Ben Bernanke: Deficit must be cut, but debt limit 'the wrong tool'
Fed chief Bernanke avoids taking a position on taxes while telling Congress it must act 'in a timely manner' to reduce the deficit. Failing to raise the debt limit, he says, would be a costly mistake.
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“As we have seen in a number of countries recently, interest rates can soar quickly if investors lose confidence in the ability of a government to manage its fiscal policy,” he stated.Skip to next paragraph
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The Fed chairman, who was appointed by President Bush, called for what he termed “fiscal sustainability,” basically a budget that is at least balanced, not running in the red. The budget deficit this year is projected to be $1.5 trillion, or 9.8 percent of Gross Domestic Product.
'Status quo is not an option'
“Perhaps the most important thing for people to understand about the federal budget is that maintaining the status quo is not an option,” he said.
Although it’s not unusual for Fed chairman to comment about the budget deficit, outside Fed observers said this is one of the strongest statements so far.
“It’s a good shot across the bow,” says John Canally, chief economist at LPL Financial, an investment adviser, in Boston, Mass. He notes that Bernanke has said if Congress is able to cut the deficit it would give him the flexibility to keep interest rates low for a longer period of time.
Next week, the Federal Reserve Board meets to set short-term interest rate policy. Bernanke is expected to hold a press conference after the meeting and Mr. Canally says he expects the Fed chairman will be asked more about fiscal policy than monetary policy at his press conference.
Canally says Wall Street would be disappointed if Congress merely passes a series of short term measures extending the debt limit by just enough money to keep the government funded.
“If they come up with a credible plan to cut spending by $2 trillion, that would be a plus for Wall Street,” he says. “But, the worst case scenario is if they just kick the can down the road.”
Mixed signals on tax cuts
In his address, Bernanke said the federal budget should reflect the nation’s priorities “by providing the conditions to support ongoing gains in living standards and by striving to be fair to current and future generations.”
Bernanke appeared to send mixed signals on tax cuts. On the one hand, he suggested “reform” of the government’s tax policies by increasing the incentives to work and to save, encouraging investment in the workforce and stimulating private capital, all language that often used by those proposing tax cuts.
But Bernanke also suggested that reducing taxes would be insufficient in addressing the country’s fiscal problems.
“We cannot reasonably expect to grow our way out of our fiscal imbalances, but a more productive economy will ease the tradeoffs that we face,” he concluded.