Bernanke Says U.S. Fiscal Outlook ‘Somewhat Dark’ (Update2)

By Vivien Lou Chen

March 25 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke told lawmakers today that the U.S. government’s budget outlook is “somewhat dark” and Congress needs to agree on a plan to reduce the deficit.

He spoke in response to a question about the budget impact of the health-care overhaul signed into law this week by President Barack Obama. Bernanke declined to discuss the effect of the health measure, saying he didn’t want to “second guess” the Congressional Budget Office.

“Clearly everyone agrees that the overall fiscal outlook for the government is somewhat dark over the medium term, and it would be very useful if there could be a bipartisan, concerted effort to explain, demonstrate and decide how the government is going to achieve a more sustainable fiscal trajectory,” he said during testimony today to the House Financial Services Committee.

Treasuries declined today, pushing the yield on 10-year debt to the highest level since June, after this week’s record- tying $118 billion note auctions drew lower-than-average demand. U.S. stocks fell for a second day on concern governments around the world will have trouble managing growing debt levels.

The yield on the 10-year note increased 3 basis points, or 0.03 percentage point, to 3.89 percent at 4:02 p.m. in New York. It reached 3.92 percent, the highest level since June 11. The Standard & Poor’s 500 Index fell 0.2 percent to 1,165.73.

‘Accommodative Policies’

“The economy continues to require the support of accommodative monetary policies,” Bernanke said earlier today in prepared testimony. He said the central bank will be ready to tighten credit “at the appropriate time.”

The U.S. budget deficit reached a record $1.4 trillion for the fiscal year that ended Sept. 30 amid falling tax revenue from the recession, a bailout of the banking and auto industries, and the $787 billion economic stimulus package. The Obama administration expects the shortfall to widen to $1.5 trillion this year.

Bernanke said the deficit was caused in part by the recession, and that there’s no need to close it immediately.

“There’s a reason for the big deficit and I do not think it is desirable or possible to get rid of it in the next year or two,” Bernanke said during the question-and-answer period.

“Down the road, when the economy operates more normally, if we could convince creditors that we will have a more sustainable situation, that will improve interest rates today and support the growth process today,” he said.

Investor Confidence

Bernanke said the deficit might affect monetary policy if it causes investors to lose confidence in the government’s ability to achieve fiscal balance.

“Interest rates might rise because of a lack of confidence by creditors in the long-term fiscal stability of the government,” and “high interest rates tend to slow the economy,” he said.

The Congressional Budget office estimates that the health- care package will cost $940 billion over 10 years and cover 32 million uninsured Americans. That’s more than made up for with a new tax on the highest earners, fees on health-care companies and hundreds of billions of dollars in Medicare savings, which will reduce the federal deficit, the CBO said.

To contact the reporter on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net