Fed chief warns Congress against hampering growth while cutting debt

Federal Reserve Chairman Ben S. Bernanke on Thursday cautioned lawmakers against taking any steps that would hurt economic growth as they work to cut the nation’s debt, and he defended the central bank’s recent actions to support the economy.

In testimony before the House Budget Committee, Bernanke urged Congress to put a priority on finding a sustainable level of federal spending over coming decades.

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But, he said, they also must “take care not to unnecessarily impede the current economic recovery.” Supporting growth now, he said, “will lead to lower deficits and debt in coming years.”

Bernanke’s comments reflect the heightening concern among lawmakers and on the presidential campaign trail about how to keep the economic recovery on track while trying to rein in the federal debt in the long term. A report this week from the Congressional Budget Office laid bare the consequences if the government moved forward with plans to raise some taxes while slashing funding.

The CBO said that unless Congress takes new action, most Americans will face higher taxes next year while federal agencies and the Defense Department will both suffer deep spending cuts. Those measures would be a big step forward toward taming the nation’s debt. But they would also trigger a very troubling jump in unemployment from 8.5 percent to 8.9 percent by next fall and to 9.2 percent in 2013, according to the CBO.

Bernanke said in his testimony that he was especially concerned about the jobs market, warning that it will take a long time for unemployment to fall back to sustainable levels. A Fed projection last week suggested that the unemployment rate — which stands at 8.5 percent — could still be above 7.5 percent at the end of 2014.

“Particularly troubling is the unusually high level of long-term unemployment: More than 40 percent of the unemployed have been jobless for more than six months, roughly double the fraction during the economic expansion of the previous decade,” Bernanke told the committee members.

Republicans at the hearing questioned the Fed under Bernanke’s leadership had gone too far to reduce the unemployment rate at the risk of sparking inflation by keeping interest rates near zero.

“This is not because unemployment is a lesser concern, far from it. It is because the Fed’s tools for promoting employment are limited, imprecise and can have highly undesirable unintended consequences,” said House Budget Committee Chairman Paul Ryan (R-Wis.) “By contrast, the Fed is uniquely positioned to protect the currency, the value of our money.”

Bernanke replied that the Fed was not abandoning its mandate to keep prices stable. “We agree that low inflation -- low, stable inflation — is good for the economy, and it’s good for growth,” he said. “Inflation currently looks to be very well controlled. Our expectation is inflation will be below target over the next couple of years.”

Bernanke otherwise said that despite the weak outlook for employment in coming years, more recent data has been positive.

“Fortunately, over the past few months, indicators of spending, production, and job-market activity have shown some signs of improvement,” Bernanke said. “The outlook remains uncertain, however, and close monitoring of economic developments will remain necessary.”

The Bureau of Labor Statistics will release its monthly unemployment figures for January on Friday morning.

 
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