Budget deficit puts US economy at risk, Bernanke says

The US economic recovery is at risk because politicians are failing to deal with its long-term budget deficit, the Federal Reserve chairman has warned.

Ben Bernanke told lawmakers in blunt language yesterday that they needed a fiscal exit strategy that will tackle the country's unsustainable deficits, as the national debt mounts throughout this decade.

Although he left the door open for politicians to enact more short-term economic stimulus, particularly in relation to unemployment, Bernanke warned that financial markets need a sign that Congress is also willing and able to cut government spending commitments or raise taxes in coming years.

Barack Obama this month created a bipartisan commission that will look into the issue of spending cuts and limits on entitlements such as social security benefits, following the publication of a budget that shows the national debt rising to 77 per cent of GDP by the end of the decade, even in a rosy economic scenario.

Annual deficits are never projected to fall below the 3 per cent of GDP that Bernanke said was sustainable.

"I realise it is extremely difficult to address this issue, but it would be helpful to the current recovery, helpful to the markets and helpful to confidence if there was a plan for a 'fiscal exit', if you will," the Fed chairman said.

Bernanke said such a plan could reduce market interest rates on government debt, stimulating the economy right away.

And he said failing to do so was dangerous for the economic recovery: "It's not necessarily just a long-term issue because it is possible that bond markets will become worried about sustainability and we may find ourselves facing higher interest rates even today."

In his prepared testimony, the chairman reiterated that the Fed will hold interest rates "exceptionally low ... for an extended period".

Stock markets read the chairman's statement to mean that monetary tightening could be further away than thought, and rallied on his comments. The Dow Jones climbed 98.86 points, or 0.96 per cent, to 10,381.27.

- INDEPENDENT