Monday, September 17, 2012

Bernanke aims at job market in latest bid to revive faltering recovery

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Although the economy has shown signs of progress, employment continues to lag, says Fed Chairman Ben Bernanke. "The weak job market should concern every American," he adds.
Federal Reserve Chairman Ben Bernanke said Thursday the central bank’s decision to unleash another flood of money on the U.S. economy was motivated by the need to get more Americans back to work.
“While the economy appears to be at a path of moderate recovery, it isn't growing fast enough to make significant progress reducing the unemployment rate,” Bernanke told reporters. “The weak job market should concern every American. High unemployment imposes hardship on millions of people, and it entails a tremendous waste of human skills and talents.”
The move, known as "quantitative easing," was widely expected. Fed Chairman Ben Bernanke signaled the plan to move ahead with what has been dubbed QE3 in a widely-watched speech last month, when he noted that U.S.unemployment remains stuck at stubbornly high levels.To try to spur job creation, Fed policymakers Thursday opened the money spigots for the third time since the financial collapse of 2008. This time around, the central bank targeted mortgage bonds in an effort to drive mortgage rates, already at historical lows, even lower. The open-ended promise to buy those bonds, at a pace of $40 billion a month, will drive the Fed’s holdings of securities past the $3 trillion mark.

Though financial markets responded enthusiastically to the Fed's announcement, with the Dow up 200 points in late trading, some economists expressed doubts that this latest round of bond-buying will have any more impact than the prior two rounds.
“Try as it might, the Fed cannot prompt the economy to do much more under these circumstances,” said Bernard Baumohl, chief global economist at The Economic Outlook Group.
With this latest move, central bankers are hoping that extended lower mortgage rates will help accelerate a tepid recovery in the housing market, which historically helps lead the economy out of recession.
House price have begun to recover and sales perked up from the worst bust since the Great Depression. But the pace of foreclosures remains historical high and the homebuilding industry is still mired at recession levels.
Potential home buyers also face bigger hurdles than low rates, especially the nearly one in four owners who owe more on their mortgage than their home is worth.
There’s little debate over the devastating impact of the Great Recession on the U.S. labor market. With the jobless rate well above normal levels, at 8.1 percent, fewer than half of the 8 million jobs lost in the recession have been restored. Some five million Americans have been out of work for more than six months and millions more have given up looking and left the labor force.
The weak job market has also been accompanied by flat wages for those who have a paycheck, takingan ongoing toll on the living standards of middle class American households. Median household income fell again last year, according to the latest data from the Census Department.
Based on renewed weakness shown in recent economic indicators, the Fed lowered its growth forecast for this year to just two percent – down from the 2.4 percent expansion in gross domestic product in its June forecast. The Fed expects its easy money policy to lift growth to a 3 percent rate next year – up from the 2.8 percent pace predicted in June. For 2014, growth will range between 3 percent and 3.8 percent, the Fed predicts.Nearly five years after one of the worst recessions in decades, the pace of economic growth and job creation is badly lagging prior recoveries. The U.S.economic woes are being compounded as Europe slides deeper into recession and the once-robust Chinese economy slows.
The forecast also sees the jobless rate falling gradually from current levels, but not reaching historical “full employment” levels for another four years.
To add more weight to its latest policy move, the Fed promised to keep interest rates at "exceptionally low" until at least mid-2015, rather than late 2014 as previously promised. If the job market doesn’t improve, Fed officials said Thursday, they’re ready to ramp up their bond buying or use “other policy tools as appropriate.”
Getty Images
Fed Chairman Ben Bernanke speaks at Thursday's news conference.
But Bernanke said the central bank isn’t targeting a fixed level of employment with its latest policy.
“There’s not a specific number we have in mind,” Bernanke told reporters. “But what we’ve seen in the last six months isn’t it.”
The Fed’s move, coming just weeks before the presidential, drew fire from Congressional critics who argue that the Fed’s action was designed to help re-elect president Obama.
“Chairman Bernanke is beginning to do serious damage to the Fed as an institution,” said Senator Bob Corker, R-Tenn., a member of the Senate Banking Committee. “Open-ended purchases of mortgage-backed securities will politicize the Fed and add substantially to its balance sheet risks, but it will not help our economy's long-term growth prospects.”
But Bernanke told reporters that the central bank remains “non-partisan and apolitical.”
“We make our decisions entirely bases on the state of the economy,” said Bernanke. “We just don’t take those (political) factors into account and we think that’s the best way to maintain our independence and maintain the trust of the public.”
Buoyed by expectations that the easy-money policy was in the works, investors have bid up stock prices in the past few months in anticipation of the move. Major market indexes surged Thursday on the official announcement, dubbed "QE3" on Wall Street.
“Investors see QE3, they see successful can-kicking in Europe and are convinced that a lame duck Congress will save the day and extend the tax cuts that expire at year-end," said David Rosenberg, chief economist at Gluskin Sheff.
While central bankers are pinning some hopes on the housing market, Bernanke acknowledged hurdles, including tight lending standards.
"One reason that lenders have been very constraining is they're worried about further house price declines that will make the collateral worth less than the loan," he said. "As house prices have begun to rise, as the economy's gotten a little stronger, lending standards have eased just a bit."
“The problems of limited equity, tight lending standards and appraisal problems are still out there limiting the Fed’s effectiveness,” said Joel Naroff of Naroff Economic Advisors. “At least the Fed members can say they are trying. That is more than what we can say about Congress.”
Despite repeated calls by Bernanke for help from Capitol Hill, the Fed is powerless to head off the looming impact of the "fiscal cliff" if congress fails to act on its budget impasse.
Unless the current stalemate can be broken, ruinous tax increases and spending cuts are set to kick in by year-end. Economists, including researchers at the Congressional Budget Office, have warned the combined impact of the fiscal moves will almost certainly drive the U.S. economy into a nasty recession.
The Fed is hoping that cheaper money will encourage companies and households to borrow and spend more, boosting demand and prompting employers to create more jobs.
But worries that Congress may not avert the “fiscal cliff” in time are weighing on consumer and business confidence, prompting them to cut back, according to Russell Goldsmith, CEO of City National Bank in Los Angeles.
“That's why our deposits are up enormously,” he said. “People are saying, ‘I’m sitting on the sidelines. I want to know what the tax rates are going to be.’”
“There's a risk that these guys will not solve it, and then you drive this weak GDP growth right below zero. So people want to say, ‘Hey, I'll wait and see. So it's self-fulfilling. That slows down the economy and that hurts hiring.”
Below is the full press conference Bernanke held following the Fed announcement.

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