Bernanke warns on danger of US deficits

Ben Bernanke, the new Federal Reserve chairman, warned yesterday that without correction America's burgeoning trade and budget deficits could damage the country's prosperity and reduce living standards for future generations.

In his first appearance before Congress since taking the helm of the central bank a fortnight ago, Mr Bernanke repeated the valedictory hint of his predecessor Alan Greenspan that one or two interest rate increases were possible in the months ahead, to keep inflation under control.

"With the economy advancing 'briskly', inflationary pressures might arise," he said in the semi-annual testimony to the House Financial Services Committee. "Price stability is essential for the strong and stable growth of output and employment." The appointment of Mr Bernanke, a former Princeton professor and Fed governor, has been widely welcomed by Republicans and Democrats. Yesterday, his main task was to set out his inflation-fighting credentials and commitment to a stable, balanced economy - underlined by his warning on the twin deficits, now at record levels.

Mr Bernanke said higher national savings, greater foreign demand and a weaker dollar should see the trade deficit - which hit a record $725bn (£417bn) in 2005 - decline "in a way that will not be disruptive to our economy".

But the White House has already also forecast a record federal budget deficit of $423bn (£243bn) for fiscal 2007 - a figure that excludes supplementary spending on the Iraq war.

"I am concerned about the prospective path of the deficits," the Fed chairman told the panel.