Bernanke Urges Deficit Reduction

From Wsj.com

Federal Reserve Chairman Ben Bernanke warned Congress and the White House that the U.S. economy will suffer if they don't move soon to rein in the federal budget deficit, which the Fed chief blamed for helping to push long-term interest rates higher.

Mr. Bernanke, who offered an important voice of support earlier this year to the Obama administration's $787 billion fiscal stimulus plan, told Congress Wednesday, "Even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance."

Yields on long-term Treasury bonds have been rising despite the Fed's efforts to push them down by purchasing Treasury securities. The Fed wants Treasury yields lower because they are a benchmark for many other private-sector interest rates -- such as rates on mortgages or corporate bonds.

"Concerns about large federal deficits," Mr. Bernanke said, are one cause of the unwanted rise in yields. The wider the deficits, the more the Treasury borrows and the higher rates go. Wider deficits also stir inflation fears, which also push Treasury yields up.