"But also warns on tightening too soon, favors more Fed asset buys"
By Steve Goldstein
WASHINGTON (MarketWatch) — Federal Reserve Chairman Ben Bernanke called on Congress on Monday to adopt tougher budget rules even as the nation’s top central banker warned against taking deficit-cutting action too soon.
Still, Bernanke also warned against tightening too quickly and reportedly said more asset purchases by the Federal Reserve could help the economy.
In a speech delivered at the annual meeting of the Rhode Island Public Expenditure Council and devoid of comments on monetary policy, Bernanke said that fiscal rules might be a way to impose discipline, particularly if those rules are transparent, ambitious, focused on what the legislature can control directly, and are embraced by the public.
“A fiscal rule does not guarantee improved budget outcomes; after all, any rule imposed by a legislature can be revoked or circumvented by the same legislature,” Bernanke said, according to a copy of prepared remarks made available in Washington.
“However, although not all countries with fiscal rules have achieved lower deficits and debt, the weight of the evidence suggests that well-designed rules can help promote improved fiscal performance.”
The current pay-as-you-go rule “at its best” prevents new tax cuts and mandatory spending increases from making budget deficits worse but doesn’t force Congress to reduce the deficits that are already built into current law.
Bernanke said current spending plans are “unsustainable” and pointed out the ratio of federal debt-to-national income has climbed to a level not seen since the aftermath of World War II.
Though the budget deficit should narrow over the next few years so long as the economy and financial markets continue to recover, it will swell over the medium and long term if current policy settings are maintained.
“Expectations of large and increasing deficits in the future could inhibit current household and business spending -- for example, by reducing confidence in the longer-term prospects for the economy or by increasing uncertainty about future tax burdens and government spending -- and thus restrain the recovery,” Bernanke said.
The aging of the U.S. population will cause federal health-care program costs to climb and will also strain Social Security, the Fed chief said.
“The threat to our economy is real and growing, which should be sufficient reason for fiscal policy makers to put in place a credible plan for bringing deficits down to sustainable levels over the medium term. The sooner a plan is established, the longer affected individuals will have to prepare for the necessary changes,” Bernanke said.
“Indeed, in the past, long lead times have helped make necessary adjustments less painful and thus politically feasible.” He noted the gradual step-up in the full retirement age for Social Security was enacted in 1983 but didn’t take effect until 2003 and won’t be completed until 2027, “giving future retirees ample time to adjust their plans for work, saving and retirement.”
That said, Bernanke doesn’t want Congress to act too quickly.
“Economic conditions provide little scope for reducing deficits significantly further over the next year or two; indeed, premature fiscal tightening could put the recovery at risk,” he said.
During a question-and-answer session after the speech Monday, Bernanke also reportedly said that fresh asset purchases by the Fed could boost the economy.
“I do think the additional purchases — although we don’t have the precise numbers for how big the effects are — I do think they have the ability to ease financial conditions,’’ the Associated Press quoted Bernanke as saying.
He said that the Fed’s purchase of about $1.7 trillion in mortgage securities, debt and Treasurys was “an effective program,” according to the AP report.
Steve Goldstein is MarketWatch's Washington bureau chief.
sumber : MarketWatch
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