Recovery on brink, Fed chief says
WASHINGTON - Ben Bernanke went to Congress yesterday with a message: Cut out the brinkmanship over tax and spending policy and slash budget deficits more than planned, but don’t do it so fast that it undermines economic growth.
In making this unusually explicit push, the Federal Reserve chairman told lawmakers that the increasingly likely scenario that they do nothing to put the nation’s finances on a sound footing and let the nation lurch from crisis to crisis is not acceptable.
Bernanke’s remarks came as Congress and the Obama administration are facing a stalemate over how to handle the government purse.
Republicans have rejected President Obama’s $447 billion proposal to promote job creation but have shown openness to some elements of it. Meantime, a congressional “supercommittee’’ held a pair of hour-long sessions yesterday as part of its mission to produce a bipartisan plan for reducing the national debt. So far, that panel has shown no outward signs of progress.
With his strong words, Bernanke reinserted himself into the roiling political debate over the nation’s fiscal policy at a time when he is already under fire from some Republican presidential candidates, among others, for overplaying his hand as Fed chairman. Some critics have faulted Bernanke and the Fed for taking steps to stimulate the sagging recovery on the grounds that these steps could instead hurt the economy.
Amid a gloomy outlook for economic growth, Bernanke warned that the recovery is “close to faltering,’’ and he said the central bank has marked down its forecasts since they were last released publicly in June.
The Fed decided two weeks ago to shift the kind of Treasury bonds it buys from short-term instruments to long-term debt in a bid to lower longer-term interest rates and encourage economic growth. While Bernanke did not signal that any further steps were imminent, he did say that the Fed is “prepared to take further action as appropriate.’’
Reflecting this economic uncertainty, financial markets have been exceptionally volatile.
The stock market was down sharply for most of the trading day yesterday. But in the final minutes, a news report that European Union leaders were considering a plan to strengthen European banks prompted a sharp rebound, with the Standard & Poor’s 500 rising 4 percent from 3:15 p.m. to the 4 p.m. closing time, finishing up 2.25 percent for the day.
Wild swings on the stock market have been particularly common since late July. Bernanke attributed them in large part to political uncertainty, both in Europe and the United States. A bitter standoff earlier this summer between Republicans and Democrats over whether to raise the government’s borrowing limit raised the prospect of a national default.
“The brinksmanship of the summer and at least perception in the minds of some investors that the United States might actively consider defaulting on its debt . . . I think was a negative for the financial markets,’’ Bernanke said. “It’s no way to run a railroad.’’
Bernanke stressed that the US fiscal situation is “clearly not on a sustainable path at present,’’ and added that the deficit reductions the supercommittee is charged with achieving, at least $1.2 trillion over the coming decade, would not alone make the government’s finances sustainable.
Congressional action to stimulate the economy in the short term appears unlikely. While lawmakers are poised to take action on three long-stalled trade bills that Obama finally sent to Congress on Monday, Democrats and Republicans are bickering over what else to do about the sluggish economy, with Republicans adamantly opposed to any fresh government spending.