With $85 billion in mandatory federal spending cuts due Friday, Federal Reserve Chairman Ben Bernanke urges officials in Washington, D.C., to act quickly to avoid them. Delivering his semiannual report today on monetary policy to the Senate banking committee, Bernanke says, "Congress and the administration should consider replacing the sharp, front-loaded spending cuts required by the sequestration with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run."
Avoiding the immediate cuts, he says, "could lessen the near-term fiscal headwinds facing the recovery."
Asked when the sequester might appear in the job market, Bernanke says he wouldn't expect a big impact immediately, but he believes the effects would be seen "over a period of months." He said that furloughs and spending cuts would take time to be implemented.
Bernanke reminds lawmakers that the central bank, which has kept short-term interest rates at record lows, "cannot carry the entire burden of ensuring a speedier return to economic health."
Economist Robert Brusca writes in a note that Bernanke's comment on risks of the budget cuts "is the sort of clear fiscal advice one rarely gets from a sitting Fed chairman." None of the senators speaking during the hearing indicated that they expected the cuts to be avoided by Friday's deadline.
Since his previous report to Congress in mid-2012, Bernanke says economic growth has continued at a "moderate if somewhat uneven pace." He says growth in the fourth quarter of 2012 was "temporarily restrained by weather-related disruptions," a reference to Superstorm Sandy.
He says more recent information has indicated "economic growth has picked up again this year," and adds that "the pause in real (gross domestic product) growth last quarter does not appear to reflect a stalling out of the recovery."
Bernanke cites figures from the Congressional Budget Office indicating that the March 1 budget cuts would trim 0.6 percent from GDP this year.
Sen. Jack Reed, D-R.I., says that fiscal policy (which is decided by Congress) and monetary policy (which is decided by the Fed) appear at odds with each other. In reply, Bernanke says that monetary policy cannot fully offset the austerity included in this year's budget cuts. He adds that he's not denying "the long-run importance" of managing the federal budget properly.
Idaho Sen. Mike Crapo, ranking Republican on the panel, asserts that the Fed's "easy money" policies may outweigh the risks. He asks Bernanke what "metrics" are being monitored to make sure problems are avoided. Bernanke says additional resources are being used to stay on top of any unintended consequences, including scrutiny of leverage, asset valuations and interest rate risk.
In response to a question about the Fed's $3 trillion balance sheet, Bernanke says he believes the central bank has "appropriate means to unwind at the appropriate time." Later, during further questioning whether "bubbles" might be forming because of Fed policies, Bernanke says no strategy is "risk-free."
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