Bernanke: Long-Term Unemployment Has Severe 'Social Consequences'

NEW YORK (By Kristina Cooke): Federal Reserve Chairman Ben Bernanke warned on Tuesday that a long period of high unemployment could exact a steep social cost, as he and other Fed officials defended the central bank against criticism of its easy money policy.

Minneapolis Fed President Narayana Kocherlakota said the Fed's controversial bond purchase program was needed given a "troubling" slowdown in U.S. economic growth and too low inflation and employment.

The Fed said earlier this month it would buy $600 billion in Treasury bonds to support a weak economy. Core inflation has averaged well below the Fed's informal target of about 2 percent and the jobless rate remains stubbornly high.

"There are obviously very severe economic and social consequences from this level of unemployment," Bernanke said at Ohio State University. "So getting new jobs, getting unemployment down is of an incredible importance."

The Fed's purchase program has elicited an unusual amount of criticism both at home and abroad, including that it is deliberately pushing down the dollar and fueling asset bubbles. Some U.S. Republicans have warned the policy will lead to runaway inflation.

Jeffrey Lacker, president of the Richmond Federal Reserve Bank and known as an inflation hawk, said the Fed faces a delicate task of timing the eventual withdrawal of easy money to avoid a run-up in inflation, but that he doesn't yet know when that time will be.

"We've increased the monetary base tremendously, and there is a lot of people that just look at that and jump to the conclusion that hyperinflation is a threat," Lacker told a panel in New York.

"I think there's a little bit of overreaction, a little bit of hysteria out there" on inflation.


Bernanke repeated his argument that action was called for even though the economy has been growing for a year and a half, but he steered clear of any direct comments on U.S. monetary policy.

The high share of workers who have been out of work for six months or longer is troubling, he said, because those workers face a particularly high bar to reentering the labor force both because they lose skills and because employers may question their suitability for employment.

Bernanke also said the elevated jobless rate makes businesses and households reluctant to spend because they are uncertain of future income.

Kocherlakota, for his part, told a symposium in St. Paul, Minnesota, that the Fed's decision to buy more longer-term assets should help reduce real interest rates and "lead to less unemployment and upward pressure on prices" albeit only modestly.

Kocherlakota, who next year rotates into a voting seat on the Fed's policy-setting committee, said the purchases are unlikely to fuel future inflation because the central bank has the tools and the commitment to keep inflation low.

Peter Diamond, whose nomination to the Fed's Board of Governors is awaiting Senate approval, told Reuters Insider in an interview that the Fed's plan was an insurance policy at a time the global economy faces risks.

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