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Banking

Fed Chairman Bernanke Discusses Outlook, Deficit to Congress

photo of Fed Chairman Bernanke Federal Reserve Chairman Ben Bernanke discussed economic conditions during his recent semiannual monetary policy address to Congress, noting that "the pace of expansion so far this year has been modest." The weaker-than-expected growth in the first half of 2011 was, in part, the result of temporary factors such as higher food and energy prices and supply chain disruptions following the earthquake in Japan, he said.

The second half of the year should see stronger growth. However, "the ability and willingness of consumers to spend money will determine much of the pace of recovery in the near term," Bernanke said. "Once the temporary shocks that have been holding down economic activity pass, we expect again to see the effects of policy accommodation reflected in stronger economic activity and job creation."

If the economy does weaken, however, the Fed stands ready to provide further stimulus, the chairman said, while noting that the central bank also stands ready to raise interest rates if inflation becomes a problem.

Looming deficits pose obstacle
Bernanke also discussed the need for Congress to resolve the issue of raising the U.S. government debt limit, noting that even a partial default would likely result in a downgrade of the government's triple-A credit rating, with potential negative consequences for the economy, including higher borrowing rates for the government as well as for businesses and consumers.

While urging Congress to reach an agreement before August 2, the chairman also stressed the need to address "the unsustainability of our fiscal position." Bernanke championed a long-term approach to bringing down the deficit, warning that making deep cuts now could derail the fragile economic recovery.

July 28, 2011