Bernanke to testify on economy and deficit

[February 02, 2012]  WASHINGTON (AP) -- Federal Reserve Chairman Ben Bernanke will likely tell members of Congress on Thursday that the slowly improving economy may need more help from the Fed and that cutting the deficit too fast could backfire.

Bernanke is testifying before the House Budget Committee a week after the Fed signaled that a full recovery could take at least three more years. As a result, the Fed said it doesn't plan to raise its benchmark interest rate from a record low before late 2014 at the earliest.

The Fed chief is appearing two days after the Congressional Budget Office estimated that the deficit will top $1 trillion for a fourth straight year and could stay around that level for years.

Republicans have been critical of the Fed's efforts to support the economy. Many have argued that keeping rates too low for too long could escalate inflation. And they've stressed that cutting government spending and lowering taxes are necessary to boost growth.

The hearing is sure to be contentious, and the toughest questions could come from Chairman Paul Ryan, a Republican from Wisconsin.

At a hearing last year after Republicans won control of the House, Ryan told Bernanke that "many of us fear monetary policy is on a difficult track."

Monetary policy refers to the Fed's use of interest rates to try to boost or slow the economy.

At the time, Ryan also expressed concern that the Fed's bond-buying programs could trigger inflation or fuel speculative buying of stocks or other assets. The Fed's bond purchases were intended to further drive down long-term rates to encourage more borrowing and spending by consumers and businesses.

Ryan made his comments at a time when energy and food prices were rising quickly. Inflation has moderated since then, and Bernanke has maintained that it doesn't threaten the economy.

The two leaders also offered contrasting views last summer over how to handle high budget deficits. Bernanke warned Republicans that threatening to block a pending increase in the nation's borrowing limit could hurt the economy. He said the debt ceiling was the "wrong tool" for trying to push federal spending cuts through Congress.

Ryan countered at the time that using the debt-ceiling vote as leverage to win meaningful deficit reductions was a valid approach.

This time, Bernanke will likely point to some economic improvements. Factories are making more goods. Americans are buying more cars. The unemployment rate is near its lowest level in nearly three years. And employers have produced six straight months of solid hiring.

Still, growth was only modest in the final three months of last year. And consumers will likely slow their spending if hiring and pay increases don't strengthen.

A key reason the deficit has surged in the past four years is that the government collected less tax revenue. In part, that's because the economy has yet to regain the millions of jobs lost during the Great Recession.

And the government has had to spend more on emergency unemployment benefits and efforts to boost growth, such as the Social Security tax cut that will expire in February unless Congress extends it.

The Fed has also taken extraordinary measures during and after the recession to try to help the economy recover. In June, it completed its second round of bond buying.

At a news conference after last week's Fed meeting, Bernanke said a third round of bond buying might be necessary. Some economists think the Fed could announce more bond buying as soon as its next meeting in March.

[Associated Press; By MARTIN CRUTSINGER]

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