WASHINGTON—Federal Reserve Chairman Ben Bernanke urged the Senate Tuesday to make gradual cuts in the federal budget and avoid the sweeping, automatic reductions promised by the impending sequester.
Bernanke’s appearance before the Senate Banking, Housing and Urban Affairs Committee came just days before the first phase of sequestration, an $85 billion cut, takes effect on Friday – barring a last minute deficit-cutting deal. After outlining the Fed’s semiannual Monetary Policy Report, he fielded questions from committee members on the economic climate and also analyzed how the sequestration cuts will affect the economy.
“The challenge for the Congress and the administration is to put the federal budget on a sustainable long-run path that promotes economic growth and stability without unnecessarily impeding the current recovery,” Bernanke said.
The monetary report revealed that the nation’s economic activity has expanded at a moderate rate with labor markets growing steadily and inflation remaining low. The gross domestic product (GDP) rose around 3 percent in the third quarter of 2012 but remained flat in the fourth quarter due to unforeseen conditions such as weather-related disturbances.
Many of the senators present tailored their questions and concerns to the looming sequestration. Senate Banking Chairman Tim Johnson, D-S.D., said he feared the cuts could wipe out 750,000 jobs this year alone.
“Without a fix, automatic spending cuts will take effect in just a few days, and could send out economy into reverse at a time we should continue moving forward on creating jobs,” Johnson said in opening remarks. “These cuts will impact many of our nation’s most vulnerable citizens including children, seniors, and the disabled.”
In response to questions about the effects of the sequester, Bernanke said he does not “expect to see a big impact immediately” as the reductions take place over time. But he believes that the administration and Congress should opt for cuts that reduce the deficit, “more gradually in the near term but more substantially in the longer run,” because they will not be as harsh or sudden.
Idaho Republican Mike Crapo expressed concerns about the cost of entitlement programs, which are largely exempt – in terms of benefits – from the sequester. The committee’s top-ranking GOP member said the high unemployment rates as well as threats to Medicare and Social Security pose grave problems.
“Until we take specific steps to reform our entitlements and make them solvent for generations to come, and reform our tax code to produce significant, sustained economic growth, our fiscal problems are far from solved,” Crapo said.
Bernanke assured that, “not all tax and spending programs are created equal” when it comes to their influence on the economy. He said job-creating programs that promote economic growth and address infrastructure projects are crucial.
Despite some concerns from senators, Bernanke defended the Fed’s easy-money policies and signaled that these programs will continue. He lauded the benefits of purchasing assets and bonds, as they are not at a high risk of inflation. He concluded that the potential consequences of “increased risk-taking” policies like low interest rates do not outweigh some projected benefits.
The Fed chairman is scheduled to appear before the House Financial Service Committee Wednesday morning to continue to address concerns.