Bernanke Speech: Don't Cut Government Spending Too Quickly

 @MikeObelm.obel@ibtimes.com
on September 08 2011 2:12 PM

Ben Bernanke, the head of the U.S. central bank, warned Thursday against cutting government spending too sharply or quickly, lest one of the most fragile recoveries in the nation's economic history suffer further damage.

The Federal Reserve chairman's speech, coming just hours before President Obama was set to address a joint session of Congress to propose a jobs plan, left stocks cold: While equities started the day's session, rising they tapered off as the time for Bernanke's speech neared and were down on all three major indexes by the time he finished.

The Fed chairman, who sought to assuage fears of inflation from past Fed actions that increased the money supply, forecast inflation moving to 2 percent or less. He also said the central bank would do all it could to promote a stronger economic recovery in the context of price stability.

In what appeared to be comments aimed at federal lawmakers, Bernanke affirmed the need to put a lid on the exploding national debt -- but warned that measures to that end must be judicious.

While prompt and decisive action to put the federal government's finances on a sustainable trajectory is urgently needed, fiscal policymakers should not, as a consequence, disregard the fragility of the economic recovery, Bernanke said.

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.

Besides warning against rash cuts in government spending, the Fed chairman said one of the most striking features of the current anemic recovery is unusual weakness in household spending.

After contracting very sharply during the recession, consumer spending expanded moderately through 2010, only to decelerate in the first half of 2011, he said, in prepared remarks. Bernanke cited as causes of the unusually weak household spending a persistently high level of unemployment, slow gains in wages for those who remain employed, falling house prices, and debt burdens that remain high for many, notwithstanding that households, in the aggregate, have been saving more and borrowing less. Even taking into account the many financial pressures they face, households seem exceptionally cautious.

In conjunction with unusually weak household spending is unusually weak housing prices, he said.

Unfortunately, the recession, besides being extraordinarily severe as well as global in scope, was also unusual in being associated with both a very deep slump in the housing market and a historic financial crisis, Bernanke said. These two features of the downturn, individually and in combination, have acted to slow the natural recovery process.

 

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