Fed chief: Cuts won't derail recovery
Wednesday, March 02, 2011
Fed chief: Cuts won't derail recovery
By: Vicki Needham, The Hill
Federal Reserve Chairman Ben Bernanke says a plan from House
Republicans to cut $61 billion in spending this year would not harm
economic growth.
The GOP's proposed spending cuts, passed as part of a continuing
resolution, would probably reduce "growth on the margins" and lower
gross domestic product by only one- or two-tenths of a percent,
Bernanke told the Senate Banking Committee.
The Fed chairman's estimate contrasts with recent reports from
Goldman Sachs and Moody's Analytics that predicted economic harm
from a $61 billion spending reduction.
The Goldman Sachs report released last week predicted that the
Republican spending cuts would slow growth by as much as 2
percentage points in the second and third quarters of this year.
Senate Democrats pounced on the analysis to argue that Republicans
were trying to "drag our economy back into a recession."
But Bernanke said that analysis is off the mark.
"Two percent [reduction in growth] is enormous and would be
based on $300 billion in cuts," Bernanke told the panel in his
semiannual report to Congress. "Sixty billion to $100 billion isn't
sufficient to create that kind of effect."
Although Bernanke didn't provide a projection of possible jobs
losses from the spending bill, he said the proposed spending cuts
aren't likely to lead to the 700,000 job losses predicted
by Moody's Analytics chief economist Mark Zandi.
He reiterated previous statements that, while the debt and
deficits are major issues for the nation, Congress needs to tackle
the issue of long-term budget imbalances.
"Sixty billion won't have much impact on the long run," he said.
"Congress needs to address the budget deficit over a 5- to 10-year
window."
Bernanke said he would like to see the nation's structural
budget deficit reduced by 2 to 3 percentage points in the next
decade.
Zandi said the Republican plan to trim $61 billion from
federal spending through the next seven months would wipe out
700,000 jobs through 2012 and reduce economic growth by 0.5
percentage points this year.
As the economy continues to improve, Bernanke said the central
bank is paying "close attention" to rising commodity prices,
specifically the cost of gasoline, that has increased sharply with
the political turmoil in the Middle East and North Africa.
Increasing prices could raise inflation expectations, reduce
confidence and sap consumers of some spending power as the recovery
picks up pace.
So far, Bernanke isn't seeing any signs that rising gas prices are
posing a significant risk to the nation's economic recovery but the
Fed is taking the issue "very seriously" as part of its job to
ensure inflation remains low.
He said that "sustained rises in the prices of oil or other
commodities would represent a threat both to economic growth and to
overall price stability, particularly if they were to cause
inflation expectations to become less well anchored" but said the
price increases could create a "temporary and relatively modest
increase in consumer prices inflation."
Republicans attempted to dismantle Bernanke's arguments that the
central bank's quantitative easing policy, known as QE2, isn't
working but he strongly defended the plan saying the proof of its
effectiveness is evident in the improving financial and labor
markets. In addition, inflation has remained low, the threat of
deflation has faded and the long-term outlook for inflation
expectations, about 2 percent, is on track, he said.
Senate Banking ranking member Richard Shelby (R-Ala.) questioned
whether QE2 -- using $600 billion to buy up government debt -- may
risk "sparking inflation" while failing to help the nation address
its fundamental problems.
"We take the inflation issue very very seriously and there's no
illusion about allowing inflation to get high," Bernanke assured
lawmakers, reassuring policymakers that ultimately the Fed's
balance sheet would eventually return to a more normal level. The
balance sheet has expanded to more than $2 trillion as the Fed
bought up bad mortgage debt.
Bernanke called $600 billion a "strong statement and a powerful
move" it's not outside the "range of historical experience."
"Instead of unemployment stagnating or going up we're seeing some
improvement," Bernanke said.
He also called concerns that QE2 has caused the dollar's value to
diminish as "way overstated" saying it's about the same as before
the crisis across world markets.
Besides the Fed's monetary policy, Bernanke credited an $858
billion package of tax cuts for contributing to the nation's
economic growth this year and in 2012.
While lawmakers peppered Bernanke with questions over the effects
of $14 trillion in debt and a projected $1.5 trillion deficit this
year, he argued that the tax code could be make more efficient but
while lawmakers need to control spending they should look to invest
in research and development, education, infrastructure "and other
things that help the economy grow and "allows the private sector to
bring the economy forward."
He urged lawmakers "not to lose sight that money spent is spent
effectively with attention to long-term growth."
"I support a program to improve long-term fiscal sustainability,"
he said.