Federal Reserve Chairman Ben Bernanke sketched a more optimistic outlook for the economy, but said a $600 billion bond-buying program is needed because it will take up to five more years to bring unemployment back to healthy levels.
Bernanke told the Senate Budget Committee that there's increasing evidence that a "self-sustaining" recovery is taking hold. He said he expects stronger economic growth because consumers and businesses will boost spending this year.
Bernanke spoke one hour after the government released a disappointing employment report. Employers added only 103,000 jobs in December. The unemployment rate fell to 9.4 percent partly because people gave up looking for jobs. The report suggested only slow healing in the jobs market. Many economists had forecast much bigger job gains and were looking for a signal that a crucial corner had been turned in the labor market recovery.
Asked about Friday's 103,000 job gains, Bernanke said if that pace of job creation were maintained "you won't see sustained declines in the unemployment rate."
The Fed chief defended the central bank's much criticized decision in November to start buying $600 billion in Treasury's through June. And, he gave no hint that the Fed would change its course.
The bond purchases are designed to boost the economy by lowering interest rates and lifting stock prices.
The program has been criticized by Republicans in Congress and some Fed officials who contend it will do little to help the economy and could hurt it by unleashing inflation and speculative buying on Wall Street. The move heightened tensions with trading partners including China, Germany and Brazil. They complained it was really a scheme to push down the value of the dollar, giving U.S. exporters a competitive edge.
The Fed chief said the threat of deflation — a dangerous drop in prices, wages and in the values of homes and stocks — and the potential for persistently high unemployment were sufficient reasons for the Fed to launch the bond-buying program.
Bernanke predicted that the overall pace of the economy will be "moderately stronger" this year and said the Fed recently has seen "increased evidence that a self-sustaining recovery" is taking place.
Factories are cranking up production. The service sector is growing at its fastest pace in more than four years. Fewer people applied for unemployment benefits over the past month than in any other four-week period in more than two years. Consumers are spending more freely, and a payroll tax cut is likely to boost their activity further.
However, there are risks — namely a weak jobs market.
"Notwithstanding these hopeful signs ... employers reportedly still reluctant to add to payrolls, considerable time likely will be required before the unemployment rate has returned to a more normal level," Bernanke said. "Persistently high unemployment, by damping household income and confidence could threaten the strength and sustainability of the recovery," he warned.
Bernanke said unemployment is likely to be close to 8 percent two years from now.
Other threats to the economic outlook, Bernanke said, are:
- A depressed housing market, where growth in foreclosures could push down home prices even more.
- Deeper spending cuts and more layoffs from state and local governments.
- Rising gasoline prices, which now top $3 a gallon.
Earlier this week, Fed officials said they think Congress' tax-reduction plan will help bolster the economy this year and should spur more hiring.
The tax package extends tax cuts enacted by President George W. Bush in 2001 and 2003, gives a pay raise to working Americans by lowering the Social Security payroll tax, provides tax breaks to businesses and extends unemployment benefits. The package has a price tag of $858 billion over two years.
Bernanke also argue for Congress and the White House to come up with a long-term plan to reduce the government's trillion-plus-dollar budget deficits. However, he warned them not to slash spending or boost taxes now because the economy is too fragile.
President Barack Obama's debt commission at the end of last year failed to reach a consensus on what to do about exploding deficits. Over the coming decade government deficits are estimated in the $10 trillion range. If Congress fails to come up with a plan to curb those deficits in the long run, the economy could be hurt, Bernanke said. Big deficits could force investors to demand more returns to loan out their money to the government. Interest rates could soar, crimping spending and slowing the economy.