PJ Media

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.

Bernanke faced a flurry of questions on new bank capital rules under the Basel III regulatory reforms created by the Basel Committee on Banking Supervision – an international group of banking authorities that sets policy guidelines for banks worldwide. The Fed made some changes to its proposed capital rules to accommodate the concerns of smaller banks. It also gave them more time to meet the new capital requirements.

Rep. Robert Hurt, a Republican from a rural Virginia district, expressed his concern that community banks would have problems complying with the new rules.

Bernanke responded that the Fed wants to make sure that community banks are well capitalized so that they can continue lending during difficult periods. He also said that the Basel III is primarily aimed at the largest, internationally active financial institutions and small banks do not get the same tough treatment that large banks get.

Rep. Steve Stivers (R-Ohio) asked why the Fed could not exempt community banks entirely from the Basel III rules.

“Well, again, I don’t think that Basel III is primarily aimed at community banks. And the amount of bureaucracy and rules is not significantly different from what they’re doing now,” Bernanke said. “In terms of capital, the community banks already typically held more capital, as a ratio, than larger banks do. And our calculations are that community banks are already pretty much compliant with the Basel III rules. We don’t expect them to have to raise substantial amounts of new capital.”

A House Republican at the hearing articulated a common worry on the right: the fear that the Fed is injecting too much money into the economy.

Rep. Stephen Fincher (R-Tenn.) said he was fearful that “we’re out of control pumping the money.” The money pumping, he said, is only helping big business, and when the money pumping stops, bad things are going to happen to the economy.

Bernanke dismissed the concern, saying the reason interest rates are low is that the economy is weak and inflation is low.

“And even if the Fed wasn’t engaging in asset purchases, interest rates would still be quite low, as they are in other countries,” he added.

Rep. Lacy Clay (D-Mo.) asked whether the increasing mortgage rates could have any effect on the fragile housing recovery. Bernanke said that mortgage rates remain relatively low, but the Fed will be watching carefully how housing and house prices evolve.

“If mortgage-rate increases are threatening” the housing recovery, he said, “we would have to take additional action in the monetary sphere.” He emphasized that the Fed’s key concern is “whether or not the housing recovery is continuing to the degree sufficient to provide necessary support for the overall recovery.”

Chairman of the House Financial Services Committee Jeb Hensarling (R-Texas), who recently introduced a proposal to privatize Freddie Mac and Fannie Mae, asked Bernanke whether he still supported privatization of the government-sponsored enterprises (GSEs) Freddie Mac and Fannie Mae. Bernanke dodged the question by saying that policymakers should decide on the government’s role in the housing market in any future reform of housing finance.

He told lawmakers that he believed the old GSE model contained “very serious flaws.” He said that the government guarantee had not played a significant role in lowering mortgage rates for homebuyers and noted that other countries had housing markets operating normally despite the lack of guaranteed 30-year fixed-rate mortgage loans.

“There are a number of plans out there. One of the key questions is what role, if any, government should play. It seems pretty clear that private capital should have a greater role,” Bernanke said.

Bond prices edged higher and stocks rose on Wednesday after Bernanke’s remarks offering reassurance about the continuation of the Fed’s bond-buying program.

Bernanke faced the Senate Banking Committee Thursday.