WASHINGTON — Federal Reserve Chairman Ben S. Bernanke urged Congress to avert the new spending cuts set to begin Friday, saying they not only are bad for the economy but fail to deal with the underlying problems of the nation's long-term debt.
"You've made progress in the very near term as far as the budget is concerned," Bernanke told members of the Senate on Tuesday, referring to measures now in place that are expected to reduce the government's red ink for the next several years.
"Where the problem still remains unaddressed is in the longer term. And so it doesn't quite match to be doing tough policies today when the real problem is a somewhat longer-term problem."
At the same time, the Fed chief laid out a case for why the central bank should keep priming the economy with monetary stimulus — despite dissent from within and concerns from outside that the Fed's easy-money policies may be doing more harm than good.
Critics said the Fed was encouraging excessive risk-taking and sowing seeds of future inflation.
In his semiannual testimony to Congress on monetary policy and the economy, Bernanke said the Fed's bond-buying and other efforts to hold down interest rates had helped the housing market and car sales.
The Fed should continue those policies given the weak job market and low rate of inflation, he said, noting that he didn't see much evidence of a stock market bubble.
Diane Swonk, chief economist at Mesirow Financial in Chicago, said of Bernanke's testimony, "Those worried that the Fed may end large-scale asset purchases prematurely should be reassured."
Bernanke's remarks cheered Wall Street as investors and analysts concluded that the Fed's campaign to stimulate economic growth was unlikely to be slowed or halted any time soon.
The Dow Jones industrial average rose 115.96 points, or 0.84%, to close at 13,900.13 on Tuesday. That recouped about half the losses the Dow suffered Monday after the Italian election results reignited worries about the Eurozone debt crisis and unsettled financial markets around the world.
Bernanke also pushed back against accusations that he was soft on inflation.
Responding to Sen. Bob Corker (R-Tenn.), who called Bernanke the "biggest dove" on inflation "since World War II," Bernanke said "my inflation record is the best of any Federal Reserve chairman in the postwar period, or at least one of the best, about 2% average inflation."
The record of the Bernanke years has been notably less stellar on unemployment. The Fed has a dual mandate — to control inflation and to maximize employment. Liberal critics have said Bernanke has done too little to stimulate the economy to bring unemployment down, even as conservatives have accused him of doing too much.
In his testimony, Bernanke repeated his oft-stated concerns about the hardships of millions of unemployed people, particularly those without work for more than six months. He also rebutted the complaint that the Fed's efforts to tackle the nation's high jobless rate have hurt savers, especially seniors, by keeping interest rates at record-low levels.
"The only way to get interest rates up for savers is to get a strong recovery. And the only way to get a strong recovery is to provide adequate support to the recovery," he said.
Right now, that recovery continues at a moderate pace, Bernanke said. He described the flattening of growth in the fourth quarter last year as a "pause" and said "available information suggests that economic growth has picked up again this year."
Although the Fed's stimulus programs drew considerable attention in the two-hour hearing, lawmakers were largely focused on their own problems, most notably the automatic spending cuts that are set to start taking effect Friday.
Several pressed Bernanke for his opinion on whether the economy would be better off with a more targeted round of budget cuts instead of the across-the-board effects of the so-called sequestration.
A more "thoughtful approach" would be better, Bernanke said. But he noted that in the short term, the "effect on growth would probably not be substantially different" if smarter budget cuts were put in place.
The basic problem is that any cut the size of the one planned — about $85 billion this year — probably would reduce economic growth, Bernanke said. He agreed with the Congressional Budget Office's estimate that the budget cuts would slice a sizable 0.6 percentage point from economic growth this year.
Combined with other deficit-reduction policies that already have been put into place, the budget changes are likely to slow economic growth by 1.5 percentage points this year, a significant figure given that the economy has been growing on average just over 2% a year.
"I am not in any way denying the importance of long-run fiscal stability," Bernanke said. "I just think that to some extent, the fiscal policy decisions being made are mismatched with the timing of the problem. The problem is a longer-term problem and should be addressed over a longer time frame."
don.lee@latimes.com
Bernanke urges Congress to avoid spending cuts
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Bernanke urges Congress to avoid spending cuts
