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Fallout: The Financial Crisis

Why is Bernanke a deficit hawk now?

Amy Scott Jun 3, 2009
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Fallout: The Financial Crisis

Why is Bernanke a deficit hawk now?

Amy Scott Jun 3, 2009
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TEXT OF STORY

Kai Ryssdal: When Ben Bernanke decides to make news, he doesn’t really pull any punches, does he? The chairman of the Federal Reserve was on Capitol Hill today. And he used his moment in the spotlight to warn Congress about the growing budget deficit.

Washington is going to shell out almost $2 trillion more than it takes in this year. Of course all that spending was meant to rescue the U.S. economy from disaster. And there are signs that some of the money may be doing what it was supposed to do. So this morning’s pronouncements by the Fed chairman prompt this question: Why’s he such a deficit hawk now? Marketplace’s Amy Scott reports.


AMY SCOTT: Bernanke warned members of Congress today that all their stimulus spending could eventually hurt the economy.

BEN BERNANKE: Even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we as a nation begin planning now for the restoration of fiscal balance.

By confidence of the financial markets Bernanke means confidence that U.S. treasuries remain good long-term investments. Lately, bond investors have started worrying that all that deficit spending could lead to higher inflation. They also worry that all the borrowing could make the U.S. government less credit-worthy. So as the Treasury sells more long-term bonds, it’s having to pay higher interest rates.

Axel Merk is president of Merk Investments. He says the Fed is counting on low interest rates to jump start the housing market and revive the economy.

AXEL MERK: The best thing that the Fed can do is try to talk down interest rates, talk some calm into the markets, so the cost of borrowing doesn’t soar.

Today Bernanke downplayed any concerns about inflation. But in the last few months market predictions of inflation have jumped. Guy LeBas is a strategist at Janney Montgomery Scott.

GUY LEBAS: In reality one of the best indicators we have about future inflation is the market’s expectations of inflation, so I’m quite sure the Fed was watching those figures.

You have to remember Bernanke’s job is to keep inflation at bay. Sometimes that means managing expectations.

In New York, I’m Amy Scott for Marketplace.

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