Bernanke warns of sharp cuts in spending

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Federal Reserve Chairman Ben Bernanke on Wednesday warned against sharp cuts in United States spending at a time when the economic recovery is still fragile enough to require extraordinary support from the central bank.

Even as he warned about the need for a long-term plan to address "unsustainable" budget deficits, Bernanke said steep reductions in government outlays could compromise growth at a time when employment is just beginning to rebound.

"The cost to the recovery would outweigh the benefits in terms of fiscal discipline," Bernanke told the House of Representatives' Budget Committee. "I think we really need to take a long-term view."

Bernanke offered few clues into whether the Fed might extend its controversial policy of buying US$600 billion in government bonds beyond its June deadline, nor did he signal any inclination to cut the program short.

The Fed launched the bond-buying plan in November in a bid to keep long-term borrowing costs down and support a fragile economic rebound.

Acknowledging renewed momentum in the economy, Bernanke said a drop in the jobless rate to 9 percent in January from 9.8 percent in November, the biggest two-month decline since 1958, was "grounds for optimism."

However, he said hiring is still anemic and noted that the economy has made up just over one million of the more than eight million jobs lost during the recession.

"This gain was ... not enough to significantly erode the wide margin of slack that remains in our labor market," he said. "Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established.

In separate remarks, Atlanta Fed President Dennis Lockhart indicated the bar will be relatively high for extending the Fed's bond purchases beyond June.

"It depends entirely on the state of the economy and if I take my base case forecast, which continues the moderate rate of growth through 2011 and for 2012, I'm not sure it will be necessary," Lockhart said after a speech to a group of professional accountants.

Brian Sack, head of the powerful New York Fed markets group charged with implementing Fed policy, sounded a similar note. "The issue for the prospect of an additional round of asset purchases would need to be calibrated with whether it is appropriate given the shift in the economic outlook."

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