Bernanke praises Greenspan and says deficits must be cut

Ben Bernanke, President George Bush's nominee to lead the Federal Reserve, said yesterday that the US should reduce both its current and budget deficits. But he refused to be drawn on how worried he was at the size of those deficits, or their implications for future interest rate policy.

"We need, over a period of time, to reduce the current account deficit," Mr Bernanke told the Senate Banking Committee yesterday, at the start of formal hearings that are expected to result in his overwhelming confirmation as successor to Alan Greenspan at the helm of the US central bank.

But under questioning by Christopher Dodd, the Connecticut Democrat, Mr Bernanke seemed to play down any fears that financing the deficit - running at more than 6 per cent of GDP - might create major problems for the dollar.

"We are fortunate that foreigners seem quite willing to hold US Treasury debt and other financial instruments, including foreign central banks," he said. "It's like asking how it feels to be growing old: when you consider the alternative, it's better to have willingness to hold our financial assets than not."

He also repeated Mr Greenspan's concerns about the federal budget deficit, a relatively manageable $330bn (£190bn) in the most recent fiscal year, but which experts say will grow sharply as outlays on social security and health benefits soar. "I agree that budget deficits are a problem, it is important to reduce them."

Mr Bernanke's previous appearance on Capitol Hill was in the job he is about to vacate, as chairman of President Bush's council of economic advisers. But yesterday marked his public debut in a far more important role - the world's most powerful central banker, and the successor to a man who has become a financial legend.

As such, the nominee wanted to avoid surprises. In his prepared testimony, he lavished praise on Mr Greenspan, yet promised to ensure "a continuity of the policy process that transcends any single person". He also vowed to protect the jealously guarded independence of the central bank from political pressures.

He reiterated his commitment to inflation targeting - a practice adopted by the European Central Bank, of which the outgoing chairman is wary - saying it would underline the Fed's commitment to maintain low inflation. Making known a target rate, moreover, would reinforce the trend towards greater transparency at the central bank. But there would be "no significant change in the overall approach to monetary policy", he said.

The general expectation is that the Fed - which has raised its key short-term rate at each of its last dozen policymaking sessions - will opt for further 25-point increases at the two remaining Federal Open Market Committee sessions before Mr Greenspan steps down on 31 January.