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Ben Bernanke's Jackson Hole Speech: More Stimulus Possible With Unemployment So High

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Ben Bernanke, in a speech at Jackson Hole, Wyoming, all but promised more Fed action to fight unemployment.
Ben Bernanke, in a speech at Jackson Hole, Wyoming, all but promised more Fed action to fight unemployment.

The job market is still in horrible shape, and the Fed will probably, finally, do something about it very soon.

In a highly anticipated speech at Jackson Hole, Wyoming, Friday morning, Federal Reserve Chairman Ben Bernanke described "the daunting economic challenges that confront our nation," particularly the labor market.

Bernanke suggested the Fed could and should help fight unemployment, in language that all but promised the Fed would act -- perhaps within a matter of weeks.

"This is another clear sign that the Fed is ready to provide more policy stimulus," Paul Dales, senior U.S. economist at Capital Economics, said in a note.

The speech initially confused, but ultimately pleased, financial markets. The Dow Jones Industrial Average fell to nearly flat in the first minutes after the speech was released, but then jumped to about a 100-point gain.

Bernanke's description of the job market, where unemployment is at 8.3 percent and not expected to decline much any time soon, was noticeably bleak:

"The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years," Bernanke said.

The Fed has a dual mandate, to ensure full employment and stable prices, and it is clearly failing on at least that first half of the mandate. Despite this failure, the Fed has for months refrained from taking any more big steps to help the economy. But hopes for more action started to rise after the release of the minutes of the Fed's latest policy meeting, at which policy makers seemed to be building up to taking action. And Bernanke essentially promised new action with the last paragraph of his speech:

Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labor market. Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.

Given how lousy Bernanke thinks the job market is, it's clear that "additional policy accommodation" is indeed "needed." The Fed has already slashed its key interest rate to nearly zero and promised to keep them there until 2014. It has also engaged in two rounds of bond purchases, dubbed "QE1" and "QE2," short for "quantitative easing," meant to pump cash into the economy and encourage more risk-taking. Bernanke said the Fed estimates the first rounds of QE added 2 million jobs to the economy.

The Fed's next chance to do more comes at its policy meeting scheduled for Sept. 12-13. Lots of Fed critics fret that the central bank is nearly out of ammunition to help the economy, and Congress could probably be a lot more effective. But Congress apparently has no interest in helping the economy, so the job is left to Bernanke.

In his speech, Bernanke acknowledges the risks and limitations of another round of Fed stimulus, but said he thinks the risks are manageable and don't outweigh the rewards of doing more:

the hurdle for using nontraditional policies should be higher than for traditional policies. At the same time, the costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant.

So, to review: The job market is a hellhole that needs fixing. The Fed thinks it has the tools to help the job market. Sure sounds a lot like the Fed is getting ready to act, and maybe soon.

Correction: An earlier version of this story incorrectly said Bernanke delivered his speech on Thursday.

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