Ben Bernanke

Federal Reserve Chairman Ben Bernanke offered a robust defense of the effectiveness of the central bank’s easy-money policies in his speech today (Aug. 31) at the Fed conference, and left little doubt that he is looking toward doing more to give the economy a lift at the Fed’s next policy meeting in September.

As reported by the Wall Street Journal, Bernanke also flagged deep worries about the pace of the economic recovery, calling it “far from satisfactory” and cited concerns about the jobs market’s weak growth in his speech at the Federal Reserve Bank of Kansas City’s annual economic symposium in Jackson Hole, Wyo.

Some market participants have been wondering if a run of moderately better economic data of late has changed the Fed’s thinking about the economy. Bernanke left little doubt that he is still deeply dissatisfied with the outlook

He dwelled on stagnation in the labor market, describing high unemployment as a “grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for years.” Moreover, he said, “it is important to achieve further progress, particularly in the labor market.”

Importantly, the Fed chairman also said the job market’s weakness, to date at least, is the result of cyclical problems in the economy—that is, a lack of demand—and not structural ones, such as a mismatch between the skills people have and the skills employers are looking for.

The Fed feels it can help on cyclical problems, but not structural ones. In other words, this is a situation where the Fed feels it can do something. Bernanke also included his “no panacea” caveat: He would love fiscal policy makers to take actions to support the economy and address long-run deficits. But he doesn’t seem to see that as justification for inaction on his front.

The focus on labor-market stagnation is critical. The Fed has a dual mandate imposed by Congress to achieve price stability and maximum sustainable employment. Bernanke played down inflation risks, saying inflation has remained near 2 percent, “despite repeated warnings that excessive policy accommodation would ignite inflation.”

With inflation stable and unemployment unsatisfactorily high, Bernanke in effect laid out his legal argument for pressing harder on the monetary gas pedal.