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Bernanke to Congress: Seriously, guys, what are you doing?

Ben Bernanke testifies before Congress today for the first time in three months, and the Federal Reserve chairman has a message for lawmakers: You’re the reason the economy isn’t taking off more.

Of course, Bernanke is too polite to phrase things quite so bluntly. But to anyone versed in Fedspeak, that's the gist of his message. Even as state and local governments are becoming less of a drag on growth, Bernanke says in his prepared testimony before the Joint Economic Committee, “fiscal policy at the federal level has become significantly more restrictive."

“In particular," his testimony says, "the expiration of the payroll tax cut, the enactment of tax increases, the effects of the budget caps on discretionary spending, the onset of sequestration, and the declines in defense spending for overseas military operations are expected, collectively, to exert a substantial drag on the economy this year.”

He adds that with the Fed’s interest rate policies already near zero, “monetary policy does not have the capacity to fully offset an economic headwind of this magnitude.”

It might be one thing if the fiscal retrenchment was also solving the country's longer-term deficits. But, Bernanke says, it has not. “Although near-term fiscal restraint has increased, much less has been done to address the federal government’s longer-term fiscal imbalances,” he says in the prepared testimony. “Indeed, the [Congressional Budget Office] projects that, under current policies, the federal deficit and debt as a percentage of GDP will begin rising again in the latter part of this decade and move sharply upward thereafter.”

That current policy is the exact opposite of the path that Bernanke has advocated countless times in past testimony: Focus on reducing the long-term sustainability of the U.S. government’s finances while moving cautiously, if at all, on short-run fiscal austerity. And the chairman repeats that plea in today’s testimony: “Congress and the Administration could consider replacing some of the near-term fiscal restraint now in law with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run.”

In other news from the testimony, Bernanke makes a preemptive defense of the Fed’s low interest rate policies, which lawmakers have assailed in the past for reducing returns for savers. The Fed chief argues, in effect, that savers will actually be better off if the low rates stay in place for now.

The Fed policymaking committee “actively seeks economic conditions consistent with sustainably higher interest rates,” Bernanke says. “Unfortunately, withdrawing policy accommodation at this juncture would be highly unlikely to produce such conditions. A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further,” an outcome that would prolong the period of low interest rates and trigger “poor returns on other assets.”

Translation: Savers, I know it isn’t much fun getting zero interest rates on your savings accounts, but the alternative would likely be worse.