Federal Reserve chief tells Congress: You're making weak economy worse

Federal Reserve Chairman Ben Bernanke tells Congress that its tax hikes and spending cuts are creating 'strong headwinds' for economic recovery and could be costing 750,000 new jobs.

James Lawler Duggan/Reuters
US Federal Reserve Chairman Ben Bernanke delivers his semiannual monetary policy report to Congress before the House Financial Services Committee in Washington on Wednesday.

Federal Reserve Chairman Ben Bernanke said Wednesday that the US economy needs more help from the fiscal policies that Congress controls, not just from the Fed’s own stimulus efforts.

He said that the economy faces “strong headwinds created by federal fiscal policy,” and he said this “makes a big difference” in terms of jobs and the unemployment.

Appearing at a congressional hearing, Chairman Bernanke said that Congress's moves to pare back on tax cuts and federal spending are reducing the pace of economic growth by about 1.5 percentage points. For reference, the economy was growing by about 1.8 percent in the year’s first quarter.

Bernanke said an extra 1.5 percentage points of growth could add as many as 750,000 new jobs and bring the unemployment rate from 7.6 percent to 6.9 percent.

His words represent a pointed message at a time when economic growth is weak, the Fed has been struggling to bring the jobless rate down, and Congress has shifted from stimulus efforts to focus on bringing down federal deficits.

Bernanke didn’t say Congress should start ignoring federal deficits to launch a massive new stimulus effort. But he said the need for fiscal discipline to avoid an unsustainable buildup of national debt can be addressed for the long term without imposing severe tightening this year.

“My suggestion to Congress is to consider policies that involve somewhat less restraint in the near term,” he said, adding later that in his view Congress has failed so far to address long run issues such as entitlement reform.

The US economy has continued to grow this year, according to government data, despite tax hikes that took effect in January and automated spending cuts in many federal programs (known as the “sequester”) that began taking effect in April.

But growth has been tepid. The 1.8 percent growth rate in the first quarter could be followed by a second-quarter pace of 0.7 percent, the firm Macroeconomic Advisors predicts.

Bernanke expressed the view, shared by many economic forecasters, that gross domestic product (GDP) should start rising at a faster rate later in the year, as the pinch of those early-year policy changes fades.

“But, of course, that hasn’t happened yet,” he said.

Democrats at the hearing appeared more open than Republicans to Bernanke’s message about the challenge posed by tightening of fiscal policy.

“Your good work … still needs some help from the policymakers [in Congress],” said Rep. Al Green (D) of Texas, during the discussion between the Fed chairman and members of the House Financial Services Committee.

Similarly, the Obama administration has proposed jobs-oriented fiscal measures such as a ramp-up in infrastructure spending.

A stumbling block for any adjustments to fiscal policies for this year is that the two parties remain sharply divided on the long term issue of entitlement reform.

Bernanke also warned against a partisan standoff in Congress this year over raising the nation’s debt limit – since delay on that issue can rattle investor confidence. His prepared statement said “risks remain” that tight fiscal policy will impose unexpectedly strong restraint on the economy, “or that the debate concerning other fiscal policy issues, such as the status of the debt ceiling, will evolve in a way that could hamper the recovery.”

The hearing also focused the Fed’s monetary policies, with Bernanke pledging to maintain an “accommodative” stance designed to spur growth until the unemployment rate falls significantly.

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