Federal Reserve Chairman Ben Bernanke is warning that – even as the nation struggles to recover from the worst recession in 75 years – Congress must deal with an “unsustainable” level of debt. “Our nation’s fiscal position has deteriorated appreciably since the onset of the financial crisis and the recession,” Bernanke said in testimony before the House Budget Committee.
Although Bernanke admits that the deficit was a necessary evil designed to bring the nation out of a deep recession, it has to be addressed in the long term because of the European debt crisis. The budget deficit gap will narrow as the economy improves and stimulus programs are phased out. The Fed chairman still sees several drags on the economy. First and foremost is the jobless rate, which stands at 9.7 percent nationally, as well as the housing market that is plagued by foreclosures and short sales – of which 4.5 million are expected this year. The good news is that the Fed’s recently updated Beige Book found that consumer and business spending are up slightly. There is limited growth in the manufacturing, non-financial services and transportation sectors.
The housing market is expected to remain flat, thanks to the expiration of government-funded subsidies. According to the Mortgage Bankers Association, the number of people applying for mortgages has fallen to its lowest level in 13 years. Tourism also is down, partly because of the Gulf of Mexico oil spill. Inflation also is low, making it probable that the Fed will keep the benchmark U.S. interest rate close to zero.
The Fed is planning to purchase as much as $1.25 trillion of mortgage-backed securities, $200 billion of federal agency debt by the end of 2009, and $300 billion in long-term Treasuries by September. Bernanke believes that some of these assets may remain on the Fed’s books for an undetermined period of time.