Bernanke explains why the Fed is still leaning towards being more accomodative

Fed Chair Bernanke gave a talk today at a conference organized by National Association for Business Economics. His talk today was about recent improvement in Jobs growth and it revealed some interesting information about his current thinking. Bernanke noted that it was sort of puzzling that even though the job market has improved recently, GDP growth has not picked up. There is a relationship in economics called Okun’s law which relates change in the unemployment rate with GDP growth. According to Okun’s law we should have seen around a 4% GDP growth rate to see the kind of drop we have seen in the unemployment rate, whereas in reality we only got about 2% GDP growth in 2011. Bernanke thinks it could just be businesses finally undoing some of the extreme layoffs they did during the recession. To have sustainable jobs growth we will finally need better GDP growth, therefore he thinks it is important to keep a very accommodative monetary policy so that GDP can grow at a faster pace and we continue to see a reduction in the unemployment rate. Conversely one can also draw the conclusion that this improvement in the job market will be temporary if GDP just grows at last years pace. Below is a link to the talk, if you have a chance go and read it. It is very well written and informative and not too technical.

Bernanke Talk at NABE conference

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