BL: Bernanke Says U.S. Fiscal Outlook ‘Somewhat Dark’ Following Recession(Update1)
By Vivien Lou Chen
March 25 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke told lawmakers today that the U.S. government’s budget outlook is “somewhat dark” and Congress needs to agree on a plan to reduce the deficit.
He spoke in response to a question about the budget impact of the health-care overhaul signed into law this week by President Barack Obama. Bernanke declined to discuss the effect of the health measure, saying he didn’t want to “second guess” the Congressional Budget Office.
“Clearly everyone agrees that the overall fiscal outlook for the government is somewhat dark over the medium term, and it would be very useful if there could be a bipartisan, concerted effort to explain, demonstrate and decide how the government is going to achieve a more sustainable fiscal trajectory,” he said during testimony today to the House Financial Services Committee.
The budget deficit reached a record $1.4 trillion for the fiscal year that ended Sept. 30 amid falling tax revenue from the recession, a bailout of the banking and auto industries, and the $787 billion economic stimulus package. The Obama administration expects the shortfall to widen to $1.5 trillion this year.
Bernanke said the deficit was caused in part by the recession, and that there’s no need to close it immediately.
‘Sustainable Situation’
“There’s a reason for the big deficit and I do not think it is desirable or possible to get rid of it in the next year or two,” Bernanke said. “Down the road, when the economy operates more normally, if we could convince creditors that we will have a more sustainable situation, that will improve interest rates today and support the growth process today.”
Bernanke said the deficit might affect monetary policy if it causes investors to lose confidence in the government’s ability to achieve fiscal balance.
“Interest rates might rise because of a lack of confidence by creditors in the long-term fiscal stability of the government,” and “high interest rates tend to slow the economy,” he said.
The Congressional Budget office estimates that the health- care package will cost $940 billion over 10 years and cover 32 million uninsured Americans. That’s more than made up for with a new tax on the highest earners, fees on health-care companies and hundreds of billions of dollars in Medicare savings, which will reduce the federal deficit, the CBO said.
Treasuries dropped today after the government’s record- tying $32 billion sale of seven-year notes attracted a higher yield than analysts forecast.
The securities drew a yield of 3.374 percent, compared with the average forecast of 3.372 percent in a Bloomberg News survey of 8 of the Fed’s 18 primary dealers. The bid-to-cover ratio, which compares total bids with the amount of securities offered, was 2.61 percent.
The current seven-year note yield rose 5 basis points, or 0.05 percentage point, to 3.34 percent at 1:04 p.m. in New York, according to BGCantor Market Data.
To contact the reporter on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net
Last Updated: March 25, 2010 14:31 EDT
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