Automatic budget cuts set to go into effect this week will slow the already sluggish U.S. economy even further, Federal Reserve Chairman Ben Bernanke warned senators Tuesday (Feb. 26).
According to a report by CNN Money, the recovery is already moderate as it is, and upcoming cuts add an additional “significant” burden, Bernanke said in prepared testimony.
Forecasts from the Congressional Budget Office suggest that deficit-reduction policies — including the automatic cuts taking effect Friday — will slow the U.S. economy by 1.5 percentage points this year. Bernanke cited those figures in his testimony, a semi-annual report to Congress.
“Besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions,” he said in prepared testimony.
Bernanke has long warned lawmakers that monetary policy, which the Federal Reserve oversees, can only do so much to boost the U.S. economy. He said Congress needs to reduce the deficit over the long term without threatening short-term economic growth.
“The sizes of deficits and debt matter, of course, but not all tax and spending programs are created equal with respect to their effects on the economy,” he said.
Bernanke urged Congress to consider tax and spending policies “that increase incentives to work and save, encourage investments in workforce skills, advance private capital formation, promote research and development, and provide necessary and productive public infrastructure.”
“Although economic growth alone cannot eliminate federal budget imbalances, in either the short or longer term, a more rapidly expanding economic pie will ease the difficult choices we face,” he said.
Bernanke also came to the hearing prepared to defend the Fed’s stimulus efforts against its critics.
Under more normal circumstances prior to the Great Recession, the Fed typically operates by lowering interest rates to spur economic growth, or vice versa.
But with short-term rates already parked near zero, the Fed has turned to alternative policies that include purchasing mortgage-backed securities and long-term Treasury bonds.
Those bond purchases are intended to lower interest rates even further. But they worry many observers who wonder if the Fed will be able to pull back the policy when the economy eventually gets going again at a stronger pace.
Responding to those criticisms, Bernanke said Tuesday that he “remains confident that it (the Fed) has the tools necessary to tighten monetary policy when the time comes to do so.”