Federal Reserve Chairman Discusses Economic Recovery, Debt, Jobs

09 February 2011

Federal Reserve Chairman Ben Bernanke, left, meets with House Budget Chairman Paul Ryan before a hearing on the state of the U.S. economy February 9 in Washington.

The U.S. economy continues to strengthen as consumer and business spending increase, but unemployment remains stubbornly high, says Federal Reserve Chairman Ben Bernanke.

“Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established,” Bernanke said at a February 9 hearing of the House of Representatives Budget Committee. The central bank president makes appearances before congressional committees twice a year to help Congress understand the state of the economy and the forces that affect it.

The hearing came about a week before President Obama and his administration submit the proposed fiscal year 2012 federal budget to Congress. Once the budget is submitted, numerous committees in the U.S. Senate and House of Representatives begin hearings to determine if spending plans meet needs and how to pay for them. Knowing where the economy stands affects those decisions.

“The economic recovery that began in the middle of 2009 appears to have strengthened in the past few months, although the unemployment rate remains high,” Bernanke said in prepared testimony. “The initial phase of the recovery, which occurred in the second half of 2009 and in early 2010, was in large part attributable to the stabilization of the financial system, the effects of expansionary monetary and fiscal policies, and the strong boost to production from businesses rebuilding their depleted inventories.”

However, he said, the recovery slowed in spring 2010 and concerns about the durability of the recovery intensified. Two key things caused the slowdown: The impact of inventory building and fiscal stimulus policies diminished, and Europe’s fiscal and banking problems caused a negative effect on global financial markets.

Real consumer spending rose at an annual rate of more than 4 percent in the fourth quarter of 2010, Bernanke said, and the gains in consumer spending over the period appear to be broadly based. Businesses for the most part boosted investment in new equipment as the demand for their products and services expanded.

“Construction remains weak, though, reflecting an overhang of vacant and foreclosed homes and continued poor fundamentals for most types of commercial real estate,” Bernanke added.

The U.S. gross domestic product — the broadest measure of the total value of goods and services produced — rose 3.2 percent in the fourth quarter of 2010, its best showing since early 2009, according to the U.S. Commerce Department. For all of 2010, the U.S. economy grew at 2.9 percent, the best performance since 2005.

Unemployment in the United States fell from 9.8 percent in November 2010 to the current level of 9 percent, the fastest decline in unemployment in nearly 50 years, according to the U.S. Labor Department. The service and manufacturing sectors have begun growing again at pre-recession levels, the Labor Department said, accounting for a large part of the decline in unemployment.

This improvement, though welcome, is still insufficient to significantly erode a wide margin of slack that remains in the U.S. labor market, Bernanke told the congressional committee.

“Notable declines in the unemployment rate in December and January, together with improvement in indicators of job openings and firms’ hiring plans, do provide some grounds for optimism on the employment front,” Bernanke said.

But rising inflation was a concern of Congress. Budget Committee Chairman Paul Ryan said he is concerned that inflationary pressure from the Federal Reserve’s monetary policies will outweigh any short-term economic benefits.

Bernanke testified that overall U.S. inflation remains low and longer-term inflation expectations have remained stable. He said prices for all the goods and services consumed by households rose 1.2 percent for all of 2010, down from 2.4 percent over the previous 12 months.

But he said it will take several more years for the U.S. unemployment rate to fall to within a normal range.

Finally, Bernanke told the congressional committee that raising the $14.3 trillion U.S. debt ceiling is essential to keep the United States from defaulting on its loans and creating a severe impact on the global economy.

“We do not want to default on our debts. It would be very destructive,” Bernanke said.

He also said that for the U.S. economy to strengthen, Congress and the administration must undertake reforms of the government’s tax policies and spending priorities that will serve to reduce the deficit and enhance long-term growth.

(This is a product of the Bureau of International Information Programs, U.S. Department of State.