Ben S. Bernanke said the U.S. economy has improved considerably since the 2008 financial crisis, but the recovery has a ways to go.
The departing Federal Reserve chairman told a standing-room crowd at the Philadelphia Marriott in Center City on Friday that despite “unusually high” long-term unemployment, the head winds that slowed the economy “may now be abating.”
Bernanke, 60, reflected on his eight years as chief of the U.S. central bank at the annual meeting of the American Economic Association, a confab of 12,000 academic, business, government and not-for-profit economists at the Pennsylvania Convention Center.
Bernanke’s second four-year term as central bank chief expires Jan. 31, and Janet Yellen, currently the Fed’s vice chairman, will succeed him Feb. 1 if confirmed in the U.S. Senate, which is expected to vote Monday.
Bernanke has led the Fed since 2006, during which time he used new monetary-policy tools to try to revive an economy hit by the worst financial downturn since the Great Depression.
The Fed’s policy-making committee last month decided to gradually end a massive bond-buying campaign, a step toward unwinding the central bank’s broader stimulus program as it gains confidence that the economy is steadily growing.
The Fed plans to cut its monthly purchases of Treasury and mortgage-backed securities to $75 billion this month from $85 billion in December. The purchases will shrink to nothing by the end of the year, in a series of steps.
Bernanke said the decision “did not indicate any diminution of its commitment to maintain a highly accommodative monetary policy for as long as needed.”
“Rather, it reflected the progress we have made toward our goal of substantial improvement,” he told an enthusiastic audience.
Bernanke said payroll employment has risen by 7.5 million jobs and the economy has grown in 16 of the past 17 quarters.
Unemployment has fallen from 10 percent in fall 2009 to 7 percent in November. Industrial production and equipment investment “have matched or exceeded prerecession peaks. The banking system has been recapitalized, and the financial system is safer.”
However, Bernanke said that “despite this progress, the recovery clearly remains incomplete.”
In the last year, the Fed has bought more than $1 trillion in Treasury and mortgage-backed securities, in its effort to encourage job creation. Fed officials say the purchases have modestly reduced a range of borrowing costs, contributing, for example, to a rise in auto sales and an improving housing market. They say the program has also helped to revive an appetite for taking risks, driving up stock prices.
The Fed’s announcement in December went beyond the previous declaration of an intent to keep rates near zero at least as long as the unemployment rate remains above 6.5 percent.
“My colleagues and I emphasized that the conditions stated in that guidance were thresholds, not triggers,” Bernanke said Friday. “Crossing one of the thresholds would not automatically give rise to an increase in the federal funds rate target,” especially if projected inflation continues to run below the committee’s 2 percent longer-run goal.
The plan will likely define the first years of the term of Yellen, who would become the first woman to chair the Fed. She has supported Bernanke’s approach.
Contributing to the slow recovery was “fiscal tightness” in Washington, where tax increases and spending cuts lowered output growth in 2013 by as much as 1.5 percentage points, Bernanke said.
“To illustrate the extent of fiscal tightness” since the 2001 recession, “employment at all levels of government had increased by nearly 600,000 workers; in contrast, in the current recovery, government employment has declined by more than 700,000 jobs, a net difference of more than 1.3 million jobs. There have been corresponding cuts in government investment – in infrastructure, for example – as well as increases in taxes and reductions in transfers,” he said.
Despite difficult challenges for the U.S. economy and the Fed, Bernanke said he sees reason for optimism:
“The encouraging news is that the head winds I have mentioned may now be abating. Near-term fiscal policy at the federal level remains restrictive, but the degree of restraint on economic growth seems likely to lessen somewhat in 2014 and even more so in 2015.”
“The U.S. recovery appears to be somewhat ahead of those of most other advanced industrial economies,” he said. “I see some grounds for cautious optimism abroad as well.”