Cutting too deep could harm recovery, says Fed chairman

 

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The chairman of the US Federal Reserve, Ben Bernanke, gave his implicit backing to a new round of government stimulus for the world's largest economy, hours before President Barack Obama was due to launch a job-creation plan that would cost several hundred billion dollars.

With the first $787bn (£490bn) economic stimulus in 2009 having now been spent, and with state and local governments cutting spending sharply, Mr Bernanke said "fiscal policymakers should not... disregard the fragility of the economic recovery". He told his audience at the Minnesota Economic Club, yesterday: "There is ample room for debate about the appropriate size and role for the government in the longer term, but – in the absence of adequate demand from the private sector – a substantial fiscal consolidation in the shorter term could add to the headwinds facing economic growth and hiring."

The Fed chairman insisted that a government debt-reduction plan remained an urgent priority, but said cuts could be phased in in a way that does not weaken the economic recovery and worsen unemployment.

Markets were disappointed that Mr Bernanke did not provide any new hints on monetary policy in his speech, ahead of a two-day meeting of the Fed's interest–rate setting committee this month.

The Fed has spent more than$2 trillion buying Treasury securities in two bursts of quantitative easing, the second of which ended in June, and discussed a third round at its last meeting.

Economists believe a more likely move will involve replacing the short-term Treasury debt on the Fed's balance sheet with long-term debt, in the hope of pushing down long-term interest rates that businesses and homebuyers pay. Last month, the Fed promised to keep official interest rates at zero for two further years, sending rates sharply down.

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