Bernanke's Troubling Comments on Unemployment

by: Zachary Scheidt

For any remaining employment optimists, the comments out of Washington from Ben Bernanke are certainly troubling. Last night the Federal Reserve Chairman sat down with Sam Donaldson (NYSE:ABC) to discuss the state of the US economy. His words were less than encouraging:

Ben BernankeThe unemployment rate is still going to be high for a while, and that means that a lot of people are going to be under financial stress.

Last week, the employment report was released and was quite a disappointment to most traders. While government hiring increased as a result of new census workers coming online, the private sector is still struggling to create new jobs. Since each new government job must be funded by taxpayer revenues or additional borrowing, the number of new census workers isn’t exactly a benefit to the system as a whole.

Optimists might point to the declining unemployment rate as evidence that the picture is brightening. But the actual decline in unemployment is more a result of a smaller workforce as the statisticians reduced the denominator of “employable workers.” This is much more of a statistical magic trick than a true improvement in the employment picture.

Last night, Bernanke also seemed to be hedging his words carefully and possibly hinting at an impending rate increase – which would likely constrain growth:

The Fed chief reiterated yesterday that the central bank’s “extended period” of a record low interbank lending rate is conditioned on high unemployment, low inflation and stable price expectations.

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“We have right now a very accommodative, very easy monetary policy,” Bernanke said. “We can’t wait until unemployment is where we’d like it to be” or inflation gets “out of control” to tighten credit, he said.


So at this point it appears the market fear is pricing in an increasing possibility of a double dip recession – which would be very difficult to endure given the high level of government debt and the relatively high level of unemployment heading into this period.

Investors should continue to be cautious, employ strict risk control measures, and be willing to hold cash positions. The market continues to be very turbulent and long-only investors are likely to have much better prices for buying a bit farther down the road.