Bernanke suggests more support needed for weak job market

Reporting from Arlington, Va. —  Despite the recent pickup in job gains, Federal Reserve Chairman Ben S. Bernanke offered a cautious assessment of the labor market and suggested that he would press the Fed to continue or expand the central bank’s easy-money policies to ensure further improvements in the unemployment rate.

In a speech Monday at an economics conference, Bernanke maintained that conditions in the job market remain “far from normal,” with total hours of work and the number of people working still well below pre-recession levels. And once again, he expressed strong concerns about the millions of jobless people who have been out of work for more than six months.

But job gains have been solid the last three months, although Bernanke noted that the unexpectedly large drop in the jobless rate recently to 8.3% was “somewhat out of sync” with the slow pace of overall economic growth. The unemployment rate was 9.1% in August. Bernanke referred to Okun’s law, which describes the close relationship between the changes in jobless rate and economic output, or gross domestic product. By this rule of thumb, given the weak 1.7% growth in GDP last year, the unemployment rate shouldn’t have shown much if any improvement in the last year.

Bernanke offered one possible explanation for this disconnect. By Okun’s rule of thumb, he said, employers slashed jobs during the recession well in excess of the decline in GDP, and now they may be taking reverse action to offset some of the heavy cutting earlier.

“What we may be seeing now is the flip side of the fear-driven layoffs that occurred during the worst part of the recession, as firms have become sufficiently confident to move their workforces into closer alignment with the expected demand for their products,” Bernanke said at the National Assn. for Business Economics conference in Arlington, Va.

Some economists think the drop in the jobless rate may be overstating the real improvement in the labor market, believing that the unemployment figure has fallen primarily because many discouraged workers dropped out of the labor force, thus reducing the overall number of people who are counted as unemployed. But Bernanke cast some doubt on that view and said that “on balance, an assessment of a broad range of indicators suggests that a substantial portion of the decline in the unemployment rate does reflect genuine improvement in labor market conditions.”

Still, Bernanke cautioned that for the unemployment rate to drop further, “a more-rapid expansion of production and demand from consumers and businesses” would probably be needed. And he said that argued for “continued accommodative policies” to support growth.

Diane Swonk, chief economist at Mesirow Financial in Chicago, said Bernanke’s speech essentially laid out the rationale for continuing or expanding monetary stimulus policies. The Fed has pledged to keep short-term interest rates at near zero until at least late 2014, but some policymakers at the Fed have called for a rate increase earlier, seeing an improving economy and inflation risks of extending monetary stimulus for too long.

“Bernanke made clear that the slack in the labor market is sufficient to sideline the inflation issue for the moment,” Swonk said in a note to clients. “Ben will continue to resist and override dissenters in his own ranks to keep and perhaps even expand monetary policy accommodation.”
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