In response to a question about whether he was surprised that the public felt his views had changed radically.

In some ways, yes, I was surprised.

I was surprised by the reaction in the sense that I felt I was putting a lot of weight on the price stability mandate by suggesting that even an inflation outlook—medium-term outlook, two-year outlook—that is a quarter percentage point higher than 2 percent should be viewed as a cause for concern. I’m not saying we’re going to raise rates at that point, just to be clear. But I’m saying it’s a time to consider raising rates.

I felt that I was actually being highly respectful of the price stability mandate, and properly so. With that said, I think it is true that to suggest that unemployment could get as low as 5 1/2 percent without pushing inflation above 2 1/4 percent, that was a change in my thinking relative to where I was in April. That change in my thinking came just because of the data on inflation and reading a ton of work that had been done on the factors generating high unemployment.

…

I gave a speech about structural unemployment in August 2010 in which I pointed to the shift in the “Beveridge curve.” This is a plot of unemployment and vacancies over time. It has shifted outward, meaning that, roughly speaking, it looks like firms are having a surprisingly hard time filling their job openings given how many people are looking for jobs. There are other interpretations of this, though, as there always are in economics. So, I laid out my concerns about that shift in August 2010. That shift is still there in the data.

But what’s changed since August 2010 is that there’s been a lot of research trying to parse out what is responsible for this shift. That work goes through a number of factors. It’s summarized in a paper that Professor Edward Lazear gave at the Kansas City Fed’s Jackson Hole Conference earlier this year [2012].8 As a Fed president, I was already aware of a lot of that work because much of it has been done within the [Federal Reserve] System.

What this work usually does is look, factor by factor, at how much unemployment is caused by each structural factor. Generally, the answer is not a lot. You can get to maybe a percentage point, or point and a half, of the increase in unemployment since 2007, due to structural factors, something like that.

Those studies were very important in shaping my thinking. Another thing that happened was that inflation over the course of 2012 came in considerably lower than I had anticipated. Both of those things mattered in shaping how I thought about inflation going forward.

Measuring the overall health of the labor market involves many dimensions and is a complicated matter. The state of the labor market cannot be adequately summarized in one number, whether it's the unemployment rate, payroll employment growth, the labor force participation rate or some other measure. Therefore, evaluating the overall labor market by simply looking at a single indicator would not be appropriate for monetary policy.

A possible alternative is to build an index of labor-market health that gives weight to all of these different dimensions and provides some idea of the health of the labor market in an overall sense. Even in this case, however, the Committee would likely weight the dimensions differently; so, agreement on a specific index would be problematic. What is clear is that, evaluating in a comprehensive way whether the outlook for the labor market has improved substantially and, thus, when to bring the latest balance-sheet policy to an end, will require the FOMC to consider numerous factors.

In the past, I have said we should hold the fed funds rate near zero at least as long as the unemployment rate is above 7 percent and as long as inflation is below 3 percent. I now think the 7 percent threshold is too conservative. Our latest actions put us on a better policy path than we had when I first proposed the 7/3 markers a year ago. At the same time, there still are few signs of substantial inflationary pressures. If we continue to have few concerns about inflation along the path to a stronger recovery there would be no reason to undo the positive effects of these policy actions prematurely just because the unemployment rate hits 6.9 percent — a level that is still notably above the rate we associate with maximum employment.

This logic is supported by a number of macro-model simulations I have seen, which indicate that we can keep the funds rate near zero until the unemployment rate hits at least 6-1/2 percent and still generate only minimal inflation risks. Even a 6 percent threshold doesn’t look threatening in many of these scenarios. But for now, I am ready to say that 6-1/2 percent looks like a better unemployment marker than the 7 percent rate I had called for earlier.

Although we can’t know exactly what the natural rate of unemployment is at any point in time, a reasonable estimate is that it is currently a little over 6 percent. In other words, right now, an unemployment rate of about 6 percent would be consistent with the Fed’s goal of maximum employment.

