Bernanke warns of catastrophe if debt limit not raised

WASHINGTON Thu Feb 3, 2011 5:29pm EST

Chairman of the Federal Reserve Ben Bernanke speaks during the Financial Stability Oversight Council meeting at the Treasury Department to discuss the Volker Rule from the Dodd-Frank Act in Washington, January 18, 2011. REUTERS/Larry Downing

Chairman of the Federal Reserve Ben Bernanke speaks during the Financial Stability Oversight Council meeting at the Treasury Department to discuss the Volker Rule from the Dodd-Frank Act in Washington, January 18, 2011.

Credit: Reuters/Larry Downing

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WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke on Thursday issued a stern warning to Republican lawmakers that delays in raising the United States' $14.3 trillion debt limit could have "catastrophic" consequences.

"Beyond a certain point ... the United States would be forced into a position of defaulting on its debt. And the implications of that on our financial system, our fiscal policy and our economy would be catastrophic," he told the National Press Club.

Bernanke coupled his warning with a call for the Obama administration and Congress to put in place a credible plan to curb future budget deficits.

He also offered a moderately more optimistic assessment of the economy's prospects than in other recent remarks, although he made clear the recovery still needs support from the Fed.

Some Republican leaders intend to use the need to raise the statutory debt ceiling as leverage for spending cuts. The Obama administration has said the nation would likely hit the limit between early April and late May.

If Congress does not raise the limit in a timely way, the government could be forced to scale back operations. A failure to lift the limit could raise the specter of a first-ever U.S. debt default and push interest rates up sharply.

Financial markets have not yet shown any nervousness over the debt limit, which has typically been raised after political grumbling, and Bernanke said the chances of a default were "very remote."

Still, his comments echoed dire warnings issued by Treasury Secretary Timothy Geithner and other Obama administration officials, who have also said failure to raise the debt ceiling could be "catastrophic."

The Fed chairman called on lawmakers not to hold the issue hostage to the contentious debate over how best to rein in record budget gaps.

"I would very much urge Congress not to focus on the debt limit as being the bargaining chip in this discussion, but rather to address directly the spending and tax issues that we have to deal with in order to make progress on this fiscal situation," Bernanke said.

FED MISSING BOTH MANDATE TARGETS

In discussing the recovery, Bernanke provided a modestly more rosy outlook than he has in other recent appearances, citing gains in household spending, improved consumer and business confidence and stepped-up bank lending as signs 2011 may bring stronger growth than 2010.

But he made clear Fed officials were not yet satisfied.

"Although economic growth will probably increase this year, we expect the unemployment rate to remain stubbornly above, and inflation to remain stubbornly below, the levels that Federal Reserve policymakers have judged to be consistent over the longer term with our mandate," he said.

Bernanke's comments on the economy suggest the Fed believes it has plenty of time to let its policies boost growth and pull down a high unemployment rate before it needs to worry about tightening financial conditions to keep inflation in check.

"We continue to see the Fed as making good on its intent to purchase $600 billion in long-term Treasury securities by the end of the second quarter," Barclays Capital economist Michael Gapen wrote in a note to clients. "We also believe that the chairman has the votes needed to pursue further asset purchases should he think conditions warrant."

The hard-hit job market shows some grounds for optimism, but modest growth and cautious hiring suggest that it will be several years before the jobless rate returns to a more normal level, Bernanke said.

"Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established," he said.

DATA RAISE INFLATION SPECTER

Some analysts worry the Fed is underplaying gains in the recovery and is turning a blind eye to inflation pressures that may be building, as evidenced by rising commodity prices around the world.

Economic data on Thursday pointed to stronger growth momentum, as the U.S. services sector grew in January at its fastest pace in more than five years, factory orders picked up and claims for jobless benefits fell off sharply.

"It seems to me that the chairman seems to be glass half-empty," said Stephen Stanley, chief economist at Pierpont Securities in Stamford, Connecticut. "There are all these inflation concerns that are hitting the long-end of the bond market.

Bernanke played down worries that recent commodity price rises pose an inflation threat in the United States.

"Overall inflation remains quite low," he said, adding that downward pressure on wages and prices was not surprising, given the "substantial slack" in the economy.

He also countered accusations the Fed's easy monetary policy was behind surging prices for food and other raw materials around the globe, saying the increases primarily reflected strong demand in emerging economies.

(With additional reporting by Glenn Somerville, Rachelle Younglai and Richard Leong in New York, Editing by Chizu Nomiyama and Dan Grebler)

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Comments (10)
DrJJJJ wrote:
Id make the case we may be close to full employment and this is the new normal!! With automation, computers, the internet, corp downsizing for unrealistic returns and the exportation of jobs to lower paying markets, these may just be the good old days! Find the will to cut spending and soon-there is no revenue bubble coming, please don’t gamble with our kids futures-find the will to change! Slow deflation is better than a failed revenue scheme-ask Madoff!

Feb 03, 2011 12:58pm EST  --  Report as abuse
JEYF wrote:
“The Fed chairman defended the U.S. central bank’s controversial $600 billion bond buying program, saying its benefits are evident from a range of financial market metrics.”

read as : No one else is buying US T-bills so we have to buy them or else the US will default on it’s national debt. It’s great to be in charge of printing the money you get something for nothing. It’s all just electronic ones and zeros nowadays. We really don’t have to print the money anymore. Plus when we did try we blew it and wasted $120 million real dollars trying to print $12 billion fake $100 bills.

Feb 03, 2011 1:40pm EST  --  Report as abuse
MBrewer wrote:
yeah right, we need more help from the Fed. It has always ben a great comfort knowing a bunch of greedy international bankers and corporations are watching out for us. Most people believe the Fed is a part of the US government, however they are no more under our control than Fed-Ex. Actually the government might have more control of Fed-Ex than the Federal Reserve Bank.

The Feb should be abolished.

Feb 03, 2011 1:40pm EST  --  Report as abuse
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