WASHINGTON (CN) – Federal Reserve Chairman Ben Bernanke predicted a “moderate economic recovery” at an economic outlook hearing Wednesday, but said the $1.4 trillion federal deficit is on a path that’s not sustainable.
“Clearly, at some point, we need to make sure that we have a sustainable fiscal program,” Bernanke said. “Not this year, but over the medium term.”
At current rates of federal spending, the Congressional Budget Office projects the deficit will rise to 9 percent of GDP by 2020.
“America is on a path toward economic recovery,” Joint Economic Committee Chair Carolyn Maloney said, adding that it “is still too fragile to announce that the recession is over.”
Bernanke said the economy started picking up in the second half of last year as businesses boosted production, but warned that “a significant amount of time will be required to restore the 8.5 million jobs that were lost during the past two years.”
Younger workers “may be particularly adversely affected” as they struggle to get a first job, Bernanke said.
“I am particularly concerned about the fact that in March, 44 percent of the unemployed had been without a job for six months or more,” he said. The nationwide unemployment rate held steady at 9.7 percent last month. Bernanke also noted the possibility that unemployment will stay “stubbornly high, around 10 percent,” which could undermine consumer confidence down the line.
Bernanke said the Fed is working to encourage sound lending by training bank examiners and conducting research to find out what credit barriers impede small businesses, which are critical to job creation.
“It makes sense from an empathetic perspective and an economic perspective to get small business rolling again,” Bernanke said in response to committee members’ spirited stories of small business owners seeking capital. “We’re looking for feedback and ideas from the banks.”
As part of its recovery strategy, the Fed has trained 1,000 federal and state examiners to work with banks to restructure loans, manage commercial real estate exposures and bump up small-business lending, Bernanke said.
“We have issued very strong guidance to banks and examiners that loans not be based on ability to pay, that decline in value of collateral is not a reason to deny a loan,” Bernanke said. “Banks need to evaluate every loan on its own two feet. We want to make sure credit-worthy borrowers are able to access credit.”
Bernanke said the Fed is also heavily researching factors that could contribute to solid economic growth. “We’re collecting extra data that we didn’t collect before about small business lending to see how we can better meet this need.”
When asked if the economy could slip into another recession, Bernanke said, “The risk of a double dip is certainly less than it was a few months ago. It looks like the financial markets are more stable. Banks are still working their way out. Consumer looks to be doing better.”
Overall, Bernanke sounded positive about recovery. “We’re seeing building momentum in final demand and consumer spending,” he said.
But Bernanke issued a stern warning about the skyrocketing federal deficit. Though some of the deficit can be attributed to recovery spending, he said, “an important part of the deficit appears to be structural; that is, it is expected to remain even after economic and financial conditions have returned to normal.”
When asked if the United States was on a sustainable path, Bernanke replied, “A structural deficit between 4 and 9 percent is not sustainable.”
“Clearly, at some point, we need to make sure that we have a sustainable fiscal program,” he said. “Not this year, but over the medium term.”
Sen. Sam Brownback, R-Kan., asked the Fed chair to speculate when foreign markets might react by raising interest rates and cutting off lending to the United States.
“We don’t know when that point would be reached,” Bernanke said, adding that “it’s absolutely possible” that it could happen now.
“The market is currently expressing confidence that the U.S. will have a strong fiscal policy in the future,” Bernanke said, but he said the nation has to develop a sustainable financial outlook. “If we don’t do it, it wouldn’t be something we’d have to worry about in 2040, we’d have to worry about it Wednesday,” he said.
Sen. Charles Schumer, D-N.Y., asked him to explain why China continues to keep its currency, the yuan, pegged to the dollar. Bernanke responded that the country was being “conservative,” pointing out that it would be good for China’s own economy to move to a free-flowing exchange rate. He said the United States should “continue to press” China on the issue.
Near the end of the hearing, Rep. Vic Snyder, D-Ark., seconded another committee member’s sentiment that Bernanke had “quelled the panic” by leading the injection of $1.3 trillion of liquidity into the markets in fall 2008. Snyder said the action could be “tombstone material” for Bernanke, but quickly held up his hand to qualify, “decades from now.”
Bernanke last testified before the committee in May 2009.