Tags: US | Bernanke

Bernanke Says Recovery On Track Despite Headwinds

Wednesday, 09 Jun 2010 10:09 AM

Federal Reserve Chairman Ben Bernanke says the European debt crisis is likely to have only a "modest" impact on the U.S. economy recovery as long as Wall Street stabilizes.

Bernanke, in prepared remarks to the House Budget Committee on Wednesday, strikes a more confident tone. He says the recovery will remain intact despite problems in Europe, as well as stubbornly high unemployment and a fragile housing market here at home.

"The economy ... appears to be on track to continue to expand through this year and next," Bernanke says.

Bernanke urged Congress and the White House to come up with a plan to whittle down record-high federal budget deficits.

Failing to do so could hurt the economy in the long run. That's because it can lead to higher interest rates for Americans to buy homes cars and other things, and make it more expensive for Uncle Sam to service its debt payments.

The nation's red ink hit a record $1.4 trillion last year. The recession took a big bite out of tax revenues, while spending rose to stimulate the economy and provide relief to struggling Americans.

While Bernanke has said that last year's budget deficit was unavoidable as the nation fought the worst recession since the 1930s, the Fed chief is likely to prod Congress and the White House to craft a credible deficit-reduction plan.

President Barack Obama has promised to freeze most domestic agency budgets.

As he did last year, budget chief Peter Orszag on Tuesday directed federal agencies to come up with budgets that would cut a nickel out of every dollar so that savings could be used to boost other programs. But the White House is resisting calls from Republicans to cut spending immediately by rescinding already appropriated money.

The Obama administration also has set up a panel to tackle the soaring deficit. The president wants the panel to come up with a plan to cut the deficit so that it is no bigger than $550 billion by 2015, an amount equal to about 3 percent of the total U.S. economy.

The options for slicing the deficit — cutting spending on popular entitlement programs like Social Security and Medicare and raising taxes — will be difficult for the White House and Congress to sell to the American public — especially in an election year.

Bernanke also is likely to express cautious optimism about the economic recovery now unfolding.

Earlier this week, the Fed chief said he is hopeful the economy wouldn't fall back into a recession — despite concerns on Wall Street about Europe's debt crisis.

"My best guess is we will have a continued recovery, but it won't feel terrific," Bernanke said on Monday night. That's because economic growth — in the 3 percent range this year — won't be strong enough to quickly drive down the unemployment rate, now at 9.7 percent, he said.

Last month, virtually all of the hiring in the United States came from the federal government adding census workers. Job creation by U.S. companies was the slowest since the start of this year.

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