The US economic recovery is at risk because politicians are failing to tackle its long-term budget deficit, the chairman of the Federal Reserve has warned.
Ben Bernanke told lawmakers in blunt language that they needed a “fiscal exit” strategy that will tackle the country's unsustainable deficits, as the national debt mounts throughout this decade.
Although he left the door open for politicians to enact more short-term economic stimulus, Mr Bernanke warned financial markets need a sign that Congress is also willing and able to cut government spending commitments or raising taxes in future years.
Barack Obama this month created a bipartisan commission that will look into the issue of spending cuts and limits on entitlements such as social security benefits, following the publication of a budget that shows the national debt rising to 77% of GDP by the end of the decade, even in a rosy economic scenario. Annual deficits are never projected to fall below the 3% of GDP that Mr Bernanke said was sustainable.
“I realise it is extremely difficult to address this issue, but it would be helpful to the current recovery, helpful to the markets and to confidence if there was a plan for a ‘fiscal exit',” the Fed chairman said, answering questions from the House financial services committee.
Mr Bernanke said such a plan — or even a concerted political effort to create one — could reduce market interest rates on government debt, stimulating the economy right away. And he added that failing to do so was dangerous for the economic recovery, since markets can quickly take fright and push up the interest rate demanded on Treasuries.
In his testimony, the chairman described the economic recovery as “nascent” and reiterated that the Fed will hold interest rates “exceptionally low... for an extended period”.
He warned that most of the rebound so far could be explained by government stimulus and businesses restocking inventories from very low levels, and final customer demand was rebounding much more slowly.
Stock markets read the chairman's statement to mean monetary tightening could be further away than thought, and rallied on his comments.