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Fed chief says US should cut deficit

Fed chief says US should cut deficit
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First Published: Tue, Oct 20 2009. 12 42 AM IST

Cautious move: Federal Reserve chairman Ben S. Bernanke. Jim Lo Scalzo / Bloomberg
Cautious move: Federal Reserve chairman Ben S. Bernanke. Jim Lo Scalzo / Bloomberg
Updated: Tue, Oct 20 2009. 12 42 AM IST
Washington: Federal Reserve chairman Ben Bernanke on Monday called for the US to whittle down its record-high budget deficits and for countries such as China to get their consumers to spend more, moves that would help combat skewed global trade and investment flows that contributed to the financial crisis.
Bernanke’s remarks to a Fed conference in Santa Barbara, California, came just days after the federal government on Friday reported a $1.42 trillion (Rs65.75 trillion) deficit for the 2009 budget year that ended 30 September. The previous year’s deficit was $459 billion.
Cautious move: Federal Reserve chairman Ben S. Bernanke. Jim Lo Scalzo / Bloomberg
The Fed chief’s comments were aimed at reducing global imbalances, and echo pledges made by leaders of the Group of 20 nations at their Pittsburgh summit last month.
“As the global economy recovers and trade volumes rebound, however, global imbalances may reassert themselves,” Bernanke warned. For the US’ part, “the most effective way” to boost national savings in this country “is by establishing a sustainable fiscal trajectory, anchored by a clear commitment to substantially reduce federal deficits over time,” Bernanke said. He didn’t suggest ways to do so.
And, for trade surplus countries such as China and most Asian economies, they need to get their consumers to spend more and rely less on export-led growth, Bernanke said.
“In large part, such action should focus on boosting consumption,” Bernanke said.
The bulk of Bernanke’s remarks largely offered a scholarly assessment of Asia and how it fared during the global financial crisis, the focus of the Fed’s conference. The Fed chief didn’t discuss the state of the US economy or the future course of interest rates.
Bernanke and his colleagues last month held a key bank lending rate at an all-time low near zero and pledged to hold it there for an “extended period”. Many economists believe that means through the rest of this year and into next year.
Deciding when to boost interest rates and reel in the unprecendented amount of money plowed into the US economy will be one of the biggest challenges facing the Fed in the coming months. Remove the support too soon and the recovery could be derailed. Leaving the support in place for too long risks unleashing inflation.
In terms of the world economy, “Asia appears to be leading the global recovery,” Bernanke said. “Recent data from the region suggest that a strong rebound is, in fact, under way.”
Many economists predict the US economy started growing again in the third quarter at a pace of at least 3%, and is still expanding in the current quarter.
Economic activity contracted in the second quarter at an annualized rate of 0.7%, marking a record four straight quarters of decline.
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First Published: Tue, Oct 20 2009. 12 42 AM IST
More Topics: Ben Bernanke | Federal Reserve | Fed | US | Deficit |