Bernanke: Steep budget cuts this year would threaten economy

Kevin G. Hall | McClatchy Newspapers

WASHINGTON — Steep spending cuts proposed by Republicans in the House of Representatives would slow the nation's economic growth, cost jobs and work against the Federal Reserve's efforts to stimulate the economy, Federal Reserve Chairman Ben Bernanke warned lawmakers Tuesday.

The nation's prosperity would be better served by Congress and the White House agreeing on credible legislation to reduce the federal deficit and debt over a longer period of five or 10 years, he told the Senate Banking Committee.

On an issue of more immediacy, Bernanke said that recent rising oil and gasoline prices were unlikely to stall the strengthening economic recovery or lead to significantly higher inflation. However, if those prices go considerably higher and stay there, he said, that would reduce consumer spending on other goods and slow the broader economy.

"My sense is that the increases we've seen so far ... do not yet pose a significant risk," the Fed chairman said.

The current battle in Congress over the federal budget dominated questions at a hearing that ostensibly was about the Fed's semiannual report on monetary policy.

Bernanke was asked repeatedly about GOP proposals to trim anywhere from $60 billion to $100 billion in government spending during the current fiscal year, which ends Sept. 30. These cuts would do little to bring down long-term budget deficits but would slow the economic recovery, he cautioned.

"That would be 'contractionary' to some extent," Bernanke said, projecting that "several tenths" of a percentage point would be shaved off of growth, and it would mean fewer jobs. "That's why I have been trying to emphasize the need to think about the budget issue not as a current-year issue."

While Democrats got what they wanted out of Bernanke with that answer, he frowned on some of their projections that the spending cuts that are being debated could reduce growth by a full 2 percentage points.

Politicians frequently use the Fed chairman's appearance to elicit his agreement on their particular points of view. But Bernanke didn't mince words when he warned of the need to reduce the nation's budget deficits and of the rising interest on mounting national debt.

"The long-term imbalances are not just a long-term risk, they're a near and present danger," he said ominously, warning that investors may demand a premium to hold future U.S. debt. "I think the sooner a long-term plan is in place ... it would actually have benefits in the near term, not just 20 years from now."

The National Commission on Fiscal Responsibility and Reform, created by President Barack Obama, offered a credible, albeit painful, path toward bringing down deficits and the debt late last year. Obama then ignored its recommendations in his proposed 2012 budget in February, disappointing nonpartisan budget-watchdog groups.

Neither the president nor Republicans in Congress have offered serious plans to reduce long-term deficits. Instead, both sides are trying to score political points by offering one-year budget cuts that don't address the bigger fiscal threats.

On other topics, the Fed chairman strongly defended his unorthodox policies of buying billions in Treasury and mortgage bonds to spark economic activity.

"I think they're working well," Bernanke said, noting the actions came amid the risk of a stall in the recovery and that they staved off deflation — a collapse of prices across the economy. "There (were) also significant risks for not taking the action."

Critics charge that the Fed's action, which since August has helped to drive up the prices of stocks and other financial assets, also has resulted in rising commodity prices in developing nations, pushing up the costs of food and fuel and fostering unrest. Bernanke again rejected those accusations.

Refusing to rule out the option of purchasing even more Treasury bonds when the $600 billion bond-buying program ends in June, Bernanke said the next few months would tell whether the U.S. economy was strong enough to stand on its own feet.

Recognized as a top historian on the Great Depression, Bernanke described the 2008 financial meltdown as "in many ways as big or bigger than anything we saw in the 1930s," and said that was why he moved aggressively to prevent a full-blown depression.