Bernanke bets on monetary stimulus for US economy

22 May 2013

1

Ben BernankeThe Federal Reserve will keep its policy of monetary stimulus unchanged for the present as low real interest rates have helped support spending on durable goods, such as automobiles, and also contributed significantly to the recovery in housing sales, construction, and prices, central bank chairman Ben Bernanke said today.

In his testimony to the US Congress, Bernanke said higher prices of houses and other assets, in turn, have increased household wealth and consumer confidence, spurring consumer spending and contributing to gains in production and employment.

More importantly, he said, an accommodative monetary policy has helped to offset incipient deflationary pressures and kept inflation from falling even further below the Federal Open Market Committee's 2 per cent longer-run objective.

In remarks prepared for delivery to the Joint Economic Committee of the US Congress, Bernanke said the Fed was not yet ready to downscale or abandon its bond-buying unless the unemployment level eases from the current levels.

He, however, admitted that the low inflation rate is at least partly due to a decline in energy prices. But there were also indications of more broad-based disinflation, Bernanke said.

"Price inflation for other consumer goods and services has also been subdued," he said.

According to him, economic growth in the US has continued at a moderate pace so far this year. Real gross domestic product (GDP) grew has risen at an annual rate of 2.5 per cent in the first quarter after increasing 1.75 per cent during 2012.

Economic growth in the first quarter was supported by continued expansion in demand by US households and businesses, which more than offset the drag from declines in government spending, especially defence spending.

Conditions in the job market have shown some improvement recently. The unemployment rate, at 7.5 per cent in April, has declined more than 0.5 percentage point since last summer. Moreover, gains in total non-farm payroll employment have averaged more than 200,000 jobs per month over the past six months, compared with average monthly gains of less than 140,000 during the prior six months. In all, payroll employment has now expanded by about 6 million jobs since its low point, and the unemployment rate has fallen 2.5 percentage points since its peak.

Despite this improvement, the unemployment rate is still well above its longer-run normal level, rates of long-term unemployment are historically high, and the labor force participation rate has continued to move down.

''Nearly 8 million people are working part time even though they would prefer full-time work. High rates of unemployment and underemployment are extraordinarily costly: Not only do they impose hardships on the affected individuals and their families, they also damage the productive potential of the economy as a whole by eroding workers' skills and--particularly relevant during this commencement season--by preventing many young people from gaining workplace skills and experience in the first place,'' he said.

The loss of output and earnings associated with high unemployment also reduces government revenues and increases spending on income-support programs, thereby leading to larger budget deficits and higher levels of public debt than would otherwise occur, he added.

Since December, the FOMC has indicated that its current target range for the federal funds rate, 0 to 0.25 per cent, will be appropriate "at least as long as the unemployment rate remains above 6.5 per cent and inflation no more than a half percentage point above the 2 per cent longer-run goal.

Bernanke said that the Fed may either increase or reduce the pace of its bond buys depending on economic conditions, as the central bank stated on 1 May after its last policy meeting.

Business History Videos

History of hovercraft Part 3...

Today I shall talk a bit more about the military plans for ...

By Kiron Kasbekar | Presenter: Kiron Kasbekar

History of hovercraft Part 2...

In this episode of our history of hovercraft, we shall exam...

By Kiron Kasbekar | Presenter: Kiron Kasbekar

History of Hovercraft Part 1...

If you’ve been a James Bond movie fan, you may recall seein...

By Kiron Kasbekar | Presenter: Kiron Kasbekar

History of Trams in India | ...

The video I am presenting to you is based on a script writt...

By Aniket Gupta | Presenter: Sheetal Gaikwad

view more