Bernanke issues warning over debt ceiling

THE chairman of the US Federal Reserve, Ben Bernanke, says it is vital that Congress raise America's borrowing limit before the Treasury runs out of manoeuvring room to avoid a potential default on US debt.

Mr Bernanke said the approaching debt limit was one of the "critical fiscal watersheds" for the government in coming weeks.

The President, Barack Obama, also spoke on Monday about the urgency of raising the limit. Mr Obama said he would not let congressional Republicans use the debt limit as leverage in negotiations over spending cuts.

Mr Bernanke noted that an impasse over the debt ceiling in 2011 led to a rating downgrade of long-term US debt, the first time that has occurred. He said Congress should raise the ceiling to "avoid a situation where our government doesn't pay its bills".

The Fed decided last month to keep buying $US85 billion ($80.6 billion) a month in Treasuries and mortgage bonds to keep borrowing costs low and encourage more spending. The bond-buying program was left open-ended.

But it turned out that Fed officials differed about how long the bond purchases should continue. When the minutes of the Federal Open Market Committee meeting were released on January 3, they revealed that "several" committee members thought the purchases should slow or end well before the year's end.

The officials fear the bond buying is keeping rates so low that it could ignite inflation or encourage speculative buying of risky assets.

Many economists have said they think the Fed will maintain its bond purchases at their present level through 2013.

On Monday, Mr Bernanke didn't address the divisions within the Fed. But he said he thought the new round of bond-buying was providing key support. The Fed would continue to assess the benefits of the bond buying against any risks of continuing the purchases.

Mr Bernanke said the purchases showed the Fed still had "ammunition" to aid the economy even after having cut short-term interest rates to near zero.

Last month, the Fed also said it planned to keep its key short-term interest rate at a record low even after unemployment falls close to a normal level - which it said might take three more years.