“Although historical experience and economic theory do not indicate the exact threshold at which the perceived risks associated with the U.S. public debt would increase markedly, we can be sure that, without corrective action, our fiscal trajectory will move the nation even closer to that point,” Bernanke said in testimony.
Bernanke said resolving this issue should be a top priority for policymakers to stabilize debt relative to the country’s income, or preferably, take steps to see the deficit decline over time.
“Even the prospect of unsustainable deficits has costs, including an increased possibility of a sudden fiscal crisis,” said Bernanke. “As we have seen in a number of countries recently, interest rates can soar quickly if investors lose confidence in the ability of a government to manage its fiscal policy.”
The Fed chairman said “achieving long-term fiscal sustainability and avoiding fiscal headwinds” are two mutually reinforcing goals.
“On the one hand, a more robust recovery will lead to lower deficits and debt in coming years,” said Bernanke. “On the other hand, a plan that clearly and credibly puts fiscal policy on a path to sustainability could keep longer-term interest rates low and improve household and business confidence, thereby supporting improved economic performance today.”
Bernanke also warned that events in Europe could put the U.S.' economic recovery at risk.
“They are working hard to address their fiscal and financial challenges,” he said. “Nonetheless, risks remain that developments in Europe or elsewhere may unfold unfavorably and could worsen economic prospects here at home.”
Bernanke said the Fed keeps in close contact with European authorities and will continue to monitor the situation closer to help protect the U.S. financial system and economy.
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