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Bernanke to testify on US economy and deficit

Last Updated: Friday, February 3, 2012 - 00:00

Washington: US Federal Reserve Chairman Ben Bernanke will likely tell members of Congress on Thursday that the slowly improving economy may need more help from the Fed and that cutting the deficit too quickly could backfire.

Bernanke is testifying before the House Budget Committee 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 Fed chief is appearing two days after the Congressional Budget Office estimated that the deficit will top USD 1 trillion for a fourth straight year and could stay around that level for years.

Republicans have been critical of the Fed's efforts to support the economy. Many have argued that keeping rates too low for too long could escalate inflation. And they've stressed that cutting government spending and lowering taxes are necessary to boost growth.

The hearing is sure to be contentious, and the toughest questions could come from Chairman Paul Ryan.

At a hearing last year after Republicans won control of the House, Ryan told Bernanke that “many of us fear monetary policy is on a difficult track.''

Monetary policy refers to the Fed's use of interest rates to try to boost or slow the economy.

At the time, Ryan also expressed concern that the Fed's bond-buying programs could trigger inflation or fuel speculative buying of stocks or other assets. The Fed's bond purchases were intended to further drive down long-term rates to encourage more borrowing and spending by consumers and businesses.

Ryan made his comments at a time when energy and food prices were rising quickly. Inflation has moderated since then, and Bernanke has maintained that it doesn't threaten the economy.

The two leaders also 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.

Bureau Report

First Published: Friday, February 3, 2012 - 00:00
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