Friday, June 22, 2018

Chairman Ben Bernanke's comments on Fed caution drive stocks higher

WASHINGTON — Fed Chairman Ben Bernanke says the U.S. job market remains weak despite three months of strong hiring and that the Federal Reserve's existing policies will help boost economic growth.

Bernanke's comments Monday to a group of economists in Arlington, Va., drove stocks higher. Many took his cautious words about the economy to mean the Fed is likely to stick to its plan to hold short-term interest rates at record lows through 2014.

Though the hiring has helped support consumer confidence and incomes, "We have not seen that in a persuasive way yet," Bernanke said. The Fed needs to "remain cautious" in deciding what its next moves should be, he said.

Further job gains will likely require stronger consumer and business demand, Bernanke said in a speech to the National Association for Business Economics spring conference.

The association includes about 2,500 economists for corporations, universities, the government and trade associations. It meets each spring and fall.

After he spoke, the Dow Jones industrial average surged and finished up 160 points, its third-biggest gain of the year. Broader indexes also gained.

The gains in hiring since December had led some economists to predict that the Fed might consider raising rates earlier than it planned. But many took Bernanke's cautious tone Monday as a firmer commitment to the late-2014 timetable.

And some viewed the speech as a signal that the Fed might take more steps, if the economy falters, to try to further drive down long-term borrowing rates. The goal would be to encourage more spending by consumers and businesses.

Robert Dye, chief economist at Dallas-based Comerica bank, said the Fed might extend a program of shuffling its investment portfolio to shift more of its holdings into long-term Treasurys. That could help lower long-term rates. Or the Fed could launch another round of bond-buying.

"The chairman is very much keeping additional monetary policy options on the table," said Dye, who attended the NABE conference.

Bernanke said the combination of modest economic growth and rapid declines in unemployment is something of a puzzle. Normally, it takes roughly 4 percent annual growth to lower the rate by 1 percentage point over a year.

He offered some reasons for the unexpected decline in unemployment. Employers may be hiring rapidly because they cut too many jobs during the recession. He also said that government revisions may later show stronger economic growth over the past year.

But Bernanke cautioned that he doesn't expect the unemployment rate to keep falling at its current pace without much stronger growth and more robust hiring. He noted that the rate is still roughly 3 percentage points more than its average over the 20 years preceding the recession.

"Despite the recent improvement, the job market remains far from normal," Bernanke said. "The number of people working and total hours worked are still significantly below pre-crisis peaks."

He also expressed concerns about millions who have been out of work for more than six months. Those long-term unemployed Americans have made up more than 40 percent of the unemployed since December, he noted. By contrast, in the severe 1981-82 recession, long-term unemployment never exceeded 25 percent.

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