Chairman of the Federal Reserve Board, Ben Bernanke testified before the House Budget Committee on the Economic Outlook and Monetary and Fiscal Policy. While noting a strengthening economic recovery, he discussed concerns about unemployment and projected debt and deficit levels.
Benanke attributed the building economic recovery on "the stabilization of the financial system, the effects of expansionary monetary and fiscal policies, and the strong boost to production from businessess rebuilding their depleted inventories." Consumer spending picked up in the fourth quarter at an annual rate over 4% and business investement appears to have increased robustly.
Although construction remains weak, which he attributed to inventory of vacant and foreclosed homes, he pointed to improving confidence, monetary policy and improving banks willingness to lend as supporting factors of a more rapid pace of recovery in 2011.
With employment gains lagging, currently barely sufficient to meet the added demand of new entrants to the employment pool, Bernanke suggested that it could take several years for the unemployment rate to return to more normal levels.
Even with some prices rising recently, especially with gasoline, overall inflation remains low, with core inflation at 0.7% in 2010. The low inflation has also restrained growth on wage growth with average hourly earnings increasing by 1.7% last year.
Turning to monetary policy, Bernanke stated that reducing the federal funds target rate to near zero and the purchasing of long term secureties have achieved their goal of reducing interest rates and easing in broader financial conditions. He stated that the Board remains focused on price stability and are confident that they will be able to smoothly withdraw from an accomodative policy stance at the appropriate time.
Before turning to fiscal policy and warning the committee about budget deficts, Bernanke made to sure to clarigy that the Fed's purchases of longer-term securities are not comparable to ordinary government spending. "In executing these transactions," Bernanke said, "the Federal Reserve acquires financial assets, not goods and services; thus, these purchases do not add to the government's deficit or debt." The Fed earns interest from these holdings, which have amounted to $125 billion in remittances since the program began in 2009.
Examining current spending levels, Bernanke was very clear that the current levels of deficit spending are unsustainable. Under currently projections, with federal debt reaching 90% by 2020 and 150% by 2030, up from 60% in 2010. The biggest contributors to the escalating debt are the aging of the population and rapidly raising health care costs. Addressing health costs, expected to double as a percentatge of GDP over the next 25%, will be a critical factor towards developing a sustainable budget.
Since the current trends are unsustainable, change will have to happen one way or another. In cautioning the committe of the need to act now to develop a reasonable program to address these concerns, Bernanke said, ""The question is whether these adjustments will take place through a careful and deliberative process that weighs priorities and gives people adequate time to adjust to changes in government programs or tax policies, or whether the needed fiscal adjustments will come as a rapid and painful response to a looming or actual fiscal crisis."