Bernanke: Budget Deficits Hurt Financial StabilityFederal Reserve Chairman Ben Bernanke says large domestic budget deficits will hurt financial stability, and the federal government can't continue indefinitely to borrow at the current rate to finance the shortfall.
"Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth," Bernanke said in testimony to legislative members of the Committee on the Budget on Wednesday.
"Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance." Bernanke's speech is a sign that the Federal Reserve sees risks of a relapse into financial turmoil even as credit markets show signs of stability. Bernanke says the Federal Reserve will not finance government spending over the long term, and warns the financial industry remains under stress and the credit crunch continues to limit spending.
The Federal Reserve Chairman notes deficit concerns are already influencing the prices of long-term Treasuries. Yields on 10-year notes have climbed about 1 percentage point since the Federal Reserve announced plans in March to buy $300 billion of long-term government bonds.
"In recent weeks, yields on longer-term Treasury securities and fixed-rate mortgages have risen," Bernanke said. "These increases appear to reflect concerns about large federal deficits, but also other causes, including greater optimism about the economic outlook, a reversal of flight-to-quality flows and technical factors related to the hedging of mortgage holdings."
The budget deficit this year is projected to reach $1.85 trillion, equivalent to 13 percent of the nation's economy, according to data from the Congressional Budget Office.
Bernanke also spoke to banks' efforts to bolster common equity in the aftermath of regulators' stress tests on the 19 largest U.S. lenders. The 10 firms that were found to have a total capital shortfall of $75 billion have now sold or announced plans to boost common equity by $48 billion.