Boost in U.S. job market won’t last: Bernanke

The U.S. unemployment rate may have fallen from 9.1% to 8.3% over the past six months, but more must be done to cement the U.S. economic recovery, according to Federal Reserve chairman Ben Bernanke.

Speaking to an audience at the National Association for Business Economics, Bernanke said that the U.S. job market was still weak, and suggested the Fed should continue to prop up the economy with near zero short-term interest rates and further bond purchases.

He added that the improvement in the job market might merely reflect a one-off bounce back from big job cuts in 2008 and 2009 and that it will not likely last. His cautious attitude has served to calm investors who fear interest rates will soon rise despite his previous promise to leave ultralow rates in place until 2014.

“Further significant improvements in the unemployment rate will require a more-rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies,” Bernanke said in his speech.

The Fed has embarked on two previous rounds of quantitative easing, most recently in late 2010, in an effort to drive down long-term interest rates and encourage investors to buy stocks. The second round of QE ignited a 28% Wall Street rally over the following eight months.

On news of the possibility of a third round of easing, the markets responded instantly, with stocks rising to their highest level in years and the S&P climbing 1.4% following his speech.

“Bernanke said that the Fed has to maintain the regime of loose monetary policy, and the market interpreted this as a chance for QE3,” said Francis Lun, managing director of Lyncean Holdings in Hong Kong. “That’s why the stock markets rallied and that carried over to Asia.”

While stock markets rallied, the U.S. dollar weakened against most major currencies since lower rates tend to weigh on a currency by reducing investor returns.

Bernanke said current unemployment is due to lack of demand rather than structural problems. He considers monetary policy a solution that will ensure demand-driven unemployment doesn’t become a permanent structural problem due to the collapse of skill and labour force attachment.

He also indicated that the miscalculation of gross domestic product data, along with the falling rate of workers pursuing employment, may also have contributed to the drop in current unemployment rates.