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Washington • Federal Reserve Chairman Ben S. Bernanke warned Tuesday that budget cuts under the upcoming sequestration would create a "significant" burden on an economy that is growing only moderately.
In his semi-annual economic report to Congress, the Fed chief urged lawmakers and the Obama administration to "consider replacing the sharp, front-loaded spending cuts required by the sequestration with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run."
He told the Senate Banking Committee that the sequestration set to take effect March 1, which would cut federal spending by $85 billion this year, and other recent near-term budget changes could create a "significant head wind for the economic recovery."
"Besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions," he said in prepared remarks.
Bernanke said that the economy was continuing to grow at a moderate pace and that the flattening of growth late last year did not indicate a "stalling-out" of the recovery, but instead reflected weather-related disruptions and other transitory factors.
Still, Bernanke again highlighted the weakness and hardships in the labor market, noting the high unemployment rate and the millions of people struggling with long-term joblessness and the inability to obtain full-time work.
In addition to the slow recovery and the risks of sequestration, Bernanke's remarks came as the U.S. and the world faced renewed threats from the eurozone debt crisis, which had quieted since late last year but reawakened this week in the wake of an impasse in Italian elections.
Inside and outside the Fed, experts and policymakers are concerned that the Fed's easy-money policies could be sowing the seeds of runaway inflation, asset bubbles and unstable financial markets down the road.