Federal Reserve chief warns GOP: Don't hold debt-ceiling vote hostage

Federal Reserve Chairman Ben Bernanke waded into a contentious Washington debate Tuesday, telling a Senate committee that he is "worried" about Republican efforts to link a decision on the nation's debt ceiling to passage of reforms to curb federal spending.

"It's extremely important that you address this issue" of long-term federal deficits, Mr. Bernanke said. "I'm just worried about using the debt limit as the vehicle" for reforms.

By stating that, the Federal Reserve chairman in effect sided with the Obama administration and its Treasury secretary, Tim Geithner.

The nation's federal debt is close to hitting a $14.3 trillion ceiling set by Congress. The Treasury says it will reach the cap sometime between this month and May, and Secretary Geithner has asked Congress to raise the limit.

Some congressional Republicans say they may oppose raising the ceiling on the national debt unless the move is paired with budget reforms.

Sen. David Vitter (R) of Louisiana said he knows Congress will need to raise the debt limit higher, but worries it would send a negative signal to financial markets if that step is not linked with new constraints on federal deficits.

Bernanke's credit-card analogy

Bernanke said he would "really support a program" for long-term fiscal discipline. And he said that, in theory, he had no problem with the idea of Congress doing that at the same time as raising the debt ceiling.

The risk would be if that effort to link the two raised doubts in the minds of bond investors as to whether the debt limit would, in fact, be raised. Bernanke warned that "even the possibility of default on existing debts" could have negative consequences for Treasury bond interest rates and the economy.

Bernanke used the analogy of a family with credit-card debt to explain how the debt ceiling differs from congressional spending decisions.

A refusal to lift the ceiling would prevent the Treasury from making payments on debts already accrued by Congress. That's like a family trying to solve its finance problems by refusing to make debt payments, Bernanke said.

By contrast, Bernanke said a responsible path is to get future spending under control – like a family cutting up its credit card.

But at other times during his testimony before the Senate Banking Committee Tuesday, the Federal Reserve chairman sounded reluctant to see Congress cut up its credit card too quickly.

$100 billion in cuts: A good thing?

He struck a neutral tone on Republican efforts to cut $100 billion from the fiscal year 2011 spending plan laid out last year. He endorsed neither a recent forecast by Goldman Sachs – that such cuts would sharply dent the economic recovery – nor Republican views that the cuts would boost private sector confidence and job growth.

The spending cuts proposed by Republicans wouldn't come close to eliminating the current-year federal deficit. Bernanke said that annual deficits need to be pared through long-term planning on issues such as health-care entitlements.

"We don't have a single-year problem. We have a long term problem and it needs to be [addressed] ... on a long term basis," Bernanke said.

Bernanke praised President Obama's bipartisan fiscal commission for giving a sense of the magnitude of the challenge, and possible responses. But he said the commission "punted" by assuming health-care costs would be cut, while not suggesting how to do it.

He also defended the Federal Reserve policy known as "QE2," because it is a second round of so-called quantitative easing of monetary policy. The Federal Reserve program purchases bonds with the aim of stimulating economic growth without fueling inflation, and Bernanke said it is working.

He said most forecasters have upgraded their outlook for growth since the Federal Reserve launched its effort last fall. He said US inflation remains low and attributed rising prices for global commodities such as oil mainly to rising demand in emerging markets, plus constraints on supply of some raw materials.