Fed Chief Calls for Plan to Curb Budget Deficits BY JACK HEALY
Published: June 3, 2009 The Federal Reserve chairman, Ben S. Bernanke, said on Wednesday that the United States needed to develop a plan to restore fiscal balance, even as the government racks up huge budget deficits as it tries to spend its way out of the worst economic crisis since the Great Depression.
In remarks to the House Budget Committee, Mr. Bernanke said that the government must address the immediate problems of a crippling recession that has erased trillions of dollars in household wealth, hobbled people’s stock portfolios and raised unemployment to its highest levels in a generation. Still, he said, the government needed to think about putting its fiscal house back in order.
“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” he said in prepared remarks.
The deficit is expected to reach $1.8 trillion this year as the country spends feverishly on financial bailouts, a sweeping stimulus package, lending programs, rescues for the automobile industry and more. Those are the highest budget deficit projections as a share of gross domestic product since World War II.
President Obama has vowed to reduce the budget gap by half by the end of his term, a promise made even as tax revenue is falling and the administration is trying to cobble together a potentially costly overhaul of the health care system. And the country faces trillions more in Social Security and Medicare obligations as baby boomers retire in coming years.
“Even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance,” Mr. Bernanke said.
Lately, financial markets have started to quaver on worries about the government’s spending plans, and how they are piling more obligations onto the country’s $11 trillion national debt.
Investors in the bond markets, where the Treasury Department goes to raise money to keep the government running, are getting skeptical about the scale of Washington’s spending. The yields on Treasury notes have risen to their highest points in five months as investors who thronged to the safety of government debt begin to invest their money elsewhere.
“These increases appear to reflect concerns about large federal deficits but also other causes, including greater optimism about the economic outlook, a reversal of flight-to-quality flows, and technical factors related to the hedging of mortgage holdings,” Mr. Bernanke said.
But Mr. Bernanke made no mention of whether the Fed would increase its purchases of $300 billion worth of government securities. Such a move could help to push down interest rates on longer-term Treasury notes, but it could raise the prospects for inflation down the road.
The movement away from Treasuries, which rose to record prices at the height of the credit crisis, is a good thing on some levels. It suggests that investors are becoming more confident in riskier investments like stocks and corporate bonds.
But rising interest rates on Treasury notes make it costlier for the government to raise money. And higher yields on government debt can also push up interest rates on mortgages and other loans, making borrowing more expensive for consumers and homeowners.
In his testimony, Mr. Bernanke said that some corners of the once-frozen financial markets were edging toward normal. Major banks deemed in need of additional capital are raising money by issuing billions in common stock and notes, and markets for short-term loans among banks are functioning more smoothly, Mr. Bernanke said.
He noted that some financial institutions are weaning themselves off government-backed loan programs as they seek to pay back the money they took under the $700 billion financial bailout.
“It is encouraging that the private sector’s reliance on the Fed’s programs has declined as market stresses have eased, an outcome that was one of our key objectives when we designed our interventions,” he said.
Mr. Bernanke again cited numerous flickers of stability and growth in the economy and said that the economy’s swift declines were slowing and predicted growth would resume later this year. But he swatted away any hopes of a swift recovery, and said that the economy would probably continue to heal slowly.
“We expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly,” he said in his remarks. “In particular, businesses are likely to be cautious about hiring, and the unemployment rate is likely to rise for a time, even after economic growth resumes.”
