* Bernanke pushes Congress to raise debt limit
* Delay could lead to 'catastrophic' default
* Bernanke: Recovery not yet established, need job growth
* Kocherlakota: not worried about bubbles
By Mark Felsenthal and Pedro da Costa
WASHINGTON, Feb 3 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
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. For more, see:
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
For highlights from Bernanke's speech and Q&A, see
For other stores on Fed policy, see [FED/AHEAD]
For an interactive graphic on Fed officials' policy views,
Reuters Insider: link.reuters.com/qud87r
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
Minneapolis Fed President Narayana Kocherlakota, who
despite his reputation as an inflation hawk has publicly voiced
support for the Fed's bond-buying program, said on Thursday the
jobless rate will remain "troublingly" high through 2012.
"I do not believe that either unemployment or employment
will improve rapidly in 2011," he told an audience at the
University of Minnesota, where he headed the economics
department before taking the top job at the Fed's smallest
regional bank in 2009.
And while he said he is "optimistic" inflation will rise
this year, he said he expects it to stay below the central
bank's informal 2 percent target.
Asked about the potential that Fed policy is fueling
bubbles, he said, "Nothing in the current policy environment
makes me worried about that."
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
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
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. [ID:nN03278190]
(With additional reporting by Glenn Somerville, Rachelle
Younglai and Richard Leong in New York, and Ann Saphir in St.
Paul, Minn. Editing by Chizu Nomiyama, Dan Grebler, Gary Hill)