Fed chairman soft-pedals urgency of reducing spending, raising taxes

While repeating past warnings about the dire consequences of continuing to amass unsustainable debts, Federal Reserve Chairman Ben S. Bernanke took a surprisingly conciliatory tone Wednesday in his latest testimony on budget issues before Congress.

Out of concern for still-fragile financial markets and the budding economic recovery, the Fed chairman said Congress should start making plans for major cuts in deficits hovering over $1 trillion next year, after a presidential budget commission lays out recommendations. But it need not do anything drastic right away.

“This moment is not the time to radically reduce spending or raise our taxes,” he told the House Budget Committee, suggesting that Congress instead include measures along with any additional legislation extending jobless benefits this year that will show that it has an “exit strategy” to end the stimulus funding and pare down deficits next year.

“We have a little breathing space” to act on the deficit because the European debt crisis has sent global investors scurrying into the U.S. dollar and Treasury bonds, which are regarded as safe havens in times of crisis, he said.

That has dramatically lowered interest rates and given a boost to the Treasury and the economy. But how long that continues depends on whether Congress retains the confidence of the markets, he said.

“It’s important to have in place a plan that will help keep interest rates down” by convincing investors that Washington is capable of taming the deficit problem, he said.

Mr. Bernanke suggested that Congress adopt a goal of getting the “primary” budget into rough balance - that is the budget excluding the Treasury’s massive interest payments on the debt. The resulting deficits would still be large - about $300 billion a year - but far below today’s levels.

His views reflect the belief among economists that deficits are sustainable, as long as the “primary” budget is in balance.

“We still have some time” before Washington faces the kind of financial pressures plaguing Greece, Mr. Bernanke said. The beleaguered European country was shut out of public borrowing markets this spring when investors started to fear it would eventually default or restructure its debts, sending Greek interest rates soaring.

But Mr. Bernanke stressed that the repercussions for the U.S. of not eventually acting would be just as severe as Greece experienced, with a jump in interest rates that stifles economic growth by not only penalizing the U.S. government but cutting off borrowing by U.S. consumers and businesses as well.

“Unless we make a strong commitment to fiscal responsibility, in the longer run, we will have neither financial stability nor healthy economic growth,” he said.