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Why the Economy Is Recovering, but Jobs Aren't

Let's hope he's right. Ben Bernanke told lawmakers that inflation is under control and that rising gas prices will be temporary. The Federal Reserve Chairman said:

Inflation has declined, on balance, since the onset of the financial crisis, reflecting high levels of resource slack and stable longer-term inflation expectations. Indeed, over the 12 months ending in January, prices for all of the goods and services consumed by households (as measured by the price index for personal consumption expenditures) increased by only 1.2 percent, down from 2.5 percent in the year-earlier period.
The Fed's open-market committee projects inflation of 1.25-1.75 percent this year and 1-2 percent through 2013. Although turmoil in the Middle East is pushing up the cost of oil, surging commodity prices in recent months stem chiefly from rising global demand for raw materials and from constraints in global supply, Bernanke said. Rising commodity prices have had little impact on U.S. consumer prices in recent decades, which are also weighed down by low labor costs, he added.

Bernanke reiterated his view that the Fed's quantitative easing policy is working. Since the Fed last summer started buying $600 billion in long-term bonds as a way to pump money into the economy, stock prices have risen, market volatility has fallen, corporate bond spreads have narrowed and fears of deflation have abated. That in turn has boosted consumer spending and spurred economic growth. Bernanke said:

The combination of rising household and business confidence, accommodative monetary policy, and improving credit conditions seems likely to lead to a somewhat more rapid pace of economic recovery in 2011 than we saw last year.

When will jobs return?
Business spending on equipment and software has continued its upward trend from the first half of 2010. In a report accompanying Bernanke's testimony, the Fed said companies were likely replacing aging equipment and making other capital investments that they had delayed during the recession. Credit remains tight for small businesses, although some signs suggest the credit crunch for such firms is easing.

The news is less bullish for employment. Although the Fed Chairman said there is "some grounds for optimism" about renewed job growth, he conceded it's likely to be several years before the unemployment rate returns to normal.

The housing sector also remains "exceptionally weak." The large inventory of vacant and foreclosed residential property is hurting prices of new and existing homes, while many potential homebuyers still have trouble getting a mortgage, Bernanke said.

Whatever good news Bernanke has to deliver, of course, critics across the political spectrum will continue to harp about the danger of inflation. Such concerns are warranted, especially since rising prices, a weakening dollar, falling home values and stagnant wages combine to hurt average Americans.

But with non-core inflation remaining fairly low, Bernanke is certain to resist pressure to tighten monetary policy. Despite the ludicrous partisan brinksmanship in Washington, the economy is slowly healing. Steady as she goes.

Image from Wikimedia Commons

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