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Bernanke Urges Caution in Sharp Deficit Cutting

Ben Bernanke
Mark Wilson, Getty Images

Ben Bernanke is urging lawmakers to balance their desire to cut deficits with policies that could help boost the weak economy in the short run.

Bernanke told the House Budget Committee that he recognizes that huge budget deficits represent a serious threat to the economy.

“Even as fiscal policymakers address the urgent issue of fiscal sustainability, they should take care not to unnecessarily impede the current economic recovery,” Bernanke said. “Fortunately, the two goals … are fully compatible.”

The Federal Reserve chairman is testifying a week after the Fed signaled that a full recovery could take at least three more years.

As a result, the Fed said it doesn’t plan to raise its benchmark interest rate from a record low before late 2014 at the earliest. The hearing began on a contentious note. Chairman Paul Ryan, a Republican from Wisconsin, said the Fed’s policies were adding to uncertainty and raising risks of higher inflation down the road.

Ryan was critical of the Fed’s decision last week to announce that it hoped to hold interest rates at record low levels for three more years.

“I think this policy runs the great risk of fueling asset bubbles, destabilizing prices and eventually eroding the value of the dollar,” Ryan told Bernanke. “The prospect of all three is adding to uncertainty and holding our economy back.”

Bernanke is also appearing two days after the Congressional Budget Office estimated that the deficit will top $1 trillion for a fourth straight year and could stay around that level for years.

The two leaders offered contrasting views last summer over how to handle high budget deficits. Bernanke warned Republicans that threatening to block a pending increase in the nation’s borrowing limit could hurt the economy. He said the debt ceiling was the “wrong tool” for trying to push federal spending cuts through Congress.

Ryan countered at the time that using the debt-ceiling vote as leverage to win meaningful deficit reductions was a valid approach.

This time, Bernanke will likely point to some economic improvements. Factories are making more goods. Americans are buying more cars. The unemployment rate is near its lowest level in nearly three years. And employers have produced six straight months of solid hiring.

Still, growth was only modest in the final three months of last year. And consumers will likely slow their spending if hiring and pay increases don’t strengthen.

A key reason the deficit has surged in the past four years is that the government collected less tax revenue. In part, that’s because the economy has yet to regain the millions of jobs lost during the Great Recession.

And the government has had to spend more on emergency unemployment benefits and efforts to boost growth, such as the Social Security tax cut that will expire in February unless Congress extends it.

The Fed has also taken extraordinary measures during and after the recession to try to help the economy recover. In June, it completed its second round of bond buying.

At a news conference after last week’s Fed meeting, Bernanke said a third round of bond buying might be necessary. Some economists think the Fed could announce more bond buying as soon as its next meeting in March.

(Copyright 2012 by The Associated Press. All Rights Reserved.)

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