Ben Bernanke, chairman of the Federal Reserve, told Congress today that although there has been improvement in the U.S. economy, Congress' fiscal policy must be placed on a "sustainable path" to keep long-term interest rates low.
He testified before the House of Representatives' Committee on the Budget this morning, saying fiscal policy should aim to decrease debt relative to national income or at least stabilize it.
"Attaining this goal should be a top priority," he said in a prepared speech called the "Economic Outlook and the Federal Budget Situation."
Assuming that most expiring tax provisions are extended and that Medicare's physician payment rates hold steady, he said, the budget deficit would be more than 4 percent of GDP in 2017, if the economy is close to full employment then.
The Federal Reserve's Open Market Committee last week announced it expects to keep the federal funds rate at zero to 1/4 percent at least through 2014, saying the housing sector remained depressed and business investment has slowed. The federal funds rate is the rate at which banks lend to each other overnight.
Rep. Paul Ryan, R-Wis., chairman, and other committee members, warned Bernanke that the Federal Reserve might be reaching beyond its monetary role into fiscal policy.
"Our intention was to provide useful background and in all cases looked at both sides of the issue," Bernanke said in response to one question about the Fed's role in budgetary policy. "We recognize and have no doubt it's Congress that has to make those decisions. "
Ryan also asked whether the Federal Reserve was risking higher inflation by keeping interest rates low. Bernanke said inflation appeared contained at less than 2 percent for the next couple years. If investors lose confidence in the nation, interest rates, including treasury rates are going to go up, Bernanke told Congress.
Bernanke said the Fed was aware of the effect of low interest rates on savers, a question frequently posed to Bernanke because the federal funds rate has remained near zero since 2008.
Investors are closing watching the Federal Reserve for signs of additional stimulus, or a third round of quantitative easing, known as QE3.