Bernanke: Unemployment Rate ‘Probably Understates the Weakness of the Labor Market’

by Patrick Brennan

After giving a historical speech at an economics conference in Cambridge, Mass., today, Ben Bernanke took questions on current policy, in which he seemed to be doing his best to emphasize that the Federal Reserve isn’t overly eager to tighten its policies. Specifically, he reiterated that the Fed’s rule of keeping interest rates effectively at zero until unemployment gets down to 6.5 percent is a “threshold, not a trigger” — which would be semantic if the Federal Reserve isn’t serious about taking other economic and employment factors into account.

But Bernanke subtly suggested that that’s not the case, by saying “the unemployment rate probably understates the weakness of the labor market,” meaning when unemployment hits 6.5 percent, which the Fed expects it to do around the beginning of 2015, the bank might well decide that economic conditions are bad enough to keep its funds rate at the most stimulative level, zero (this wasn’t the first time Bernanke has said he thinks the labor market is weaker than the unemployment rate makes it look). To similar effect, he admitted that the Fed’s projections are indeed rosier than private-sector competitors’, saying “I think we’re somewhat optimistic,” again implying that the tapering of the Fed’s QE3 program and the raising of interest rates may not be happening quite as soon as he outlined in June, a sketch which sent markets tumbling. (One might note that, while the logic here is fairly clear, these kinds of messages are a little odd coming from a man who had just said transparency is the most important practice of a central bank.)

Further, there’s been plenty of concern over the rise in interest rates in the past few months, and Bernanke explained that the Fed would also be willing to address this issue if it begins to harm the economy.

Throughout the speech, Bernanke emphasized the importance of the tool of “forward guidance” — a central bank’s saying what its future policy will be — and that’s basically what he was providing (again, just not in a terribly transparent way). He’s not willing to commit to a zero-interest-rate policy for a longer period of time, but by admitting certain things about economic metrics and projections, he’s implicitly saying it’s more likely rates will stay low for longer. 

He also reiterated that the Fed is committed to keeping inflation at its target rate, 2 percent; it’s consistently been running lower (in the low 1s) for some months now. He explained, “we’re committed to defending the target from below as well from above,” though they haven’t been terribly successful at doing so. Bernanke did take a small jab at the concerns many Americans express over inflation, who might wonder why the Fed wouldn’t be happy to keep inflation as low as possible, or well below its 2 percent target. “It’s hard to explain to your uncle,” he said, but “very low inflation” is particularly bad for the economy, because it raises the risk of deflation, which presents signficant economic problems.

On a lighter note, one person noted that the passage of the 1912 bill creating the Federal Reserve in 1912 was regarded as a significant political achievement, and asked what Bernanke thought a central bank created by today’s Congress might look like. Bernanke quipped, “there wouldn’t be one Federal Reserve bank in the whole western part of the United States. That’s my answer.” Earlier he’d dryly explained, “I’ll have the pleasure of testifying before Congress next week.”

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