Bernanke talks unemployment

Ben Bernanke's primary focus in today's speech - the unemployment rate.

While some in the press attribute today's advance in equities to Bernanke's positive spin on the recent decline in the unemployment rate, I tend to believe that his caveats temper his optimism.

Bernanke called the "notable decline in the unemployment rate" to be "good news," but immediately added, "some key questions are unresolved." And he's not optimistic that the recent rate of decline will continue unless we see a pick-up in growth.

What may be driving equities today (Treasury yields are higher), his remark that the "Federal Reserve's accommodative monetary policies, by providing support for demand and for the recovery, should help, over time, to reduce long-term unemployment as well” may be the primary driver.

And he reiterated at the end of his speech that "accommodative policies to support the recovery will help address this problem (cyclical unemployment) as well."  He clearly didn't back away from some new form of QE3, but it's a tougher calls as to whether he inched back toward it (gold is up). Goldman Sachs, for examples, expects QE3 sometime in Q2.

Finally he cited three possible explanations for the recent dip in unemployment.

• The first two, he mostly dismissed: GDP data will be revised upward and discouraged workers have left the labor force. He did not, however, provide much explanation on the substantial decline in the labor force participation rate.

• The third explanation - firms fired too quickly in 2009 and are now playing catch-up - was his most likely reason for the recent dip in the employment rate (see chart below from Bernanke's speech)

While Bernanke believes much of the still-high rate of unemployment is cyclical and not structural - and I agree - I tend to disagree with his assessment that firms laid off too quickly in 2009  - see chart below:



The drop in GDP matched the drop in nonfarm payrolls.

Since Bernanke believes the high rate of unemployment is being caused primarily by a lack of economic growth, QE3 remains an option. And this has implications for bond yields, money markets, CDs etc.

Of course, it also has implications for stocks and potentially commodities.