery in consumer and business spending may be taking hold. Notably, real consumer spending rose at an annual rate of more than 4 percent in the fourth quarter. Although strong sales of motor vehicles accounted for a significant portion of this pickup, the recent gains in consumer spending appear reasonably broad based. Business investment in new equipment and software increased robustly throughout much of last year, as firms replaced aging equipment and as the demand for their products and services expanded. Construction remains weak, though, reflecting an overhang of vacant and foreclosed homes and continued poor fundamentals for most types of commercial real estate. Overall, improving household and business confidence, accommodative monetary policy, and more-supportive financial conditions, including an apparently increasing willingness of banks to lend, seem likely to result in a more rapid pace of economic recovery in 2011 than we saw last year.

While indicators of spending and production have been encouraging on balance, the job market has improved only slowly. Following the loss of about 8-3/4 million jobs from 2008 through 2009, private- sector employment expanded by a little more than 1 million in 2010. However, this gain was barely sufficient to accommodate the inflow of recent graduates and other new entrants to the labor force and, therefore, not enough to significantly erode the wide margin of slack that remains in our labor market. Notable declines in the unemployment rate in December and January, together with improvement in indicators of job openings and firms' hiring plans, do provide some grounds for optimism on the employment front. Even so, with output growth likely to be moderate for a while and with employers reportedly still reluctant to add to their payrolls, it will be several years before the unemployment rate has returned to a more normal level. Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established.

On the inflation front, we have recently seen increases in some highly visible prices, notably for gasoline. Indeed, prices of many industrial and agricultural commodities have risen lately, largely as a result of the very strong demand from fast-growing emerging market economies, coupled, in some cases, with constraints on supply. Nonetheless, overall inflation is still quite low and longer-term inflation expectations have remained stable.

To assess underlying trends in inflation, economists also follow several alternative measures of inflation; one such measure is so-called core inflation, which excludes the more volatile food and energy components and therefore can be a better predictor of where overall inflation is headed. Core inflation was only 0.7 percent in 2010, compared with around 2-1/2 percent in 2007, the year before the recession began. Wage growth has slowed as well, with average hourly earnings increasing only 1.7 percent last year. These downward trends in wage and price inflation are not surprising, given the substantial slack in the economy.

The Federal Reserve's purchases of longer-term securities do not affect very short-term interest rates, which remain close to zero, but instead put downward pressure directly on longer-term interest rates. By easing conditions in credit and financial markets, these actions encourage spending by households and businesses through essentially the same channels as conventional monetary policy, thereby strengthening the economic recovery. Indeed, a wide range of market indicators suggest that the Federal Reserve's securities purchases have been effective at easing financial conditions, lending credence to the view that these actions are providing significant support to job creation and economic growth.

My colleagues and I have said that we will review the asset purchase program regularly in light of incoming information and will adjust it as needed to promote maximum employment and stable prices. In particular, we remain unwaveringly committed to price stability, and we are confident that we have the tools to be able to smoothly and effectively exit from the current highly accommodative policy stance at the appropriate time. Our ability to pay interest on reserve balances held at the Federal Reserve Banks will allow us to put upward pressure on short-term market interest rates and thus to tighten monetary policy when needed, even if bank reserves remain high. Moreover, we have developed additional tools that will allow us to drain or immobilize bank reserves as needed to facilitate the smooth withdrawal of policy accommodation when conditions warrant. If necessary, we could also tighten policy by redeeming or selling securities.

As I am appearing before the Budget Committee, it is worth emphasizing that the Fed's purchases of longer-term securities are not comparable to ordinary government spending. In executing these transactions, the Federal Reserve acquires financial assets, not goods and services; thus, these purchases do not add to the government's deficit or debt. Ultimately, at the appropriate time, the Federal Reserve will normalize its balance sheet by selling these assets back into the market or by allowing them to run off. In the interim, the interest that the Federal Reserve earns from its securities holdings adds to the Fed's remittances to the Treasury; in 2009 and 2010, those remittances totaled about $125 billion.

Bernanke on Fiscal Policy

The above snips addressed monetary policy. Bernanke also yapped about fiscal policy. Here is one small but noteworthy clip:

"The unsustainable trajectories of deficits and debt that the CBO outlines cannot actually happen, because creditors would never be willing to lend to a government with debt, relative to national income, that is rising without limit. One way or the other, fiscal adjustments sufficient to stabilize the federal budget must occur at some point."

Bernanke went on preaching to the House Budget Committee about various things including , debt-to-GDP ratios, but of course he does not want them to do anything now.

No one ever wants to do anything "now". Should by some miracle the recovery pick up steam they will not want to do anything "then" either, for fear of killing the recovery. Such is the nature of Keynesian and Monetarist clowns.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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