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Fed chief's warning on jobs lifts bonds hopes

Ben Bernanke, the chairman of the US Federal Reserve, warned that the recent reduction in unemployment in the world's largest economy may not be sustainable, reigniting hopes of central bank intervention to stoke the recovery.

Mr Bernanke's declaration frames a debate on the Fed's next steps that will rage for the next four weeks, ahead of a crunch meeting of the central bank's interest rate-setting committee.

The two-day meeting of the Federal Open Market Committee is shaping up to be potentially contentious, since several members and other prominent Fed officials have signalled their opposition to further loosening monetary policy.

In a speech yesterday to the National Association for Business Economics, Mr Bernanke (pictured) defended the Fed's current policies, which include promising an official interest rate of near-zero for the next two and a half years at least and buying long-term government debt to push market rates lower, too. Those debt purchases are being funded by sales from the Fed's portfolio of short-term US government bonds, in a $400bn (£252bn)programme called Operation Twist, which is due to expire in June.

Rapidly declining unemployment had lowered economists' expectations of a further bond buying programme after June, but Mr Bernanke's comments yesterday changed some people's minds. The decline in the jobless rate from 9.1 per cent last summer to 8.3 percent in February was "somewhat out of sync" with the rather modest pace of economic growth, he said, and probably represented a reversal of the higher-than-usual spike in unemployment in the wake of the financial crisis in 2009.

"To the extent that this reversal has been complete, further significant improvements in the unemployment rate will likely require a more rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies," he said. The comments sparked a triple-digit rise by the Dow Jones Industrial Average and spurred equity market rises around the world. The UK FTSE 100 ended up 47.81 at 5902.70.

The FOMC next meets on 24-25 April, and veteran bond investor Bill Gross predicted it is "likely to hint" at a new round of bond buying.