Citing Record Budget Deficits, Bernanke Pushes for Return to Fiscal Balance

WASHINGTON, June 3, 2009— -- With the nation's budget deficit soaring to an all-time high because of the government's efforts to end the recession, Federal Reserve Chairman Ben Bernanke today cautioned that Congress and the Obama administration should take steps to restore fiscal balance or risk prolonged financial problems.

"Certainly, our economy and financial markets face extraordinary near-term challenges, and strong and timely actions to respond to those challenges are necessary and appropriate," Bernanke told the House Budget Committee this morning. "Nevertheless, even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance."

Rising deficits, the Fed chief said, could exacerbate problems with entitlement programs. As the baby-boom generation retires, Social Security and Medicare are set to become insolvent earlier than expected, according to the programs' trustees. As proof that investors had already grown worried about the deficits, Bernanke cited an increase in yields on longer-term Treasury debt.

"In recent weeks, yields on longer-term Treasury securities and fixed-rate mortgages have risen," he noted.

If the government does not take measures to address the growing deficits, warned Bernanke, the ramifications could be far-reaching.

"Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth."

Such a financial downturn could prove damaging to the country's economic recovery, he said.

"A relapse in the financial sector would be a significant drag on economic activity and could cause the incipient recovery to stall," he said.

Federal Reserve Chairman Cautiously Optimistic

But barring future financial setbacks, Bernanke's forecast was typically upbeat, though cautious: The nation's economic decline is slowing down and will come to an end later this year, while recovery will still be marred by rising unemployment.

"Sizable job losses and further increases in unemployment are likely over the next few months," he said. "However, the recent data also suggest that the pace of economic contraction may be slowing."

Assessing the data, Bernanke cited positive signs in consumer spending and the housing market, but ongoing problems in unemployment and credit markets.

"We continue to expect overall economic activity to bottom out and then to turn up later this year," he said, adding, "We expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly -- in particular, businesses are likely to be cautious about hiring and the unemployment rate is likely to rise for a time, even after economic growth resumes."

Seeking to ease concerns about inflation voiced by Republican Reps. Paul Ryan of Wisconsin and Jeb Hensarling of Texas, Bernanke said that inflation would remain low even as the government pulls back its programs.

"We are comfortable that we can exit from those policies at an appropriate time without inflationary consequences," he said.