Bernanke: Jobless drought could last for years

WASHINGTON - Federal Reserve Chairman Ben Bernanke, saying the economic outlook was "unusually uncertain," predicted Wednesday that unemployment was likely to remain stubbornly high for several years, straining families and endangering the nation's economic stability and competitiveness.

"Long-term unemployment not only imposes exceptional near-term hardships on workers and their families, it also erodes skills and may have long-lasting effects on workers' employment and earnings prospects," he said.

"This is the worst labor market, the worst episode, since the Great Depression," Bernanke said of long-term unemployment.

"Not only for the sake of the unemployed and for the short-term strength of the economy but also for a long term viability in international competitiveness," he added, "I think we need to be very seriously concerned," he said.

While Bernanke, in his semiannual testimony to Congress, painted a bleak picture for the millions of jobless workers, he said the U.S. economy was continuing to recover at a moderate pace. And for now, he said, the central bank was holding off on taking further actions to stimulate the economy.

A series of economic data in recent weeks has pointed to slowing economic growth, fanning fears of a return to recession and prompting speculation that the central bank may be gearing up to buy more securities or initiate other moves in an effort to spur lending by pushing already-low long-term interest rates even lower.

"Are you out of bullets?" asked Sen. Jim Bunning, R-Ky., a member of the Senate Banking Committee and longtime critic of the Fed.

Bernanke recited the Fed's most recent economic forecast, made in late June, that calls for 3 percent to 3.5 percent economic growth in 2010. That is a slowdown from the 4 percent growth in the second half of last year when the economy emerged from the deep recession.

Many private analysts believe the Fed's near-term forecast is too optimistic, given the weakness in the housing and commercial real estate, state and local government budgets, and particularly the labor market. Economists say it isn't clear that the private sector has gained enough strength to take over a recovery that has been spurred by massive federal spending and the Fed's expansive monetary policies.

Bernanke told Senate Banking Committee members that it will take "a significant amount of time" to reclaim the 8.5 million jobs lost during the 2008 and 2009. He projected that the nation's unemployment rate to be above 7 percent at the end of 2012, better than the current 9.5 percent but far below the 5 percent figure considered to be full employment.

Other economists such as Edward Leamer at the University of California, Los Angeles, see joblessness closer to 8 percent two years from now.

"Economic growth will be enough to drop the rate but ever so slowly, painfully slowly," he said Wednesday in reacting to Bernanke's remarks.

During the question-and-answer session, he expressed concerns that some workers may become permanently unemployed and about the effect on the broader economy.

As in past such hearings, Democratic and Republican lawmakers sought to ask Bernanke's support for further fiscal stimulus or moves to restrain the rising federal deficit, reflecting the fierce partisan debate in Washington over whether the government's role in the economy. And as before, Bernanke danced between the two sides, saying that while this was not the time to be withdrawing government support for the economy, it was also important for officials to develop a credible strategy to bring down the deficit over the coming years.

"I don't think it's either/or," he said. "I think we need to do both."

Bernanke's appraisal of the economy, which will be repeated Thursday in the House, was met with some trepidation on Wall Street, where the Dow sank by as much as 164 points during his remarks on Capitol Hill before gaining some of the losses and closing the day down 109.

"Basically the markets hate uncertainty, so when the Fed chairman says we are facing an uncertain economic outlook, look out below," said Chris Rupkey, chief financial economist at the Bank of Tokyo-Mitsubishi in New York.