Federal Reserve Chairman Ben Bernanke warned on Wednesday that rising U.S. debt was contributing to a jump in longer-term interest rates, and said now was the time to start working on reining in deficits.
He sounded more confident that the end of the recession was getting closer and economic growth would resume this year, citing signs that the housing market was bottoming and hopes that stimulus money would boost consumer spending.
But Bernanke gave no clue as to whether the Fed — the U.S. central bank — would step up its purchases of government debt or mortgage-backed securities to offset rising borrowing rates, something investors have been watching for.
"Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance," Bernanke told the U.S. House of Representatives Budget Committee.
"Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth," he said.
Bernanke gave a relatively upbeat assessment of the economy, but acknowledged that even after a recovery gets under way, "the rate of growth of real economic activity is likely to remain below its longer-run potential for a while."
He said financial markets had improved, thanks in part to the Fed's efforts to restore lending, but he noted the recent spike in yields on longer-term Treasury debt and fixed-rate mortgages.
"These increases appear to reflect concerns about large federal deficits but also other causes, including greater optimism about the economic outlook, a reversal of flight-to-quality flows, and technical factors related to the hedging of mortgage holdings," Bernanke said.
Bernanke appeared to be less concerned about deflation, a dangerous downward spiral in prices that has been a major worry for the central bank in recent months. He said even with a recent jump in the price of oil and other commodities, cost pressures "generally remain subdued."
"As a consequence, inflation is likely to move down some over the next year relative to its pace in 2008. That said, improving economic conditions and stable inflation expectations should limit further declines in inflation," he said.
