Bernanke issues warning over debt ceiling
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.
Frequently Asked Questions about this Article…
Ben Bernanke warned it is vital that Congress raise the US debt ceiling before the Treasury runs out of manoeuvring room to avoid a potential default. He described the approaching deadline as a “critical fiscal watershed” and urged action to prevent a situation where the government doesn't pay its bills.
A standoff over the debt ceiling can rattle markets: the article notes the 2011 impasse led to the first-ever downgrade of long-term US debt. That kind of political brinkmanship can increase market volatility and investor uncertainty, so investors should pay attention to developments around the debt limit.
Bernanke referenced the 2011 impasse when congressional disagreement over the debt ceiling led to a downgrade of long-term US debt—the first time that had occurred. He used that example to stress why Congress should raise the ceiling to avoid repeating the consequences of a payment crisis.
The Fed decided to buy US$85 billion a month in Treasuries and mortgage bonds to keep borrowing costs low and encourage more spending. The open‑ended program is intended to support the economy by lowering yields and stimulating lending and spending, which can influence stock and bond markets.
Yes. The article says some Fed officials worry the purchases are keeping rates so low they could ignite inflation or encourage speculative buying of risky assets. Those risks are why Fed members differ on how long the program should continue.
The minutes showed several Fed officials thought purchases should slow or end well before year-end, but many economists believe the Fed will maintain the program at current levels through 2013. Bernanke said the Fed will keep assessing the benefits of the bond buying against its risks.
By 'ammunition' Bernanke meant the Fed still has policy tools to aid the economy beyond cutting short‑term interest rates to near zero. The bond‑buying program is an example of that additional tool to support growth and lower borrowing costs.
Investors should watch whether Congress raises the debt ceiling, the Fed's assessment of its bond‑buying program (including FOMC minutes that reveal divisions), signs of rising inflation or speculative asset buying, and the unemployment outlook—since the Fed plans to keep key short‑term rates low even after unemployment approaches a normal level, which it says might take years.
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