WASHINGTON (Reuters) - For a Federal Reserve chairman who is worried about politics interfering with monetary policy, Ben Bernanke is taking on some awfully heated political topics.
Echoing comments from White House and Treasury officials, Bernanke said last week that if Congress failed to raise the government’s borrowing limit, it could force the United States into a “catastrophic” default.
He urged lawmakers not to use the debt ceiling as a “bargaining chip” in debates over taxes and spending — which some Republicans have threatened to do. The Treasury Department has said it may breach the $14.3 trillion debt ceiling as early as April 5 unless it is raised.
On Wednesday, Bernanke testifies at a congressional budget committee hearing chaired by one of the most prominent Republican proponents of spending cuts — Representative Paul Ryan, who has said any vote to increase the debt ceiling must be paired with a commitment to lower long-term spending.
John Silvia, chief economist for Wells Fargo in Charlotte, North Carolina, said Bernanke may have set himself up for some political jabs by using the same word as Obama administration officials did because it implied a bit too much coziness.
“I think it’s going to be extremely difficult for him to avoid the political footballs,” Silvia said.
As Ryan convenes his hearing, a Bernanke nemesis, Representative Ron Paul, will be chairing his own session questioning whether monetary policy can create jobs. Paul, author of a book entitled “End the Fed,” has pushed for a full audit of the central bank, including its interest rate moves.
Many Fed critics and supporters alike say the central bank left itself vulnerable to political interference by blurring the line between monetary and fiscal policy.
By wading into the debt debate, Bernanke is touching two hot buttons at once — fiscal policy and divisive politics.
At the budget hearing, lawmakers from both parties will no doubt try to get him to express views supporting their positions. Judging from Bernanke’s previous appearances, he will stick to a carefully worded line.
“Acting now to develop a credible program to reduce future deficits would not only enhance economic growth and stability in the long run, but could also yield substantial near-term benefits in terms of lower long-term interest rates and increased consumer and business confidence,” Bernanke said last week.
For Republicans, the emphasis is on the “acting now” part; for Democrats, the key phrase is “future deficits.” Both sides agree the current U.S. fiscal path is unsustainable. Finding common ground on what to do about it is a different story.
Many economists expect a bruising budget fight.
Douglas Lee, founder of Economics from Washington, said Republican leaders want to be supportive of a newly elected crop of fiscal conservatives.
“These same forces are pushing the president to sound more fiscally conservative, but his heart is not in it,” Lee said. “This strongly suggests politicians are on a path leading to a major budget confrontation by early March.”
A confrontation would rattle financial markets at home and abroad. China, Japan and other major holders of U.S. government debt are looking for proof that Washington is up to the political task of solving its long-term deficit troubles.
At issue is the timing of the pivot from stimulus to austerity, a dilemma facing virtually every advanced economy. In Europe, the sovereign debt crisis forced Greece, Ireland and others to speed up budget cuts.
The United States has taken a different course. Thanks to a tax cut deal in December, it will be the only advanced economy pumping in more fiscal stimulus money in 2011, according to the International Monetary Fund.
Obama said in January the government needed to invest more in education and training to build a more competitive work force. Although he proposed freezing non-defense discretionary spending for five years, the cuts were not deep enough to satisfy most Republicans.
U.S. budget numbers for January, scheduled for release on Thursday, are expected to show a 28th consecutive month of deficits, the longest streak on record. The White House will release its budget proposal for fiscal 2012 on February 14.
Ryan, who chairs the House of Representatives Budget Committee, wants to cut $32 billion in spending in the current fiscal year, which ends on September 30, his aides say. His party will press for even deeper reductions in the following year.
Bernanke does not want to get in the middle of this fight.
Editing by Dan Grebler