US Federal Reserve Chairman Ben Bernanke warned US lawmakers on Thursday that they would deliver a “self-inflicted” wound to the US economy by holding up efforts to raise the government’s borrowing limit.
The Fed chief also said the central bank had no immediate plans to introduce new stimulus measures, elaborating on remarks he had made a day earlier that the Fed stood ready to take additional steps to boost the economy if conditions worsened.
His comments ended an early-morning rally on Wall Street. Traders had interpreted Wednesday’s comments to mean the Fed was about to embark on another round of bond purchases, analysts said.
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The government hit its US$14.3 trillion borrowing limit in May.
Republicans have held up increasing the limit because of concerns that excessive government spending has widened the federal deficits.
The US Treasury Department said it will default on its debt if the limit is not raised by Aug. 2.
Bernanke told a Senate panel that a default on the debt would lead to even greater federal deficits.
Interest rates would rise, and the government would be forced to pay higher rates on its debt.
At the same time, higher rates would slow the economy and an already-weak job market. That would curtail tax revenue.
“I think it would be a calamitous outcome, create a very severe financial shock,” Bernanke told the Senate Banking Committee during his second appearance before Congress this week.
“Treasury securities are critical to the entire financial system ... A default on those securities would throw the financial system ... potentially into chaos,” Bernanke said.
The Federal Reserve chairman was on Capitol Hill, Washington, to deliver his semi-annual economic report.
On Wednesday, he told a House panel that the Fed would consider various options for boosting the economy if growth does not rebound.
Stocks rose immediately after he made those comments.
However, on Thursday he made clear that the Fed had no immediate plans to launch another round of bond purchases.
He said the economy is more complex now than a year ago, when the Fed decided to institute a US$600 billion program of buying Treasury bonds to lower long-term interest rates.
Last summer, the Fed was concerned about a prolonged period of falling prices, or deflation, Bernanke said. This year, inflation is higher.
“We’d like to see if, in fact, the economy does pick up, as we are projecting ... We’re not prepared at this point to take further action” to stimulate the economy, Bernanke said.
The Fed, in its weekly accounting of the central bank’s finances, reported that its balance sheet rose to a record level of US$2.88 trillion on Wednesday.
That figure is more than three times the size of the Fed’s balance sheet before the financial crisis began.
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