Bernanke: Two Percentage Points in Unemployment Rate Due to Weak Economy

WASHINGTON – In what could have been one of his last appearances before Congress, Federal Reserve Chairman Fed Bernanke told lawmakers Wednesday that a reduction in the central bank’s bond-buying program could still happen by the end of the year, depending on how the economy performs.

"Our asset purchases depend on economic and financial developments, but they are by no means on a preset course," he told the House Financial Services Committee.

Bernanke’s testimony to Congress included the same information he had provided after the Fed’s meeting in June. In the plan the Fed chairman laid out in June, the U.S. central bank would likely reduce monthly bond buys later this year and stop them altogether by mid 2014, as the economic recovery continued its current pace.

He changed this message on Wednesday, saying the current level of purchases could be reduced more quickly if economic conditions improved faster than expected. But, he noted, the Fed’s asset purchases are by no means on a pre-determined course. And, he even suggested that the central bank could buy more bonds if the economy misses the Fed’s expectations for economic growth by next year.

"Our intention is to keep monetary policy accommodative," Bernanke said.

"We're going to be responding to the data. If the data are stronger than we expect, we'll move more quickly" in reducing bond purchases while also keeping the interest-rate target low.
If the economy does not meet the Fed's expectations, it could change those plans "or even potentially increase purchases for a time," he said.

The Fed is currently spending $85 billion a month buying financial assets in the markets to lower long-term borrowing rates and bolster the economic recovery in the U.S.

Bernanke’s semi-annual monetary policy report may be his last if he steps down when his term as chairman of the Fed ends in January. Many lawmakers lauded him for his tenure at the helm of the central bank, and, in particular, his service during the economic crisis.

At the hearing, Bernanke reiterated his message that Congress should avoid any high-stakes standoffs in the upcoming debt limit negotiations.

“The risks remain that tight federal fiscal policy will restrain economic growth over the next few quarters by more than we currently expect, or that the debate concerning other fiscal policy issues, such as the status of the debt ceiling, will evolve in a way that could hamper the recovery. The more we can show we are working together the more confidence we can instill confidence in people,” he said.

Bernanke fielded many questions about different aspects of the economy, ranging from the new capital requirements to the housing market and unemployment.

He said about two percentage points of unemployment, currently at 7.6 percent, are related to weak demand in the economy. The rest, according to Bernanke, is structural unemployment – people without a job either because of a mismatch of the skills they possess with those required by the jobs available, or because they live far away from regions where jobs are available but are unable to relocate.

"We don't see much evidence that the structural component of unemployment has increased very much during this period," he said. People out of the labor force for a long time becoming unemployable has been a major concern for policymakers, but that does not seem to be a major problem, Bernanke said.

"It still appears to us that we, the country, can attain an unemployment rate near 5 percent,” he continued.