WASHINGTON — On the heels of new government data showing the biggest drop in bank lending in the postwar era, Federal Reserve Chairman Ben Bernanke offered a sober outlook Wednesday for the U.S. economy, anticipating high unemployment for years to come.
Deterioration in the job market is abating, Bernanke told the House Financial Services Committee, and there are other positive signs. These include fewer Americans filing first-time claims for unemployment benefits and an uptick in manufacturing hiring, which points to increasing consumer and business demand for products.
"Notwithstanding these positive signs, the job market remains quite weak, with the unemployment rate near 10 percent and job openings scarce," the Fed chief said in his semi-annual policy address to lawmakers.
On other topics, Bernanke repeated that he expects lending rates to remain low for the foreseeable future and that the Fed is taking numerous steps to ensure that its massive lending to fend off a potential depression doesn't translate into future inflation. Congress, he said, should move to address the problem of mounting federal budget deficits now, or it will face much higher costs for fixing the problem later.
As Congress wrestles to revamp financial regulation, Bernanke frowned on an Obama administration proposal pushed by former Fed Chairman Paul Volcker to restrict the investment activities of commercial banks. Bernanke favored an approach already passed by the House of Representatives that would give bank supervisors discretion to restrict risky investments but wouldn't explicitly direct them to do so.
In his opening statement, Bernanke said that he and the interest rate-setting Federal Open Market Committee anticipate a U.S. growth rate this year of 3 percent to 3.5 percent, and next year between 3.5 percent and 4.5 percent. That's a bit higher than mainstream private forecasts, but the nation's central bank chief wasn't as optimistic on the jobs outlook.
"Consistent with moderate economic growth, participants expect the unemployment rate to decline only slowly, to a range of roughly 6.5 percent to 7.5 percent by the end of 2012, still well above their estimate of the long-run sustainable rate of about 5 percent," Bernanke said. A recent White House economic report suggested that the nation might not return to full employment until 2018.
Most indicators suggest that the economy has emerged from recession and is picking up steam. Job growth traditionally lags coming out of a downturn because companies prefer to hire temporary workers until they're sure the economy is solidly into expansion. The unemployment rate stood at 9.7 percent in January, but is expected to rise as workers who gave up their job search begin actively looking for work again.
There are other troubling trends in unemployment beyond the headline number, the Fed chief said, noting that "more than 40 percent of the unemployed have been out of work six months or more, nearly double the share a year ago."
Bernanke's sober view came a day after Federal Deposit Insurance Corp. Chairwoman Sheila Bair said that lending by U.S. banks last year saw the largest decline since 1942, the first year the U.S. fully engaged in World War II. Lending contracted by 7.4 percent.
Bair confirmed that 702 banks are at risk of failing, the highest number in 16 years. Last year's 140 bank failures are likely to be surpassed this year, in part because problems in commercial real estate are hitting smaller banks harder than larger ones.
"It is a serious problem . . . the commercial real estate losses and loan problems are probably the biggest threat to our smaller, regional banks," Bernanke told lawmakers. He noted that the best thing the Fed can do to boost lending is support broad economic recovery, which would send shoppers back to the malls and fill office buildings with new tenants.
Although the Semiannual Monetary Report to the Congress is supposed to be about inflation and the economic outlook, much questioning of Bernanke was political. Democrats tried to have Bernanke pin the high unemployment on the Bush administration and Republicans expressed worry about high deficits.
The committee chairman, Rep. Barney Frank, D-Mass., noted that from January to April 2009 — a period whose conditions were set before Barack Obama became president — the economy shed jobs at a rate of 725,000 a month. From November through last month, the economy was shedding jobs at a rate of 20,000 per month.
"That means we got a positive swing of 700,000 jobs. Unfortunately, it's not the most important swing," Frank said, meaning that the economy has yet to post several months of consistent net gains in employment.
Bernanke came down on both sides of the aisle when pressed for specific ideas that could help create jobs. He suggested more aid to state and local governments and infrastructure spending — something advocated by Democrats. He also agreed with Republicans that lowering taxes for corporations would make them more competitive and likely to hire.
The top Republican on the panel, Alabama Rep. Spencer Bachus, pushed Bernanke on the high projected budget deficits. California Republican Ed Royce noted that by 2020, interest on the debt could become the fourth largest budget expenditure.
Bernanke said there's little likelihood that the U.S. would default on its debt, but he could envision a scenario where bond markets could demand a higher rate of return in exchange for investing in mounting U.S. government debt.
Acknowledging that it's a tough time to tackle deficits, given a fragile recovery and mid-term congressional elections, Bernanke said it would be best if Congress tackled the problem now because it'll be only more costly to do so later.
"It will be increasingly difficult because the cuts we will need to make will be even sharper, or the tax increases would be sharper," Bernanke said.
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Fed's Monetary Policy Report to Congress
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