–‘Good Bit’ Of US Employment Problem Remains Cyclical

By Brai Odion-Esene

WASHINGTON (MNI) – Federal Reserve Chairman Ben Bernanke made it
clear Wednesday that the trigger for additional monetary stimulus from
the central bank will be any sign that job creation in the United States
has ground to a halt.

Speaking on the second day of testimony on monetary policy to the
House Financial Services Committee, Bernanke also said until European
authorities come up with long-term solutions to the eurozone debt and
banking crises, there will continue to be “periods of financial market
volatility.”

On the domestic front, “We are committed to make sure that we
continue to have improvement on employment,” Bernanke said.

“It’s certainly possible that we will take additional action if we
conclude that we are not making progress towards higher level of
employment,” he added.

Bernanke argued that “a good bit” of the United States’
unemployment problem remains cyclical, “which means it could be
addressed, in principle, by monetary and fiscal policies.”

He went on to warn, however, that structural problems are probably
increasing, with the risk that the long-term unemployed become
“unemployable” over time.

Bernanke described the high number of long term unemployed in the
U.S. as an “enormous” and “very serious” problem, warning that the costs
for the economy could be “very, very high.”

“Again, we are committed to doing what is necessary to make sure
the recovery continues and that employment continues to grow,” Bernanke
said.

Across the Atlantic, Bernanke said Europe is not close to having a
long-term solution to its fiscal and banking crises.

“I don’t think they [Europe] are close to having a long term
solution that will solve the problem, and until they find those long
term solutions we are going to continue to see periods of financial
market volatility,” he said.

Switching back to the U.S., he said the recovery has been “somewhat
disappointing,” and decelerated recently.

“It is sort of a pattern we’ve seen for the last few years that
things seem to be stronger in the beginning of the year and then slow
down around the spring and summer, so we will try to asses whether this
is just a temporary slowdown or whether something more fundamental is
happening,” he said.

Still, there is evidence that the unconventional tools employed by
the Fed have provided some support for the economy, Bernanke argued.

While not without costs and risks, “I think, on the whole, that
there is evidence that it has provided some support for the recovery —
it’s not the only solution but it has had a positive effect.”

And Bernanke again assured lawmakers that the Fed has the tools to
withdraw the extraordinary amount of stimulus it has pumped into the
economy at the appropriate time without sending inflation soaring.

“We are very cognizant of our responsibility for price stability,”
he said.

Bernanke did acknowledge, however, there is a “theoretical limit”
to how much additional asset purchases the Fed can do, as there are
“finite” amounts of longer term treasuries and agency securities
available.

“Moreover, beyond a certain point, if the Federal Reserve owned too
much it would greatly hurt market functioning and have the effect of
reducing the efficacy of the policy,” he said.

“So I wouldn’t say we are at that point yet,” Bernanke added,
stressing the central bank still has “some capacity” at this point, “but
ultimately there would be some limit to how much we could do,” he said.

Fed officials such as Charles Evans of the Chicago Fed have argued
the central bank should be willing to accept a higher rate of inflation
in its drive to lower unemployment but Bernanke told lawmakers this
would be very risky.

A 3% inflation target “means we are moving towards a more
inflationary situation,” he said, while 1% “is closer to the deflation
range which is also not healthy for the economy.”

“I recognize that some people would advocate that we set an
inflation target at, say 4% and to maintain that for a number of years,”
he said.” I don’t think that first, we could do that without losing
control of the inflation process … . We have maintained inflation near
2% for a long time, and there is a lot of confidence in financial
markets that the fed will keep inflation close to 2%.”

Questions about the looming fiscal cliff popped up regularly
throughout the hearing, and Bernanke said while the current fiscal
situation is not sustainable, he favors an aggressive fiscal plan over a
period of time, rather than for Congress to attempt budget consolidation
“all in one day.”

“If that all happens, that will no doubt do serious damage to the
recovery and probably cost a significant number of jobs,” he said.

Bernanke would not be drawn on what proportion of the potential
plan should be spending cuts vs. tax increases, just that lawmakers
should adopt a “smoother approach towards achieving fiscal
sustainability.”

Bernanke said what he is advocating is for Congress to take strong
and credible steps towards achieving fiscal sustainability over the next
decade as soon as possible, while avoiding “sharp cliffs” in the short
term.

** MNI Washington Bureau: 202-371-2121 **

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