WASHINGTON — Federal Reserve Board Chairman Ben Bernanke criticized policymakers Friday for the political wrangling over raising the country's debt limit, and warned that more such events could do even greater harm to the economy.
"The negotiations that took place over the summer disrupted financial markets and probably the economy as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses," said Bernanke, in a widely watched speech at a conference hosted by the Federal Reserve Bank of Kansas City in Jackson Hole, Wy.
Lawmakers took negotiations over whether to raise the debt ceiling to the brink of default earlier this summer, reaching a deal at the 11th hour and prompting Standard & Poor's to downgrade the U.S.' long-held AAA credit rating for the first time in history.
Most of the economic policies needed to support U.S. growth in the long-run will come from outside of the Fed, Bernanke said. That's why policymakers should create a more effective process that sets clear and transparent budget goals.
The U.S. economy has been struggling to get back on its feet, hurt by an ailing housing market and the aftershocks of the financial crisis. The Federal Open Markets Committee had to revise its projections for the year after economic growth slowed considerably in the first half of 2011.
Bernanke offered some optimism, but stressed the importance of how future fiscal policy will be crafted as critical to a long-term recovery.
"I do not expect the long-run growth potential of the U.S. economy to be materially affected by the crisis and the recession if — and I stress if — our country takes the necessary steps to secure that outcome," said Bernanke. Otherwise, he warned, "without significant changes, the finances of the federal government will inevitably spiral out of control, risking severe economic and financial damage.
Housing activity, he said, will begin to stabilize over the medium term, just as financial markets and institutions continue to make progress toward normalization and adapting to ongoing reforms.
"The quality of economic policymaking in the United States will heavily influence the nation's longer-term prospects," said Bernanke. "To allow the economy to grow at its full potential, policymakers must work to promote macroeconomic and financial stability; adopt effective tax, trade, and regulatory policies; foster the development of a skilled workforce; encourage productive investment, both private and public; and provide appropriate support for research and development and for the adoption of new technologies."
For its part, Bernanke said the Fed still has a range of tools it can use to stimulate the economy if needed, but did not specify what those would be well. He said the FOMC discussed the "merits and costs of such tools" at its August meeting.
"We will continue to consider those and other pertinent issues, including of course economic and financial developments, at our meeting in September, which has been scheduled for two days instead of one to allow a fuller discussion," said Bernanke.
Bernanke's outlook for the banking system was largely positive.
"In the financial sphere, the U.S. banking system is generally much healthier now, with banks holding substantially more capital," he said. "Credit ability from banks has improved, though it remains tight in categories — such as small business lending — in which the balance sheets of potential borrowers remain impaired."
Even so, financial stress continues to be a drag on the economy, he said.
"Financial pressures on financial institutions and households have contributed, in turn, to greater caution in the extension of credit and to slower growth in consumer spending," said Bernanke.
That has sparked sharp volatility in the markets over concerns about European sovereign debts and the U.S.' own fiscal situation, he noted.
"It is difficult to judge by how much these developments have affected economic activity thus far, but there seems little doubt that they have hurt household and business confidence and that they pose ongoing risks to growth," said Bernanke.
The Fed, he said, will continue to monitor financial markets and institutions in Europe and elsewhere closely.
