At a recent meeting of the National Association for Business Economics, Dr. Ben Bernanke stated that interest rates must stay low in order to create jobs. His remarks indicate that he was not very encouraged by the job creation to date and he thinks the economy needs more propping up from the Federal Reserve Board. The stock market reported responded very favorably to his remarks with a 160-point jump in the Dow.
His rather gloomy comment on job creation caught my interest. The reality is that Private Sector employment has been growing at a solid pace since the January 2010 low. The 3.7% increase compares favorably to the 2.3% increase through a similar period in the 2003-07 rise. There are still a lot of people unemployed, but the rate of improvement in employment has been encouraging -- not an excuse for more stimulus.
The stock market would seem to agree that the economy has been in a healthy recovery. The S&P500 has risen 20.7% since the September 2011 low. The median increase through the same period is 13.4%. The market may have enjoyed the shot in the arm from Dr. Bernanke, but it did not need it.
More stimulus from the Federal Reserve Board is likely to lead to increased inflationary pressures in the future. Dr. Bernanke would do well to learn a lesson that Alan Greenspan learned the hard way; signal a rate increase and then begin to inch rates up before the inflationary pressures become unmanageable. The initial round or two of twenty-five basis point increases will not be favorably received, but it will be better than the impact on the economy if a steeper interest rate jump is introduced later.