Federal Reserve Chairman Ben Bernanke sketched a
more optimistic view of the economy Friday but said the Fed's $600
billion bond-buying program is needed because unemployment will likely
stay elevated for up to five more years.
J. Scott ApplewhiteBernanke came down hard on what he described as an unsustainable long-term fiscal path.
told the Senate Budget Committee that there's rising evidence that a
"self-sustaining" recovery is taking hold. He said he expects stronger
growth because consumers and businesses will boost spending this year.
Bernanke spoke an hour after thegovernment released a disappointing employment report.
Employers added only 103,000 jobs in December.
unemployment rate fell to 9.4 percent partly because people gave up
looking for jobs. Many economists had forecast much bigger job gains and
were looking for a signal that businesses were stepping up hiring.
about December's 103,000 job gains, Bernanke said if the pace of hiring
doesn't increase, "we're not going to see sustained declines in the
Fed chief defended the central bank's move to buy $600 billion in
Treasurys through June and gave no hint that it would change its course.
The bond purchases are designed to boost the economy by lowering
interest rates, encouraging spending and lifting stock prices.
program has been criticized by Republicans in Congress and some Fed
officials who contend it will do little to help the economy and could
hurt it by unleashing inflation and speculative buying on Wall Street.
China, Germany and Brazil complained it was really a scheme to push down
the value of the dollar, giving U.S. exporters a competitive edge.
Fed chief said the threat of deflation—a dangerous drop in prices,
wages and in the values of homes and stocks -- and the potential for
persistently high unemployment were sufficient reasons to launch the
predicted that the overall pace of the economy will be "moderately
stronger" this year. He said the Fed has seen "increased evidence that a
self-sustaining recovery" is taking place.
are cranking up production. The service sector is growing at its
fastest pace in more than four years. Fewer people applied for
unemployment benefits over the past month than in any other four-week
period in more than two years.
are spending more freely, and a payroll tax cut is likely to boost
their activity further. Tax cuts are also likely to lead businesses to
expand and hire more.
But weakness in job growth could slow this momentum, Bernanke cautioned, especially if consumers spend less.
Bernanke said unemployment is likely to be around 8 percent two years from now.
Other threats to the economic outlook, Bernanke said, are:
—A depressed housing market, where growth in foreclosures could push down home prices even more.
— Deeper spending cuts and more layoffs from state and local governments.
— Rising gasoline prices, which now top $3 a gallon.
also argued for Congress and the White House to come up with a
long-term plan to reduce the government's trillion-plus-dollar budget
deficits. However, he warned them not to slash spending or boost taxes
now because the economy is too fragile.
Barack Obama's debt commission at the end of last year failed to reach a
consensus on a deficit-reduction plan. Over the coming decade,
government deficits are estimated in the $10 trillion range.
- Hiring Again: Where the Jobs
Congress fails to come up with a reduction plan, the economy could be
hurt, Bernanke said. Big deficits could force investors to demand more
returns on government loans and interest rates could soar.
Jeff Sessions of Alabama, the highest ranking Republican on the
committee and a fiscal conservative, expressed concern that the Fed's
bond-buying program could spur inflation. And he wondered whether the
Fed was simply printing money to cover the nation's deficits.
countered that the program won't expand the amount of money in
circulation in a significant way because banks aren't lending the money.
It's not a situation "where the Fed is dumping money into the economy," he said.