Bernanke: Economy on track to expand

Federal Reserve Chairman Ben Bernanke on Wednesday said the economy “appears to be on track” to expand, but warned rising debt will be difficult to get under control.

Gross domestic product will grow by about 3.5 percent this year and “at a somewhat faster pace next year,” Bernanke said in testimony to the House Budget Committee on the state of the economy.

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“This pace of growth, were it to be realized, would probably be associated with only a slow reduction in the unemployment rate over time,” he said. “In this environment, inflation is likely to remain subdued.”

Consumer spending would continue at a “moderate pace,” helping to sustain the economic recovery as fiscal stimulus recedes, Bernanke said.

With the economy expected to strengthen, policymakers should address the country’s rising debt, which, he said, “appears to be on an unsustainable path.”

The federal debt hit $13 trillion last month and will grow by nearly $1 trillion annually under the Obama administration’s proposed budget, according to the Congressional Budget Office.

“Achieving long-term fiscal sustainability will be difficult,” Bernanke said. “But unless we as a nation make a strong commitment to fiscal responsibility, in the longer run, we will have neither financial stability nor healthy growth.”

House Budget Committee Chairman John Spratt (D-S.C.) seized on the projections of economic growth to credit the Democrats’ stimulus spending and other recovery measures with helping avert a worse financial crisis and economic downturn.

“While everyone agrees that more progress must be made, there clearly has been some noticeable improvement from where things stood a year and a half ago,” Spratt said.

When asked whether more stimulus measures were needed, Bernanke argued that any move to boost spending should come with actions that show how the government would reduce deficits.

“You’ll have a more effective set of policies if you combine any expansion of fiscal support with other measures that reassure markets that in fact our deficits will be controlled in the medium term,” he said.

Bernanke’s tempered optimism over the economy and push for a fiscal retrenchment plan for the future comes as Congress grapples over whether to pass more stimulus legislation or cut spending immediately.

House leaders sought last month to pass extensions of expiring jobless benefits, expiring tax provisions and Medicaid aid for states that cost nearly $200 billion, but freshmen and conservative Blue Dog Democrats forced leaders to cut the cost of the bill by about a third because of deficit concerns. The Senate is debating a companion measure this week.

Bernanke warned of several factors that would restrain the recovery’s pace, including continued troubles in the housing market, the lack of credit and state and local budget cuts to public jobs and construction spending.

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The debt problems of Greece and other European problems had roiled markets but would likely have just a modest impact on the U.S. economy because of international and Fed efforts to ensure stability, Bernanke said.

“The actions taken by European leaders represent a firm commitment to resolve the prevailing stresses and restore market confidence and stability,” Bernanke said. “If markets continue to stabilize, then the effects of the crisis on economic growth in the United States seem likely to be modest.”

Republicans in Congress have criticized the European effort, and have argued that the U.S. should not get involved through the International Monetary Fund.