Federal Reserve Chairman Ben Bernanke warned that failure to lift the U.S. debt ceiling would throw the financial system into tremendous disarray. He outlined potential consequences while answering questions in his semi-annual testimony to Congress:
“There would have to be significant cuts in Social Security, Medicare, military pay or some combination of those in order to avoid borrowing more money. If in fact we ended up defaulting on the debt or even if we didn’t I think it’s possible that simply defaulting on our obligations to our citizens might be enough to create a downgrade in credit ratings and higher interest rates for us, which would be counterproductive of course because that makes the deficit worse.”
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Bernanke also indicated the Federal Reserve is ready to give more support to the struggling U.S. economy. He said the central bank is ready to ease monetary policy further, if the economy weakens and inflation moves lower.
“We have a number of ways in which we could act to ease financial conditions. One option would be to provide more explicit guidance about the period over which the federal funds rate and the balance sheet would remain at their current levels. Another approach would be to initiate more securities purchases or to increase the average maturity of our holdings. The Federal Reserve could also reduce the 25 basis point rate of interest it pays to banks on their reserves, thereby putting downward pressure on short term rates more generally.”
Bernanke also said the Fed is focused on the jobs picture, and sees employment as an important aspect of the current economic problems.
Bottom line: U.S. Federal Reserve Chairman Ben Bernanke warned failure to lift the debt ceiling would throw the financial system into enormous disarray. He also said the Fed has more it can do to help the U.S. economy if needed.