- The Washington Times - Wednesday, April 27, 2011

Federal Reserve chairman Ben S. Bernanke on Wednesday called the mounting federal debt the biggest economic challenge facing the country and said the threat that it will tarnish the nation’s top credit rating should prompt Congress to address it.

“It’s the most important problem, at least in the longer term, that the United States faces,” he said in his first news conference following a two-day meeting of the Fed’s monetary policy committee.

“We’re still a long ways from a solution,” he said, but added that he hopes a warning from Standard & Poor’s Corp. last week that it may cut the nation’s AAA credit rating will act as an “incentive” for Congress and the White House to reach a bipartisan deal to rein in deficits hovering over $1 trillion for years to come.

“Hopefully, that will provide at least one more incentive to resolve the problem,” he said, although he added that “S&P didn’t really tell us anything we already didn’t know” about how bad the deficits are.

Also providing an incentive for Congress to act, the Fed removed some of the support it has been providing to finance this year’s record $1.6 trillion deficit by ending as scheduled in June a $600 billion program instituted last fall to purchase Treasury bonds.

The program was aimed at lowering long-term interest rates to boost the economy and try to accelerate lagging job growth. Mr. Bernanke said the program had worked as the Fed intended and was no longer needed, although some critics say the program did little other than to boost inflation and enable Congress to keep splurging on debt.

The Fed signaled it will only gradually remove its support for the $14 trillion Treasury market, however, by keeping in place a related program to reinvest into Treasury bonds the cash it receives from maturing mortgage bonds it purchased from Fannie Mae and Freddie Mac.

And the Fed decided to continue to reinvest the portfolio of Treasury bonds it has amassed in recent years - also providing hundreds of billions of dollars of support to the Treasury market.

Mr. Bernanke said that the Fed has not decided yet to actually withdraw from the bond market, and when it does, that will signal that it has begun a campaign to start raising interest rates back toward more normal levels.

“Reducing the size of our overall portfolio” and “not reinvesting would be policy tightening,” he said, and the Fed is a long way from deciding to do that despite a recent uptick in inflation.

Mr. Bernanke repeated his view that inflation has not re-emerged as a problem despite a surge in oil and gasoline prices that he conceded are “absolutely creating a great deal of financial hardship for a lot of people.”

While prices at the pump and at the grocery store have escalated in recent months, he said overall inflation trends remain benign, and businesses so far are not passing on the higher costs of energy and other commodities to consumers.

But he said the Fed is alert to the possibility that inflation could pick up beyond levels between 1 percent and 2 percent where the Fed feels comfortable.

Many Fed critics say the central bank has fueled inflation in oil and other globally traded commodities with its loose money policies, which have driven the U.S. dollar down against most other currencies. Commodities are priced in dollars so a lower dollar makes them more expensive.

But Mr. Bernanke insisted that the Fed’s goal is to ultimately strengthen the dollar by nurturing a strong expansion in the U.S. economy that will underpin the dollar and draw foreign investment back into U.S. businesses and markets.

While the Fed expects the economy to maintain solid growth in the 3 percent range this year, Mr. Bernanke conceded that the first quarter likely experienced subpar growth of less than 2 percent because of severe weather, reduced defense spending and other transitory factors.

The government will issue its estimate of economic growth in the first quarter Thursday morning.

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