- The Washington Times - Wednesday, June 3, 2009

Federal Reserve Chairman Ben S. Bernanke warned Congress Wednesday that the nation “will have neither financial stability nor healthy economic growth” unless the Congress and administration “demonstrate a strong commitment to fiscal sustainability in the longer term.”

Testifying before the House Budget Committee, Mr. Bernanke noted that projected budget deficits totaling $4 trillion during the 2009-2011 period would raise the ratio of publicly held federal debt to gross domestic product from 40 percent before the crisis began to 70 percent in 2011. Putting those numbers in perspective, the Fed chairman observed that “these developments would leave the debt-to-GDP ratio at its highest level since the early 1950s, the years following the massive debt buildup during World War II.”

Earlier in his testimony, Mr. Bernanke noted that interest rates on longer-term Treasury securities and fixed-rate mortgages had been rising in recent weeks. “These increases appear to reflect concerns about large federal deficits” and other causes, he said. “Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance.”

The nonpartisan Congressional Budget Office reviewed the president’s initial budget blueprint in March and concluded that it would generate $11.1 trillion in cumulative budget deficits from 2009 through 2019. Budget deficits that would average more than $1 trillion per year during the last four years of that period.

On the economic front, Mr. Bernanke told the committee that “recent data suggest that the pace of the economic contraction may be slowing.” But he warned that “sizable job losses and further increases in unemployment are likely over the next few months.”

The Fed chief said the fiscal stimulus program will likely boost households’ spending power. But he cautioned that other factors — including the weak labor market, the $13 trillion loss in household net worth since mid-2007 and still-tight credit conditions — would “likely continue to weigh on consumer spending,” which accounts for more than 70 percent of gross domestic product.

Mr. Bernanke, who famously missed the intensity of the housing crisis, said the housing market has shown “some signs of bottoming.”

The Fed’s forecast calls for the economy to hit bottom and then turn up later this year.

Even after the recovery gets under way, however, the rate of economic growth “is likely to remain below its long-run potential” about 2.6 percent per year “for a while,” Mr. Bernanke said. “The unemployment rate is likely to rise for a time, even after economic growth resumes.”

Recoveries from the last two recessions were also quite weak.

The 1990-91 recession ended in March 1991, but the unemployment rate continued to increase through June 2002, when it peaked at 7.8 percent. Although the 2001 recession ended in November of that year, the unemployment rate continued to rise until June 2003, when it peaked at 6.3 percent.

The unemployment rate was 8.9 percent in April, and forecasters have projected that it reached 9.2 percent in May. The Labor Department will release May unemployment data on Friday. The Congressional Budget Office expects the unemployment rate will peak above 10 percent next year.

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