By Bob Blandeburgo
The worst post-Depression economic decline seems to have slowed, but unemployment and the prospect of a jobless recovery remain a concern, U.S. Federal Reserve Chairman Ben Bernanke told lawmakers on Capitol Hill yesterday (Tuesday).
"Better conditions in financial markets have been accompanied by some improvement in economic prospects," Bernanke said in a prepared testimony before the House Committee on Financial Services. "Businesses have continued to cut capital spending and liquidate inventories, but the likely slowdown in the pace of inventory liquidation in coming quarters represents another factor that may support a turnaround in activity."
Still, the rising unemployment rate in the United States – which the Fed expects to top off between 9.8% and 10.1% in the second half of this year – as well as the prospect of a jobless recovery will likely keep interest rates at their record low – a range of 0.00% – 0.25% – for some time to come.
When unemployment does start to subside after next year, job growth will continue to be sluggish. The Fed estimates the rate will be between 9.5% and 9.8% in 2010, 8.4% and 8.8% in 2011 and won't return to the historical norm of around 5% until the "longer run" beyond 2011, according to the central bank's 49-page Monetary Policy Report to Congress.
"Job insecurity, together with declines in home values and tight credit, is likely to limit gains in consumer spending," said Bernanke. "The possibility that the recent stabilization in household spending will prove transient is an important downside risk to the outlook."
Rep. Ron Paul, R-Texas, who believes the Fed created the economic crisis, considers the underemployment rate as the true measure of unemployment in the United States.
"Real unemployment is now 20% and there has not been any economic growth since the onset of the crisis in the year 2000," Paul said in his opening statement, citing non-government statistics.
Bernanke's appearance before Congress yesterday was the first time he has publicly spoken face-to-face with Paul, who in February drafted a bill that calls for the Fed to be audited. Paul challenged Bernanke's urging of Congress to keep the audit away from monetary policy duties, accusing the Fed's bank loans of being political.
"Just the fact that [the Fed] can issue a lot of loans and special privileges to banks and corporations," said Paul, "That's political."
Bernanke said auditing the Fed "could raise fears about future inflation, leading to higher long-term interest rates and reduced economic and financial stability."
While the Government Accountability Office (GAO) does already audit the Fed, it is not complete. Congress purposely excludes potential GAO reviews from some sensitive areas, particularly monetary policy deliberations and operations, including open market and discount window operations.
While the current administration has drafted a proposal to increase the Fed's powers to supervise the economy, U.S. President Barack Obama's policy of government transparency will be put to the test should Paul's bipartisan bill pass through Congress and find its way on to his desk.
"The Necessary Tools" to Avoid Inflation
Bernanke does not expect the economic recovery to begin until late this year or early 2010, but when it does, concerns about inflation – which has remained subdued in the first half despite the stimulus efforts – abound.
The Fed's "highly accommodative stance of monetary policy" will be warranted for an extended period, Bernanke said.
When the time does come to pull back the unprecedented stimulus, the Fed will be ready with its "exit strategy," Bernanke said. "The [Fed] has been devoting considerable attention to issues relating to its exit strategy, and we are confident that we have the necessary tools to implement that strategy when appropriate."
Rep. Barney Frank, D-Mass., chairman of the House Committee on Financial Services, voiced support in Bernanke's ability to curb any post-recession inflation.
"When you are talking about inflation it is not just about reality but about perception," Mr. Frank said in a report that appeared in The New York Times, adding that Bernanke has "consistently shown that he is aware" of the danger of inflation.
On a Second Stimulus
Earlier this month, Laura Tyson, former chair of the U.S. President's Council of Economic Advisers during the Clinton Administration and current advisor to President Obama said that the $787 billion stimulus passed in February was "a bit too small."
"The economy is worse than we forecast on which the stimulus program was based," Tyson said during a speech at the Nomura Asia Equity Forum in Singapore. "We probably have already 2.5 million more job losses than anticipated."
While the Obama administration may have underestimated the financial crisis, Bernanke said yesterday any talk of a second stimulus is premature and less than a quarter of the first one has been spent.
President Obama earlier defended the stimulus' slow start earlier this month in an interview with Fox News.
"You just can't push [funding] out that quickly, partly, not just because the federal government has to process applications but also because states and local governments have to gear up to get these projects going," President Obama said. "There are a whole bunch of critics out there who said we shouldn't have any stimulus at all. And in fact, some of the same folks who are now saying, 'Where are the jobs?' don't really have a recipe other than doing nothing for the economic circumstances that we're in."
News and Related Story Links:
- Federal Reserve:
Semiannual Monetary Policy Report to Congresss
- Money Morning:
Jobless Recovery Category
- Federal Reserve:
Monetary Policy Report to Congress
- The Library of Congress:
- The White House:
Transparency and Open Government
- The New York Times:
Fed Chief Says Pace of Decline Seems to Have Slowed
- Money Morning:
With Unemployment Soaring, Will the U.S. Require a Second Stimulus?
- Fox News:
Reid Slams Door on Second Stimulus, as Obama Leaves Options Open