January 17, 2008

BUDGET ALERT: Bernanke Testifies on the Economy

This morning, Federal Reserve Chairman Bernanke testified at the House Budget Committee on the current state of the economy, as well as his views on an economic stimulus package. Key points in his testimony follow.

Economic Growth: "The slowing in residential construction, which subtracted about 1 percentage point from the growth rate of real gross domestic product in the third quarter of 2007, likely curtailed growth even more in the fourth quarter, and it may continue to be a drag on growth for a good part of this year as well."

Inflation: "Prices in November were 3.6 percent higher than they were a year earlier....overall and core inflation should moderate this year and next, so long as the public's confidence in the Federal Reserve's commitment to price stability is unshaken."

Actions by the Federal Reserve: "We have brought the federal funds rate down by 1 percentage point from its level just before the financial strains emerged....(I)n light of recent changes in the outlook for and the risks to growth, additional policy easing may well be necessary." (emphasis added)

Comments regarding congressional action on a fiscal stimulus package: "To be useful, a fiscal stimulus package should be implemented quickly and structured so that its effects on aggregate spending are felt as much as possible within the next twelve months or so....any program should be explicitly temporary, both to avoid unwanted stimulus beyond the near-term horizon and, importantly, to preclude an increase in the federal government's structural budget deficit....the nation faces daunting long-run budget challenges associated with an aging population, rising health-care costs, and other factors."

Making the Tax Cuts Permanent: Chairman Bernanke carefully avoided stating any position on extending the tax cuts that expire in 2010. However, he suggested that extension of the expiring tax cuts would not be relevant to short-term stimulus:

"I think those who support making the president's tax cuts permanent, I think they would say that the primary reasons for advocating that would be for long-term growth purposes. And so, our discussion today is about short-term stimulus. And I think, from the point of view of getting stimulus in the next few months... the evidence suggests that measures that involve putting money in the hands of households and firms that will spend it in the near term will be more effective."

What to watch for: A key item to watch for is whether the President will attempt to bolster his case for making the tax cuts permanent by citing the need for economic stimulus. Another issue is whether congressional Democratic and Republican leaders will be able to temporarily set aside debate on extending the President's tax cuts and negotiate a genuine short-term stimulus package. Finally, Democrats will have an internal debate on whether the pay-as-you-go, or PAYGO, rules adopted in 2007 should be waived for purposes of a stimulus package.

Bernanke Testimony