Bernanke: Economy growing much too slowly to put people back to work

In spite of recent data auguring another recession, Federal Reserve Chairman Ben Bernanke told a luncheon crowd in Indianapolis on Monday that he expects the economy to keep growing, but he's worried that it is growing so slowly that it risks creating a "permanent group" of underemployed Americans.

Bernanke, speaking to about 2,000 people in the Sagamore Ballroom at the Indiana Convention Center, also indicated the Fed plans to maintain stimulative policies even after the economy strengthens. His speech was presented by the Economic Club of Indiana. (See below for video highlights.)

“The longer we go with millions of people out of work—more than 40 percent of those unemployed have been unemployed for at least six months—the more people we’re going to have whose skills are going to atrophy, whose ability to find work is going to decline, and we’ll be creating a permanent group of people who will not be fulfilling their full potential in the labor force,” Bernanke said during a question-and-answer session after his prepared remarks. “And that, I think, is very, very costly. So that is one of the reasons, perhaps the key reason, why the Fed has taken action to support the recovery.”

The rest of Bernanke’s speech was a classroom-lecture like defense of the “less-traditional” tools the Fed has used the past four years in an attempt to spur economic growth, which have included holding the short-term federal funds rate near zero since late 2008, and spending trillions of dollars to buy U.S. Treasury securities and mortgage-backed securities in an effort to lower long-term borrowing costs.

Last month, Bernanke launched a third round of what the Fed calls “quantitative easing,” committing to purchase an additional $40 billion in mortgage-backed securities every month. Also, the Fed promised to hold interest rates low through mid-2015 assuming inflation remains stable.

On Monday, Bernanke clarified that second commitment, by saying that the Fed would maintain those policies even after the U.S. economy has shown signs of a strong rebound.

“That doesn't mean that we expect the economy to be weak through 2015. Rather, our message was that, so long as price stability is preserved, we will take care not to raise rates prematurely,” Bernanke said. “Specifically, we expect that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economy strengthens.”

Bernanke hopes that by clearly signaling the Fed’s intention to keep borrowing costs at unprecedented low levels for nearly three more years, consumers and businesses will have confidence to spend and expand.

So far, national unemployment has been stuck at 8.1 percent or higher for most of this year. Roughly 23 million Americans remain out of work even though the recession that began in December 2007 officially ended in the middle of 2009.

Gross domestic product grew just 1.3 percent in the second quarter. And, last week , when it was announced that durable goods orders fell by 13 percent in August, some economists predicted another recession in early 2013.

“Hiring and investment are suffering greatly from paralyzing uncertainty, as voters face a choice between two drastically different visions for economic policy in less than six weeks, and businesses are willing to wait for the outcome before settling on and executing plans for the future,” Stephen Stanley, chief economist of Pierpont Securities, told MarketWatch last week.

Bernanke also acknowledged that uncertainty in Europe and the so-called “fiscal cliff” that the United States faces when several tax cuts expire at the end of this year are threats to the economy. But he reiterated that his fear is not negative growth in the economy, but simply growth that is only barely creating enough new jobs to absorb new workers entering the work force—not to put unemployed workers back to work.

“With an economy which is growing only 1.5 [percent] or 2 percent, that is not fast enough to lower the unemployment rate. That is my concern,” Bernanke said, adding, “Our concern is that growth will continue, but at a pace that is insufficient to put people back to work.”