Ben Bernanke, Federal Reserve Chairman, recently announced his intentions of forming a plan that will decrease the federal deficit in the near future. Bernanke told The New York Times, “Although sizable deficits are unavoidable in the near term, maintaining the confidence of the public and financial markets requires that policy makers move decisively to set the federal budget on a trajectory toward sustainable fiscal balance.” He continued to explain the government’s pending decisions about the deficit saying that “postponing them will only make them more difficult” in the long run.

An acceptable plan of controlling the federal deficit could help lower interest rates. Bernanke did not reveal any new reasoning behind the Fed’s stance that short-term interest rates will remain near zero for the time being, but he said the time period is contingent on a number of factors including high unemployment, inflation and expected inflation for the future. Bernanke is adamant that if the situation changes drastically or if change is anticipated that they will take it into consideration and respond appropriately.

Inflation remains low. Personal consumption spending has steadily risen at a rate of 1.25 percent annually and, excluding the most unstable prices, core inflation is rising at a rate of .05 percent annually. Though Bernanke said that a moderate recovery is underway, he also stressed that it will take a long time before the jobs lost by the recession are recovered and the economy improves.

Bernanke warned last week in a speech in Dallas, of the consequences for the aging of the American population. Though he did not specify whether or not he thinks the government should raise taxes or make cuts to social security, he did warn of the nation’s growing debts and how this may frighten investors and cause the government to borrow even more money.

The New York Times reported Bernanke saying that, “At some point, the markets will make a judgment about, really, not our economic capacity but our political ability, our political will, to achieve longer-term sustainability,” and, “At that point interest rates could go up and that would be, of course, a negative for economic growth and recovery.” Bernanke went on to explain that this could happen right now but that the markets currently have a lot of confidence in the political system and its fiscal policy in the future.

Over the next two years, the deficit should start to decrease as the stimulus slows down and the recovery brings in more revenue, but the deficit is still anticipated to be four or five percent of GDP through the year 2020. Bernanke adds that the deficit could reach nine percent of GDP by 2020 if there is spending growing at the rate of GDP, an extension of tax cuts, and an inflation-indexed alternative minimum tax.

Bernanke also said that the Fed will not attempt to monetize debts simply by increasing the money and credit supply and stimulating inflation. Bernanke told The New York Times that, “Given that so many of our obligations are either short-term or indexed or real obligations, such as medical obligations or Social Security obligations, which are indexed, it wouldn’t have a substantial effect, even if there were willingness to that, which, of course, there is not,” and, “Inflation is just not an answer, either for economic reasons and just because it wouldn’t affect the balance very much.”

According to Bernanke the economy has begun to recover in the second half of 2009, but he insists that something must be done about the federal deficit for the future success of the economy.

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