I have been persuaded that the problem [of persistently high unemployment] is, to a significant enough extent, one of weak growth that can be ameliorated by prudent monetary policy actions. A stronger overall pace of recovery is central to improvement in the labor market.

The collapse in housing construction was a huge blow to our economy, and it will take a substantial amount of time for us to recover by shifting labor, capital and spending toward other growth opportunities. Thus, my assessment is that a reasonably strong case can be made that the natural rate of unemployment that corresponds to the Fed’s maximum employment mandate is now relatively elevated.

The erosion in labor-market performance that we’ve seen in the United States over the past five years may be highly persistent, even under appropriate monetary policy.

Accelerating inflation is “a signal that our country’s current labor market performance is much closer to ‘maximum employment,’ given the tools available to the FOMC, than the post-World War II U.S. data alone would suggest,” Kocherlakota said today

We need more growth in order for more jobs to be created and for that unemployment rate to come down to the 6 percent rate which I view as maximum employment.

It is the magnitude of sectoral shifts that is impeding the effectiveness of our ability to find matches for unemployed workers.

One broad quantitative measure of mismatch comes from what's called "the Beveridge curve," which refers to the relationship between unemployment and vacancies. Since the recession ended, that curve has departed from its prerecession position. Typically when the number of vacancies is low, unemployment is high, since workers are competing for a limited number of open positions. Conversely, when vacancies tend to be high, unemployment tends to be low. At present, however, both the unemployment and vacancy rates are relatively high, which suggests that unemployed workers are not finding jobs as rapidly as usual, despite the large number of open positions. This apparent outward shift in the Beveridge curve suggests that labor markets have become less effective at matching workers and vacancies. Empirical estimates suggest that this reduced efficiency could account for between 1/2; and 1-1/2 percentage points of unemployment.

Some commentators are urging the Fed to take additional action as long as the unemployment rate remains elevated. But if elevated unemployment reflects largely fundamental factors rather than insufficient spending, such stimulus might have little impact on unemployment and instead just raise the risk of pushing inflation up.

DON LEE. What kind of job growth, on average, is consistent with the unemployment projections that you’ve made?

CHAIRMAN BERNANKE. Well, we need something—estimates differ. We need fewer jobs monthly to keep unemployment consistent or stable than in the past—I suppose more like 100,000 a month for stability. I don’t have an exact answer, but broadly speaking, 150 – 200,000 jobs or so. But that’s a very rough estimate, and, of course, individual participants may have different views.
Again, that’s not a forecast, I’ve made a hypothesis, which would imply slower improvement in unemployment. But the possibility, of course, exists that this recovery will generate a virtuous circle with greater hiring, which in turn generates more consumer spending, and greater hiring, and so on. That remains to be seen, and, of course, which way that goes is going to be a very important determinant of our response.

Economists in the structural camp argue that the natural rate has risen substantially.

I’m not convinced. Research at the San Francisco and New York Feds suggests that job mismatches are limited in scope. Over the longer term, mismatches and other labor market inefficiencies may have raised the natural unemployment rate from about 5 percent to around 6 to 6½ percent.7 So, in my view, the nation remains far from the Fed’s goal of maximum sustainable employment.

Research has found that during and immediately after the serious recessions of 1973 to 1975 and 1981 to 1982, the Beveridge curve also shifted outward, but in both cases it shifted back inward during the recovery. This temporary outward shift during a deep recession may be the result of a particularly sharp increase in layoffs, which raises unemployment quickly, even as vacancies adjust more slowly. Another possible explanation for a temporary shift in the Beveridge curve is extended and emergency unemployment insurance, which induces unemployed workers who might otherwise consider leaving the labor force to continue searching for work. Or employers may be more selective in hiring when their need for workers is not pressing and take more time to fill vacancies in an effort to find especially qualified hires. In any case, the data appear consistent with the shift in the vacancy-unemployment relationship in recent years having been relatively modest and likely to reverse, at least in part, as the economy recovers further. When historical experience is taken into account, these patterns do not support the view that structural factors are a major cause of the increase in unemployment during the most recent recession.