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Bernanke explains why Fed policies were left in place

Wednesday, September 18, 2013 4:40 PM

Bernanke explains why Fed policies were left in place

WASHINGTON, Sept. 18 (UPI) -- U.S. Federal Reserve Chairman Ben Bernanke said Wednesday the labor market was giving policymakers mixed signals, showing only spotty improvements.

Bernanke, at a news conference in Washington, focused on the labor market, noting that inflation, the other half of the Fed's dual mandate, remained subdued. The Fed has tied changes in its $85 billion per month asset purchasing program to improvements in the labor market.

Investors have been anticipating a policy change but the Fed held its policy intact Wednesday, possibly a boost to markets, but likely a surprise to some.

The Fed's policymakers said the monthly asset purchases and its zero to 0.25 percent federal fund rate -- a benchmark rate that determines the cost of bank to bank lending -- would remain unchanged.

In assessing the labor market, Bernanke said, "meaningful progress has been made in the years since we announced the asset purchase program" but "conditions on the job market today are still far from what all of us would like to see."

The Fed has tied policy shifts to a drop in the unemployment rate to 6.5 percent.Bernanke said Wednesday that number alone does not determine the quality of the labor market.

The unemployment rate was at 8.1 percent when the Fed said it would let the unemployment rate guide its policy decisions. Since then, the rate has dropped to 7.3 percent.

Bernanke noted 2.3 million jobs had been created since the Fed linked policy to the unemployment rate.

In addition, "over the past 12 months, aggregate hours of work are up by 2.4 percent [and] weekly new claims for unemployment insurance have fallen by about 50,000."

"And surveys suggest that households perceive jobs as more readily available," he said.

Although such data are positive, other data are not, Bernanke said.

"Not all labor market developments over the past year were positive, however," he said Wednesday. "Notably, the labor force participation rate fell by about 0.3 percentage points and real wages remained about flat."

That means a significant part of the drop in the unemployment rate has been caused by people dropping out of the workforce. Many discouraged workers have simply stopped looking for work.

Secondly, when wages remain flat, it implies an employer's market, in which workers unwilling to accept low wage can be passed over for ones who are.

The Fed, Bernanke said, anticipates the nation's gross domestic product will rise between 2 percent and 2.3 percent for 2013 with gains increasing to 2.9 percent to 3.1 percent in 2014.

The unemployment rate is projected to fall to 7.1 percent to 7.3 percent in the fourth quarter of 2013 and to between 6.4 percent and 6.8 percent in the fourth quarter of 2014, Bernanke said.

(Source: UPI )
(Source: Quotemedia)


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