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Bernanke to Congress: Don't Make Deep Cuts

Tuesday, 04 Oct 2011 07:43 PM

 

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WASHINGTON — Federal Reserve Chairman Ben Bernanke is reiterating that Congress should not cut spending sharply while the economy is weak.

Bernanke tells the Joint Economic Committee that lawmakers face a delicate challenge: They must avoid making deep spending cuts that could impede the recovery. But he says they must also eventually cut spending more deeply than the $1.5 trillion in deficit cuts being sought by a special panel.

Bernanke says that the economy is growing more slowly than the Federal Reserve had expected and that the biggest factor depressing consumer confidence is poor job growth.

His warning to Congress not to pursue deep spending cuts in the short run comes at a time of sharp disagreement within the Fed and Congress about how to invigorate the economy.

In an unusual move, Republican leaders in Congress wrote to Bernanke on the eve of the Fed's September policy meeting, urging Fed policymakers against acting further to lower rates.

Even so, the policymakers voted to shift $400 billion of the Fed's investment portfolio from short- to longer-term Treasurys to try to drive down long-term rates. That decision followed the Fed's statement after its Aug. 9 meeting that it planned to keep short-term rates at record lows until at least mid-2013, assuming the economy remained weak.

Both decisions drew three dissenting votes on the Fed's policy committee. The three dissents, all from regional Fed bank presidents, were the most dissents in nearly 20 years.

In a speech in Cleveland last week, Bernanke called long-term unemployment a "national crisis" and said Congress should take further steps to address it. Bernanke noted that about 45 percent of the unemployed have been out of work for at least six months — a level previously unseen in the six decades since World War II.

In that speech, Bernanke said there was only so much the Fed's interest rate policies could achieve. He said that long-term unemployment, budget deficits and the depressed housing market were three priority areas that Congress should address.

Tuesday is the first time Bernanke is discussing his economic outlook with lawmakers since he delivered the Fed's twice-a-year economic report to Congress in July. In that testimony, Bernanke laid out steps the central bank could take to support economic growth.

One of the remaining options is a third round of bond buying that would expand the Fed's holdings of securities, already at record levels. Another is reducing the interest the Fed pays banks for their excess reserves. That step would be intended to reduce the incentive for banks to keep their money at the Fed. So they might lend more.

The central bank's next policy meeting is scheduled for Nov. 1-2. Because the economy is still struggling to grow, many private economists think the Fed will take some further step to try to reduce the risk of another recession.

The economy slowed to an annual growth rate of just 0.9 percent in the first six months of this year. Forecasters think growth will rebound only slightly in the final half of this year — to an annual rate of 2 percent to 2.5 percent.

Growth at that pace would be far too weak to significantly lower the unemployment rate. The rate remained stuck at 9.1 percent in August, a month when employers didn't add any jobs at all.

On Friday, the government will issue the jobs report for September.

© Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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