BEN BERNANKE yesterday urged Congress to act now to bring down long-term budget deficits, warning that the bond market was alarmed about US government debt.
The Federal Reserve chairman said the recent sharp increases in bond yields “appear to reflect concern about large federal deficits” as well as improved optimism about the economy and other factors. Since late April, the yield on the 10-year Treasury note has risen from below 3 per cent and peaked at 3.76 per cent last week, its highest level since November.
Mr Bernanke said large deficit-funded actions to fight the crisis were “necessary and appropriate”. But he said “near-term challenges must not be allowed to hinder timely consideration of the steps needed to address fiscal imbalances”.
The Fed chief’s warning came as he reiterated his view that he expects to see growth “later this year” with “some stabilisation in final demand including consumer spending”. However, he remained cautious with numerous caveats.
At about midday in New York, the yield on 10-year Treasuries was down 6 basis points at 3.58 per cent on weak data. The SP 500 index was down 1.4 per cent, though the dollar rallied amid selling in commodities.
The Fed chief warned failure to address fiscal sustainability could result in the US facing a debt trap.
“We cannot allow ourselves to be in a situation where the debt continues to rise. That means more and more interest payments, which swell the deficit, which leads to an unsustainable situation,” he said. Mr Bernanke said that to encourage lenders to finance the US at reasonable rates “we do have to persuade them that we are going to be serious about returning to a more balanced fiscal situation”.
Mr Bernanke made no reference to the possibility of increasing Fed purchases of Treasuries to lean against the rise in yields. In effect, he put responsibility for dealing with debt concerns squarely in the hands of Congress and the Obama administration. “The Federal Reserve will not monetise the debt,” Mr Bernanke said. Fed officials believe that the policy equivalent to keeping interest rates on hold would involve some modest additional Treasury purchases over and above the declared amount as purchase programmes tapered off.
But some think there may be a case for stopping at the declared amounts, even though this would involve a tightening of policy relative to expectations. Few are pressing for very large increases. – (Copyright 2009 The Financial Times Limited)
