Bernanke Urges Caution In Sharp Deficit Cutting

Associated Press By Martin Crutsinger February 2, 2012 Bernanke urges Congress
to be careful not to derail recovery with excessive deficit reduction WASHINGTON
(AP) — Ben Bernanke is urging lawmakers to balance their desire to cut
deficits with policies that could help boost the weak economy in the short run.
Bernanke told the House Budget Committee that he recognizes that huge budget
deficits represent a serious threat to the economy. "Even as fiscal
policymakers address the urgent issue of fiscal sustainability, they should take
care not to unnecessarily impede the current economic recovery," Bernanke
said. "Fortunately, the two goals … are fully compatible." The Federal
Reserve chairman is testifying a week after the Fed signaled that a full
recovery could take at least three more years. As a result, the Fed said it
doesn't plan to raise its benchmark interest rate from a record low before
late 2014 at the earliest. The hearing began on a contentious note. Chairman
Paul Ryan, a Republican from Wisconsin, said the Fed's policies were adding to
uncertainty and raising risks of higher inflation down the road. Ryan was
critical of the Fed's decision last week to announce that it hoped to hold
interest rates at record low levels for three more years. "I think this policy
runs the great risk of fueling asset bubbles, destabilizing prices and
eventually eroding the value of the dollar," Ryan told Bernanke. "The
prospect of all three is adding to uncertainty and holding our economy back."
Bernanke is also appearing two days after the Congressional Budget Office
estimated that the deficit will top $1 trillion for a fourth straight year and
could stay around that level for years. The two leaders offered contrasting
views last summer over how to handle high budget deficits. Bernanke warned
Republicans that threatening to block a pending increase in the nation's
borrowing limit could hurt the economy. He said the debt ceiling was the
"wrong tool" for trying to push federal spending cuts through Congress. Ryan
countered at the time that using the debt-ceiling vote as leverage to win
meaningful deficit reductions was a valid approach. This time, Bernanke will
likely point to some economic improvements. Factories are making more goods.
Americans are buying more cars. The unemployment rate is near its lowest level
in nearly three years. And employers have produced six straight months of solid
hiring. Still, growth was only modest in the final three months of last year.
And consumers will likely slow their spending if hiring and pay increases
don't strengthen. A key reason the deficit has surged in the past four years
is that the government collected less tax revenue. In part, that's because the
economy has yet to regain the millions of jobs lost during the Great Recession.
And the government has had to spend more on emergency unemployment benefits and
efforts to boost growth, such as the Social Security tax cut that will expire in
February unless Congress extends it. The Fed has also taken extraordinary
measures during and after the recession to try to help the economy recover. In
June, it completed its second round of bond buying. At a news conference after
last week's Fed meeting, Bernanke said a third round of bond buying might be
necessary. Some economists think the Fed could announce more bond buying as soon
as its next meeting in March. View the original article here