By Erik Wasson - 02/02/12 03:16 PM EST
Federal Reserve Chairman Ben Bernanke on Thursday said the economic recovery remains “frustratingly slow,” and warned Congress the outlook for growth is “uncertain” at best.
Testifying before the House Budget Committee, Bernanke said “the sluggish expansion has left the economy vulnerable to shocks,” most notably from the debt crisis in Europe.
“Over the past two and a half years, the U.S. economy has been gradually recovering from the recent deep recession,” Bernanke said. “While conditions have certainly improved over this period, the pace of the recovery has been frustratingly slow, particularly from the perspective of the millions of workers who remain unemployed or underemployed.
The gloomy outlook from the Fed chairman spells trouble for President Obama’s reelection bid, as the economy is likely to be the top issue for voters when they head to the polls in November.
But Bernanke also said the economy could improve quickly if the European crisis subsides.
“If business confidence continues to improve, U.S. firms should be well positioned to increase both capital spending and hiring,” he said.
Republicans at the hearing took time to hit Obama’s record, noting that the administration predicted unemployment would not exceed 8 percent once the 2009 stimulus passed. It stands at 8.5 percent now and is forecast by the Congressional Budget Office to rise to 9.2 percent next year.
“The president and his party’s leaders say things are getting better,” said House Budget Committee Chairman Paul Ryan (R-Wis.). “Yet we continue to hear from families and businesses in our districts who tell us that this kind of talk is completely disconnected to reality.”
Ryan said he is concerned that the Fed has announced it will keep interest rates at historically low levels through 2014 because the policy could engender inflation. He also criticized the Fed for suggesting it would accept higher-than-desired inflation to boost unemployment, because in his view the key role of the Fed is to guard against inflation.
“I would find it very disturbing if that role were being diminished,” Ryan said.
Ryan pressed Bernanke, arguing the low interest rates could cause an asset bubble similar to the one in housing that Republicans said spawned the financial crisis.
“We fear you are going to repeat these same mistakes,” Ryan said.
He added that the Fed appeared to be bailing out Congress, which has failed to boost the economy by addressing the deficit.
Two percent inflation remains the Fed’s target, Bernanke said, and “we will not actively seek to raise inflation or to move away from the target.”
Budget Committee ranking member Chris Van Hollen (D-Md.) responded that at a time of high unemployment it is wrong for the GOP to try to limit the Fed’s mandate to boost jobs.
“To deprive you of the tools necessary to boost employment would be a big mistake,” he said.
On the deficit, Bernanke said getting a long-term plan in place should be a "top priority" since a debt crisis will eventually develop if the current path is followed, mainly due to healthcare costs. Bernanke was asked by Rep. Tom Cole (R-Okla.) if the administration had put forward a full deficit plan to address the problem and he said he was not aware of one.
Van Hollen called on Congress to pass Obama’s jobs stimulus plan and come together on a long-term deficit plan that includes new taxes as well as spending cuts and short-term stimulus.
Rep. Scott Garrett (R-N.J.) took Bernanke to task for a Jan. 4 white paper to Congress which Garrett said sided with the administration on propping up the housing sector.
Bernanke insisted the Fed has retained its traditional neutrality on policy questions and apologized if the paper appeared to take sides rather than laying out pros and cons.
— This story was last updated at 2:05 p.m.