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Federal Reserve Chairman Ben S. Bernanke strongly defended the Fed’s monetary stimulus before a Senate panel on Tuesday, saying Congress itself is placing a “significant” burden on the economy with the sequester and urging lawmakers to replace the deep budget cuts set to take effect Friday with more measured, long-term deficit reduction.
Appearing before the Senate Banking Committee, Bernanke gave his most explicit condemnation to date about the sequester’s $85 billion in across-the-board cuts and encouraged lawmakers to craft a more thoughtful plan that would not undermine the economy.
Bernanke cited a Congressional Budget Office estimate that the sequester would reduce economic growth by 0.6 percent this year.
“To address both the near- and longer-term issues, the Congress and the administration should consider replacing the sharp, frontloaded spending cuts required by the sequestration with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run,” Bernanke said. “Such an approach could lessen the near-term fiscal headwinds facing the recovery while more effectively addressing the longer-term imbalances in the federal budget.”
Bernanke waded carefully into the partisan politics surrounding the sequester, which takes effect Friday. He said providing flexibility for administering the cuts, as Republicans propose, might improve the policy ramifications but that the economy would still suffer.
“In terms of whether or not rearranging the cuts would be beneficial, it could be beneficial from the point of view of more efficient allocation of the cuts or cuts that are more consistent with the preferences of Congress,” he said. “I think the near-term effect on growth would probably not be substantially different if you did it that way.”
The fiscal contraction pursued by Congress comes as Bernanke has deployed a series of unorthodox monetary initiatives to boost the economy. Indeed, he noted, “In terms of the near-term recovery, I think there is a sense in which monetary and fiscal policy are working at cross-purposes.”
Bernanke’s appearance comes after signals that some Fed governors are growing uneasy about continuing the Fed’s extraordinary stimulus. The central bank is currently purchasing $85 billion in securities per month, with no announced end date. The Fed has also pledged to keep short-term interest rates remarkably low until the labor market is notably improved.
In his testimony and in response to questions posed by senators, Bernanke underscored his commitment to remaining on the Fed’s accommodative path.
“Although a long period of low rates could encourage excessive risk taking, and continued close attention to such developments is certainly warranted,” he said, “to this point we do not see potential cost to the increased risk taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more rapid job creation.”