Ben Bernanke goes on record to warn US deficit 'not sustainable' By Dominic Rushe 28 Apr

 Obama must address debt quickly, warns Federal Reserve chief, while interest rates will stay low to protect recovery.

                                                                                                       Photograph: Jason Reed/Reuters

 Ben Bernanke, chairman of the US Federal Reserve, warned that the US deficit is 'not sustainable' in his first conference.

 

 Federal Reserve chairman Ben Bernanke used his historic first conference to warn that the US deficit is "not sustainable" and tell political leaders they must address it "as quickly and effectively as they can".

 Speaking at what was the first ever press conference on interest rate policy to be given by a Fed chairman, Bernanke confirmed that the US will keep interest rates low and continue its huge programme of buying back government bonds in order to keep the fragile economic recovery on track.

 The conference followed a statement from the federal open market committee, which stated that the US recovery was "proceeding at a moderate pace, and overall conditions in the labour market are improving gradually". Household spending and business investment were picking up, but construction and the housing sector remained depressed, said the committee.

 The committee's report was backed by government figures showing that orders for durable goods rose in March for a third consecutive month, demonstrating that businesses are spending to update equipment.

 With the recovery still fragile, the committee said it would continue with a policy that has seen short-term interest rates driven down to near zero, and complete its controversial $600bn (£360bn) bond-buying programme designed to pump cash into the US economy.

 At the press conference, Bernanke acknowledged fears that inflation could be a threat, but said interest rates were unlikely to change in the next few months.

 The committee played down inflationary fears in its statement. "Commodity prices have risen significantly since last summer, and concerns about global supplies of crude oil have contributed to a further increase in oil prices since the committee met in March. Inflation has picked up in recent months, but longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued."

 As the Fed winds down its stimulus programme, attention is shifting to when and how it should start raising interest rates to prevent inflation from getting out of control. Two weeks ago, the European Central Bank raised its key policy rate to 1.25% in response to inflationary fears.

 But Bernanke seemed more concerned about the size of the US deficit. Last week credit rating agency Standard & Poor's threatened to cut the US's top-tier credit rating. Asked about S&P's move, Bernanke said: "I'm hopeful this event will provide one more incentive for Congress and the political leaders to take action ... it's the most important economic problem in the long term that the US faces," said Bernanke. If the S&P's warning "goads" action by political leaders, he said, "that's constructive".

 Paul Davies, at Capital Economics, said that having a press conference was a step in the right direction: "The more information out there, the better." He believed it would attract more attention than the short statement the Fed traditionally gave out. "It gives the Fed a chance to correct any misconceptions it thinks have found their way into the markets. This is a great soapbox from which to do that," he said.

 But Davies warned that the press conference was likely to put more emphasis on Bernanke, and detract from the fact that that decisions are made by a committee and not an individual. Putting the Fed chairman in front of the cameras would put more pressure on whoever held the job to be media-savvy, he said. "I think that is the direction that things have been travelling in for some time. We see that with Mervyn King in the UK, who has become very adept at press conferences."

©guardian.co.uk