Federal Reserve Chairman Bernanke said a failure to reduce the federal budget deficit may push up interest rates over time and impair economic growth, putting the recovery at risk.
By Joshua Zumbrun
Bloomberg
Federal Reserve Chairman Ben S. Bernanke said a failure to reduce the federal budget deficit may push up interest rates over time and impair economic growth, putting the recovery at risk.
“Achieving long-term fiscal sustainability will be difficult, but the costs of failing to do so could be very high,” Bernanke said in a speech today to a White House commission on the budget deficit. “Increasing levels of government debt relative to the size of the economy can lead to higher interest rates, which inhibit capital formation and productivity growth — and might even put the current economic recovery at risk.”
Budget deficits may eventually erode the confidence of bond investors in the management of U.S. fiscal policy, driving yields higher on Treasury borrowing, raising the cost of lending in the economy and slowing economic growth, Bernanke said.
The Obama administration estimates budget deficits will total $5.1 trillion over five years and hit a record $1.6 trillion in the year ending Sept. 30. The $1.4 trillion deficit in 2009 was equal to 9.9 percent of gross domestic product, the largest share since the end of the World War II.
Bernanke spoke to the National Commission on Fiscal Responsibility and Reform, established by President Barack Obama to identify policies to reduce the deficit to a sustainable level.