Federal Reserve Chairman Ben Bernanke played down Wednesday the unemployment rate’s weight in the central bank’s calculation of when to start raising short-term borrowing costs, a fresh example of the challenge the Fed faces explaining its easy-money policies to an often perplexed public.
Since last December, the Fed has been saying short-term interest rates—now near zero—won’t go up at least until the jobless rate drops below 6.5%, and as long as inflation stays near 2%.
But Mr. Bernanke suggested the Fed might keep rates near zero long after the jobless rate, which was 7.6% in June, falls below that 6.5% threshold. It is a point he has made before, but he placed new emphasis on it in the first of two days of congressional testimony about the economy and monetary policy—possibly his last appearances before Congress since his term as chairman ends in January.
If very low inflation accompanies a drop in unemployment, Mr. Bernanke said, the Fed might feel less urgency about pulling back on cheap credit.
Moreover, the jobless rate may continue to fall partly because people are leaving the labor force, which means they are no longer looking for work and aren’t counted as unemployed. In this case, Mr. Bernanke said, the Fed might disregard a falling jobless rate as a misleading indicator of the economy’s vigor and keep rates low even after the rate falls below 6.5%.
“There are a number of problems with the labor market,” Mr. Bernanke said at the hearing of the House Financial Services Committee. “Unemployment is one problem, but long-term unemployment and underemployment—and by ‘underemployment,’ I mean people either who are working fewer hours than they would like or possibly working at jobs well below their skill level—is also indicative of a weak labor market.”
Reaching 6.5% unemployment “would not automatically result in an increase in the federal funds rate target,” Mr. Bernanke said. Most economists don’t expect the jobless rate to reach 6.5% until 2015, so the Fed likely won’t face this decision for a while.
Some economists say the Fed runs the risk of sowing new confusion in markets, though investors took Mr. Bernanke’s testimony in stride Wednesday. Stocks were little changed on the day and yields on 10-year Treasury notes fell to 2.493%.
“It is hard to paint a number on the side of the building and then explain that it may not mean as much as you think it does,” said Vincent Reinhart, Morgan Stanley‘s MS +0.61% chief U.S. economist and the former head of the Fed’s monetary affairs division.
Sorting out what to say about the jobless rate is a nagging problem for the central bank. At his June 19 news conference, Mr. Bernanke said the central bank might scrap the 6.5% number altogether and use a lower one.
Fed officials believe their guidance on what they will do to interest rates in the future has a big impact on the economy today.
For instance, if investors expect low short-term rates in a year or two, they’ll likely keep longer-term interest rates down too, which could help to stimulate borrowing, spending and investment today.
Also Wednesday, Mr. Bernanke repeated his recent public comments when discussing another aspect of the Fed’s easy-money policies, its $85 billion-a-month bond-buying program. He said the Fed could start winding down the program in the months ahead if growth picks up as expected and low inflation moves toward the Fed’s 2% objective.However on this front, too, Mr. Bernanke sought to give the central bank wiggle room.
“Because our asset purchases depend on economic and financial developments, they are by no means on a preset course,” he said.
Though he tried to take an evenhanded view of the risks to the Fed’s economic outlook, Mr. Bernanke seemed to emphasize that headwinds for the economy and tepid inflation might keep the easy-money policies in place longer than the Fed indicated last month.
“Risks remain that tight federal fiscal policy will restrain economic growth over the next few quarters by more than we currently expect,” he said. Moreover, “with the recovery still proceeding at only a moderate pace, the economy remains vulnerable to unanticipated shocks, including the possibility that global economic growth may be slower than currently anticipated.”
As Mr. Bernanke approaches the end of eight years leading the Fed, some lawmakers politely praised his leadership during a tumultuous time in the economy. But the Fed chairman at times bristled at criticism lobbed at him by some lawmakers on the panel.
When Rep. Bill Huizenga (R., Mich.) suggested that the Fed’s policies have helped Wall Street more than Main Street, Mr. Bernanke disagreed. “Our goals are Main Street, our goals are jobs, our goals are low inflation. And I think we’ve had, not all the success we would like, but we’ve had some success.”
The central bank’s “beige book” report released Wednesday, a summary of conditions in its 12 districts, found improved activity nationwide, though employers in some regions showed trepidation about hiring full-time workers. The Fed’s next policy meeting is July 30-31.