Bernanke on Fiscal Exit Strategy

On December 3rd, Federal Reserve Board Chairman Ben Bernanke appeared before the Senate Banking Committee for the hearing on his nomination to a second four year term as Fed chairman. As expected, the focus was on Fed actions in the economic and financial crisis and what the Fed’s role should be when the financial services regulatory structure is reformed. But Chairman Bernanke also made some important comments on US fiscal policy during the Q&A:

"With respect to deficits ... I agree very much that we cannot continue to have deficits that make our debts relative to our GDP rise indefinitely. We need to come down, [to] deficits that are closer to 2 percent to 3 percent, at most, not 4 percent or 5 percent. If we do that, in the medium term, we can begin to stabilize the amount of debt relative to GDP. As far as the Fed is concerned, we will not monetize the debt. We will maintain price stability.

But we would not be able to do anything about interest rates going up if creditors began to lose confidence in the U.S. fiscal sustainability. So it is very important that -- I mean, this is obvious, but I think it's worth saying, and you're -- you're right to raise it, that we need not only an exit strategy for monetary policy, we very much need an exit strategy from fiscal policy, in the sense we need to get back to -- we need to have a plan, a program to get back to a sustainable fiscal trajectory in the next few years."