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The Fed's take on the economy could hold true (#fedvalentines)

February 14, 2012: 10:28 AM ET

U.S. Federal Reserve Chairman Ben Bernanke's diagnosis of the economy may have been off in the past, but this time he could be right.

Ben Bernanke

Happy Valentine's Day, Mr. Bernanke

FORTUNE – In the spirit of Valentine's Day, finance geeks across The Twitterverse have been tweeting love notes written in the language of central bankers. Even the San Francisco Fed has playfully weighed in, tweeting: "My love is elastic, my commitment too big to fail #fedvalentines."

No word yet from Federal Reserve Chairman Ben Bernanke, but if he were to tweet anything love-dovey on this day for lovers, it might go a little something like this: "The rate of interest might be low, but that's only cuz I'm giving the economy lots of lovin' #fedvalentines."

Ironically enough, Bernanke isn't getting much love from economists and Congressional Republicans in particular, who are criticizing his less than cheery take on the state of the economy. Just when a spate of better-than-expected economic data has led many to think the recovery is on firmer footing, the Fed chairman calls it "sluggish" at best. To boost the economy, Bernanke pledged last month to keep short-term interest rates "exceptionally low" at least through late 2014 or as long as inflation was under control and the unemployment rate stays high.

That approach has made those worried about inflation unhappy. The Fed has two goals: One is to keep the unemployment rate down (or, as they say in Fed speak, maximize employment). The other is to keep prices steady, which would generally include raising interest rates when prices rapidly rise with a growing economy.

But Bernanke, at least for now, is more worried about the 12.8 million Americans unemployed than rising inflation. By announcing the Fed's plan to keep interest rates low for another three years, he's encouraging households and businesses to spend more and save less.

Could Bernanke be right this time?

Admittedly, he's been grossly wrong before. Recall March 2007 when he told Congress that "the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained." That assessment was a huge understatement, as U.S. home prices have declined about 33% since their 2006 peak and the market isn't expected to make a full recovery any time soon. And recall last year when the Fed found itself overly optimistic about the economy and having to substantially revise its forecasts for growth multiple times.

Putting Bernanke's policy prescriptions aside, it's almost hard to argue with the way he sees the economy today. True, the unemployment rate fell to a three-year low of 8.3% in January, but as Fortune has highlighted and as Bernanke told the Senate Budget Committee in Washington last week, the drop vastly understates the problems of the job market. Though the unemployment rate has fallen for five months in a row now, the rate of those jobless for 27 weeks or longer has changed little. It was at 42.9% in January versus 42.5% in December.

The Fed forecasts the U.S. will grow in the range of 2.2% to 2.7% this year. Unemployment will average 8.2% to 8.5% during the fourth quarter – a modest improvement from last year, but still above the 5.2% to 6% that the Fed considers maximum employment.

"We still have a long way to go before the labor market can be said to be operating normally," Bernanke said in a prepared statement to the committee. "Particularly troubling is the unusually high level of long-term unemployment."

And Bernanke didn't stop there. Days later, he ventured to Orlando, Fla., where he told homebuilders that more needs to be done to reboot the flagging housing market. This followed a Fed study on housing sent to Congress last month discussing whether mortgage companies Fannie Mae and Freddie Mac should take bigger losses to support the housing market. The report sparked further criticism against Bernanke, as some lawmakers thought the Fed had overstepped its authority.

Bernanke hasn't always made the right calls but it's hard not to wonder if he really deserves the latest criticisms. After all, the job market has only shown limited improvements and Congress hasn't done anything substantial to fix the nation's gravely weak housing market ( at least not anything that's worked). And if you believe those that say home prices will fall further if interest rates rise, then it's easy to see why Bernanke is obsessed with keeping borrowing costs low.

So on this Valentine's Day, might Bernanke deserve some credit, if not love in Washington?

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About This Author
Nin-Hai Tseng
Nin-Hai Tseng
Writer, Fortune

Nin-Hai Tseng covers economics and finance. Before joining Fortune, Tseng was a reporter at The Orlando Sentinel and a public affairs associate at GE. She holds an MPA from Columbia University and a BS in Journalism from the University of Florida. She lives in New York City.

Email | @ninhaitseng | RSS

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