Federal Reserve chairman Ben S. Bernanke, speaking at a high-profile economic conference Friday, made the case that Fed’s stimulus policies have helped the economy, sending a strong signal that the central bank will take action to try to spark the nation’s weak recovery.
In a widely anticipated speech in Jackson Hole, Wyo., Bernanke appeared to aim his remarks at fellow policy makers as much as the general public, reflecting divisions at the central bank over whether it should do more to spur sluggish economic growth. Bernanke said the Fed alone can’t neutralize all the factors weighing on the recovery, but it also can’t ignore the “daunting economic challenges.”
Like Boston Federal Reserve Bank president Eric Rosengren, who has argued forcefully in media interviews for more Fed action, Bernanke emphasized a still high unemployment rate that has come down at a far too slow a pace.
“The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years,” he said. “It is important to achieve further progress, particularly in the labor market.”
The speech added to expectations among investors that the Fed would pump more stimulus into the economy by moving to lower long-term interest rates, such as mortgages. Stocks rallied. The Dow Jones industrial average rose 90 points, following Thursday’s 107 point loss, to close at 13,091.
‘. . . persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.’
Bernanke and members of the Open Market Committee, which sets interest rates, have debated in recent months what, if any, additional steps the Fed should take to try to lower the nation’s persistently high unemployment rate, which was 8.3 percent in July.
The Federal Reserve has already taken unusual policy steps, such as buying hundreds of billions of dollars of US Treasuries and mortgage securities as a way to lower long-term interest rates. Bernanke defended those measures in the 39-minute speech at the Jackson Lake Lodge, answering critics who say such policies could ignite inflation, without having much impact on the economy since uncertain businesses and consumers are not eager to borrow.
Earlier this month, Rosengren suggested that Fed policy makers bring down already low mortgage rates by buying mortgage securities. Ideally, such a move would provide more incentive for people to buy homes, giving the real estate market and the economy a lift.
When people buy homes, their subsequent spending on furniture, contractors, and other goods and services adds to economic activity. Rosengren declined to comment Friday.
But it is always touchy for the Fed to take action close to an election, particularly one that is turning on the state of the economy. An independent agency, the Fed has traditionally worked to avoid any appearance that it is trying to influence election outcomes.
Several economists noted that even if the Fed took action immediately, the impact on the economy would be minimal. The central bank has already cut its benchmark short-term rate to near zero and helped push mortgages and other long-term rates to record lows, limiting the amount of additional stimulus the Fed can add.
“I don’t think chairman Bernanke is playing politics,” said Sung Won Sohn, an economics professor at California State University. “He said what he has been saying all along: The economy is not healthy enough, and the central bank can and should do more to perk up economic activity especially in the area of housing and mortgages.”
Sohn said he expects the policy makers to act to lower long-term rates at their next meeting in about two weeks, although he doesn’t think they should.
“I would say we really have reached a point of diminishing returns,” Sohn said. “I would even say it could do more harm than good.”
Jim O’Sullivan, chief US economist at High Frequency Economics, a forecasting firm in Valhalla, N.Y., said he also expects the Fed to take action, though he said much depends on whether economic data continues to improve.
Paul Edelstein, principal US economist at IHS Global Insight, a forecasting firm in Lexington, said he thinks there is more than a 75 percent chance the Federal Reserve will take action in upcoming months. But it won’t accomplish anything dramatic.
Mortgage rates are already low, he said. Tight credit standards, not interest rates, are keeping people from buying homes, he said.
“Bernanke in some sense must realize that,” he said. “Which is why he also said that it would be great if Congress could do something to help us along.”
Correction: Because of an editing error, an earlier version of this story incorrectly reported the performance of the Dow Jones industrial average onThursday. The index lost 107 points.