Federal Reserve: ‘Fiscal consolidation is needed’

Federal Reserve Chairman Ben Bernanke says he has confidence that the U.S. will be able to “financially” close the budget deficit by the end of the year, in spite of a potential recession.

Bernanke told a conference call with reporters Thursday that “fiscal consolidation and stabilizing of the economy” are the key to reaching that goal.

“In the longer term, there is a very strong likelihood that we will be in a surplus,” Bernanke said.

Bernhardt said the Federal Reserve expects to reduce the unemployment rate to 7.5% by the middle of next year.

“The longer we can stabilize the economy, the more likely it is that we are going to be able, if the economy continues to move in a positive direction, to achieve a higher growth rate,” Bernhardt told the conference call.

Bernstein did not provide details about what would be necessary to achieve the goal.

He said the economy is doing well but the unemployment gap is still growing at a “very slow pace.”

“If the economy remains in a negative trend, then we may not be able — if we are very lucky — to get a very long-term fiscal consolidation that will be enough to close the deficit,” Bernstein said.

“So I think there is still some room for fiscal consolidation.”

Bernanke is set to leave office in January 2021, after his second term as Fed chair ends.

The central bank said Thursday it expects the U-turn on fiscal policy in the wake of the presidential election to come in the second half of 2021.

“As we have discussed, the Fed should expect fiscal policy to remain accommodative, as a means of preventing further increases in the unemployment and other unemployment-related pressures, as well as to achieve some accommodation of economic and financial conditions,” Bernard said.

The Fed has cut its benchmark overnight interest rate twice this year and the agency also raised the benchmark rate to 0.25% from zero.

The decision to hold the overnight rate steady comes amid signs that the economy may be slowing down as people take on more debt, especially for housing and retirement.

Bernardo Soto, an economist with Capital Economics, said the central bank may be trying to avoid making an abrupt change to its approach to fiscal policy.

“We think that a lot of the Fed’s efforts to keep the unemployment level below the long-run goal of 7.0% will probably be focused on what we might call ‘rebalancing,’ or trying to stabilize the labor market in a way that will allow the economy to move further into the long term,” he said.

He also said Bernanke may be looking for ways to increase the rate of interest.

“A lot of what they’re trying to do is just to hold on to a rate of 1.0%, which would allow them to do the normal economic adjustment process.

That’s not necessarily what they want to do, though, because they want more flexibility to try to manage the economy more effectively,” Soto said.

On Thursday, Bernanke also said he was “surprised” by some economists who believe the Fed may be making too many policy decisions in an effort to balance the budget.

“There’s no doubt that the monetary policy regime is changing and we are moving in the right direction, but the policy decisions we make today are not necessarily aligned with the direction of the monetary system as it exists,” Bernardo said.

Federal Reserve Vice Chairman Jerome Powell also acknowledged that “we need to look at a lot more” of policy decisions to balance out the budget, but said he thought the central banking system was working.

“I think there’s still a lot that’s not quite right,” Powell said.

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