Ben S. Bernanke went to Congress on Tuesday with a message: Cut out the brinkmanship over tax and spending policy and slash budget deficits more than planned — but don’t do it so fast that it undermines economic growth.
In making this unusually explicit push, the Federal Reserve chairman told lawmakers that the increasingly likely scenario — that they do nothing to put the nation’s finances on a sound footing and let the nation lurch from crisis to crisis — is not an acceptable option.
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Bernanke’s remarks came as Congress and the Obama administration are facing a stalemate over how to handle the government purse.
Republicans have rejected President Obama’s $447 billion proposal to promote job creation but have shown openness to some elements of it. Meanwhile, the congressional “supercommittee” held a pair of hour-long sessions Tuesday as part of its mission to produce a bipartisan plan for reducing the national debt. So far, that panel has shown no outward signs of progress.
With his strong words, Bernanke reinserted himself into the roiling political debate over the nation’s fiscal policy — at a time when he is already under fire from some Republican presidential candidates, among others, who say he has overplayed his hand as Fed chairman. Some critics have faulted Bernanke and the Fed for taking steps to stimulate the sagging recovery on the grounds that these steps could instead hurt the economy.
Amid a gloomy outlook for economic growth, Bernanke warned that the recovery is “close to faltering,” and he said the central bank has adjusted its forecasts downward since they were last released publicly in June.
The Fed decided two weeks ago to shift the kind of Treasury bonds it buys from short-term instruments to long-term debt in a bid to lower longer-term interest rates and encourage economic growth. While Bernanke did not signal that any further steps were imminent, he did say that the Fed is “prepared to take further action as appropriate” to encourage the recovery, suggesting that the central bank could act if growth slows further.
Reflecting this economic uncertainty, financial markets have been exceptionally volatile.
The stock market was down sharply for most of the trading day on Tuesday. But in the final minutes, a news report that European Union leaders were considering a plan to strengthen European banks prompted a sharp rebound, with the Standard & Poor’s 500-stock index rising 4 percent from 3:15 p.m. to the 4 p.m. closing time, finishing the day up 2.2 percent.
Wild swings on the stock market have been particularly common since late July. Bernanke attributed them in large part to political uncertainty, both in Europe and the United States. A bitter standoff this summer between Republicans and Democrats over whether to raise the government’s borrowing limit raised the prospect of a national default.
“The brinksmanship of the summer and at least perception in the minds of some investors that the United States might actively consider defaulting on its debt. . . . I think was a negative for the financial markets,” Bernanke told the Joint Economic Committee. “It’s no way to run a railroad.”
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