Bernanke: Fed Falls Short on Unemployment

NEW YORK (TheStreet) -- Federal Reserve chairman Ben Bernanke acknowledged that while monetary policy has helped keep inflation in check, it has not lived up to the promise of lowering the nation's unemployment rate.

In a question and answer session Wednesday afternoon, the Fed chief acknowledged that the central bank has fallen short on one of two of its congressional mandates.

Bernanke's press conference followed an earlier statement from the Federal Reserve, which passed on introducing any new policy changes after its last decision to implement "operation twist." The major difference in the Fed's statement this time around was that economic growth improved in the third quarter.

The Fed chief defended the merits of previous quantitative easing measures, saying that while inflation has been volatile, it has averaged around 2%. However, when pushed on addressing the high rate of unemployment, currently at 9.1%, Bernanke acknowledged that the outlook for unemployment remains "unsatisfactory."

The Fed's current outlook for long run unemployment is in the 5% ballpark. The central bank said it expects even higher unemployment at the end of 2012, raising its estimate to a range of 8.5% to 8.7% from its July forecast of 7.8% to 8.2%. Meanwhile, its core inflation projections remain largely stable between 1.4% to 2% for 2012.

The question of whether the Fed should do more to stimulate the economy amid a bleak jobs market outlook has heated up in light of Fed member Charles Evan's argument that the central bank should tie its interest rate policy to the unemployment rate. Other economists have even suggested that the Fed target nominal gross domestic product.

Those looking for clues on whether the Fed plans to change the way it communicates its interest rate policy didn't get much out of Bernanke's speech Wednesday. However, the Fed's projection of high unemployment in the long term does leave further quantitative easing on the table and economists believe that the Fed may stimulate the economy further as inflation eases.

"We believe that a good bit of the unemployment that we are seeing is cyclical unemployment," said Bernanke, adding that cyclical unemployment, if left untreated, can become structural unemployment as people lose their skills and job network over time.

Because of the threat of structural unemployment, Bernanke underscored the importance of addressing problems in the jobs market while unemployment is still "amenable" to monetary policy.

While Bernanke said that the Fed has already been "very aggressive" in providing monetary accommodation, he also said that "we're prepared to do more and we have the tools to do more." He called the Evans approach an "interesting alternative," while declining to comment on whether the Fed would pursue such a strategy in the future.

Not surprisingly, the chief said that propping up economic growth and job creation isn't all up to the Fed. "I think it would be helpful to get assistance from other parts of the government," he said.

-- Written by Chao Deng in New York.

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