Reporting from Washington and Los Angeles —
Saying the economic outlook was "unusually uncertain," Federal Reserve Chairman Ben S. Bernanke predicted 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 Wednesday in his semiannual testimony to Congress.
"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, I think we need to be very seriously concerned."
Though Bernanke 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 have 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.
"Well, I don't think so," Bernanke replied, but added that "we're not prepared to take any specific steps in the near term, particularly since we're still also evaluating the recovery and the strength of the recovery."
Bernanke recited the Fed's most recent economic forecast, made in late June, that calls for 3% to 3.5% economic growth this year. That is a slowdown from the 4% 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 housing and commercial real estate, state and local government budgets and particularly the labor market. Economists said 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 would take "a significant amount of time" to reclaim the 8.5 million jobs lost during 2008 and 2009. He projected that the nation's unemployment rate would be above 7% at the end of 2012, better than the current 9.5% but far below the 5% figure considered to be full employment.
Other economists, such as Edward Leamer of UCLA, see joblessness closer to 8% two years from now.
"Economic growth will be enough to drop the rate but ever so slowly, painfully slowly," he said Wednesday.
Bernanke said he was particularly concerned that about half of the officially unemployed workers have been without jobs for longer than six months. That translates to nearly 7 million people.
During the question-and-answer session, he expressed concerns about some workers becoming permanently unemployed and about the effect on the broader economy.
As in past hearings, Democratic and Republican lawmakers sought Bernanke's support for further fiscal stimulus or moves to restrain the rising federal deficit, reflecting the fierce partisan debate in Washington over the government's role in the economy.
And as before, Bernanke danced between the two sides, saying that though 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 as much as 183 points during his remarks on Capitol Hill before recovering 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 Bank of Tokyo-Mitsubishi in New York.
"Maybe the only certainty out there is that the Fed chairman's words have increased the market's worries about the outlook and stocks have gone from being up a small amount to going down big on the day."