Stocks rose above the 13,200 level in the Dow index today as investors responded positively to a speech made by Fed Chairman Ben Bernanke which suggested that continued lags in overall economic growth will likely require the Federal Reserve to continue its near-zero interest rate policy. While Bernanke noted that significant improvements have been made in the unemployment rate recently, the rate remains high at 8.3% and the lack of overall economic growth makes it difficult to determine whether or not this improvement can be sustained. Noting Okun’s law regarding economic growth and the unemployment rate, Bernanke admitted that given the modest economic growth, the recent improvement in unemployment statistics seems anomalous. To reconcile this divergence from the Okun relationship, Bernanke suggested “that what we may be seeing now is the flip side of the fear-driven layoffs that occurred during the worst part of the recession, as firms have become sufficiently confident to move their work forces into closer alignment with the expected demand for their products.”
Chairman Bernanke remained noncommittal regarding the potential for another round of quantitative easing from the Fed. His commitment to maintaining low-interest rates through 2014, however, contradicts sentiment within many corners of the economy which hypothesized that the recent improving economic metrics and unemployment data may lead to the Fed allowing an increase in the rate as early as 2013.