Federal Reserve chairman Ben BernankeJASON REED/Reuters
Federal Reserve Board chairman Ben Bernanke is putting the present economic danger of high unemployment ahead of the potential threat of rapid inflation.
With oil trading at more than $110 (U.S.) a barrel, and the value of the U.S. dollar at a 16-month low, Mr. Bernanke held the first press conference in the Fed's 97-year history Wednesday under pressure to show he is up to the task of safeguarding the cost of living.
Critics say the Fed's decision to attempt to keep interest rates low by creating money to purchase some $2-trillion in financial assets is feeding, if not creating, the inflation threat. Mr. Bernanke's response was to emphasize the more than seven million Americans who remain unemployed because of the financial crisis, putting a human face on an economy that is struggling to get back on its feet.
Inflation is a risk the majority of the Fed's policy makers believe they can control. Wages are stagnant, which means producers have limited scope to pass on higher input costs without losing customers.
At the same time, the U.S. central bank expects the surge in commodity prices to stabilize, which will put a brake on further inflation.
With price expectations steady for now, the central bank has the room to try and prevent a persistently high unemployment rate from turning into acute joblessness that would hamper future economic growth. At 8.8 per cent, the U.S. unemployment rate is one percentage point lower than it was in November, but still well above the Fed's target of about 5.5 per cent.
"The fact that we are moving in the right direction, even though that's encouraging, doesn't mean the labour market is in good shape," Mr. Bernanke said. "It's not, and we're going to have to continue to watch and hope that we continue to get stronger and increasingly strong job creation going forward."
The Fed is paying close attention to inflation, and stands ready to act the moment it sees sustained evidence of the public locking in expectations of higher prices - an important inflation trigger, Mr. Bernanke said.
Earlier in the day, the policy-setting Federal Open Market Committee (FOMC) voted unanimously to complete the purchase of $600-billion in Treasury securities by the end of June as planned, closing out the Fed's second program of quantitative easing. But otherwise, it pledged to keep borrowing costs low for the foreseeable future.
As Mr. Bernanke stepped in front of a capacity crowd of about 50 reporters at the Fed's headquarters in Washington, the central bank released a revised outlook that cut its forecast for economic growth this year to 3.1 to 3.3 per cent from a January estimate of 3.4 to 3.9 per cent.
The downgrade of the economic outlook reflects a weaker-than-expected start to 2011, which was marred by severe weather, rising gasoline prices and the natural disaster in Japan. Wall Street economists predict the Commerce Department's preliminary estimate of first-quarter gross domestic product Thursday will show the economy advanced at an annual rate of 1.8 per cent over the first three months of the year, compared with 3.1 per cent in the fourth quarter.
Slower growth means an already elevated unemployment rate will take longer to come down. In 2012, the Fed projects the jobless rate will drop to 7.6 to 7.9 per cent from 8.8 per cent currently. That's an improvement from the previous outlook, but still well above the Fed's preference of rate closer to 5.5 per cent.
The Fed's mandate from Congress is to achieve maximum employment and stable prices. From the central bank's perspective, it is failing on employment, while doing okay on prices.
The Fed's outlook for underlying inflation, which subtracts oil and agricultural prices, rose to 1.3 to 1.6 per cent from 1 to 1.3 per cent in January. The new forecast still is safely under the Fed's unofficial target of about 2 per cent.
That explains why the Fed appears set to leave considerable stimulus in place until at least the end of the year. During the press conference, Mr. Bernanke said the Fed would continue to reinvest the money it earns as the securities it has purchased mature. He also clarified what is meant by "extended period," saying the description means at least a length of time between "a couple" of FOMC policy meetings.
"We continue to believe the Fed will remain patient when it comes to normalizing monetary policy and do not look for an increase in the federal funds rate until July 2012," Michael Gapen, an economist at Barclays Capital in New York, said in a note to clients.