Bernanke says job growth, inflation still too low

Federal Reserve Chairman Ben Bernanke on Wednesday suggested U.S. economic conditions are still too weak for the central bank to pull back on its vast monetary stimulus, despite a welcome drop in the jobless rate.

The Fed chief, testifying to the House of Representatives Budget Committee, also warned about the dangers of record U.S. budget deficits. But he indicated sharp spending cuts in the short term could cripple the recovery.

Acknowledging a recent pick-up in the economy, Bernanke said a drop in the jobless rate to 9 percent in January from 9.8 percent in November, the biggest two-month decline since 1958, was “grounds for optimism.”

However, he said hiring is still anemic and noted that the economy has made up just over one million of the more than eight million jobs lost during the recession.

“This gain was … not enough to significantly erode the wide margin of slack that remains in our labor market,” he added.

In November, the Fed launched a plan to buy $600 billion in government debt to keep a lid on long-term borrowing costs and support a fragile economic rebound.

That program drew ire from many policymakers in emerging markets, who accused the United States of unfairly driving down the value of the U.S. dollar to boost exports. At home, many Republican lawmakers attacked the program as potentially sowing the seeds of inflation.

Pressed by skeptical lawmakers, Bernanke said the Fed regularly reviews its bond buying, but also indicated he feels it is still needed. He repeated that it would take four to five years for unemployment to return to more “normal” levels closer to 5 percent.

“The chairman continues to deliver the same message of caution and patience despite the better-than-expected data flow observed in recent months,” said Michael Gapen, economist at Barclays Capital in New York.