WASHINGTON – Federal Reserve Chairman Ben Bernanke said Monday that it’s important that Congress raise America’s borrowing limit before the Treasury runs out of manoeuvring room to avoid a potential default on U.S. debt.
Bernanke, speaking at the University of Michigan, said the approaching debt limit is one of the “critical fiscal watersheds” for the government in coming weeks.
President Barack Obama also spoke Monday about the urgency of raising the limit. Obama said he wouldn’t let congressional Republicans use the debt limit as leverage in negotiations over spending cuts.
Bernanke noted that an impasse over the debt ceiling in 2011 led to a rating downgrade of long-term U.S. debt, the first time that’s occurred. He said Congress should raise the ceiling to “avoid a situation where our government doesn’t pay its bills.”
The Fed decided last month to keep buying $85 billion a month in Treasurys and mortgage bonds to try to keep borrowing costs low and encourage more spending. The bond-buying program was left open-ended.
But it turned out that Fed officials differed about how long the bond purchases should continue. When the minutes of the meeting were released Jan. 3, they revealed that “several” committee members thought the purchases should slow or end well before year’s end. These officials fear the bond buying is keeping rates so low for so long that it could ignite inflation or encourage speculative buying of risky assets.
Still, many economists have said they think the Fed will maintain its bond purchases at their current level through 2013.
On Monday, Bernanke didn’t address the divisions within the Fed. But he said he thought the new round of bond buying was providing key support. He said the Fed will continue to assess the benefits of the bond buying against any risks of continuing the purchases.
Bernanke said the purchases have shown that the Fed still has “ammunition” to aid the economy even after having cut short-term interest rates to near zero.
Last month, the Fed also said it planned to keep its key short-term interest rate at a record low even after unemployment falls close to a normal level — which it said might take three more years. Unemployment remains high at 7.8 per cent because the economy is growing too slowly and not creating jobs fast enough.
In December, employers added 155,000 jobs, roughly matching the monthly average in 2011 and 2012. That’s just been enough to slowly reduce the unemployment rate, which fell 0.7 percentage point during 2012.