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It's too soon for austerity, Ben Bernanke tells Congress

Guardian Economics 23rd July 2010

The head of America's central bank, Ben Bernanke, warned against immediate European-style budget austerity measures yesterday when he insisted that withdrawing fiscal stimulus was too risky for the recession-threatened US economy.

In a second day of testimony to Congress, Bernanke said the Obama administration should delay measures to reduce Washington's record budget deficits by cutting spending or increasing taxes.

"I believe we should maintain our stimulus in the short term," Bernanke said, as the latest batch of economic data from the world's biggest economy showed an increase in weekly unemployment claims, a drop in home sales and the second easing of activity in three months.

Bernanke's opposition to fiscal retrenchment until economic recovery has been assured is in contrast to the approach favoured by Britain and the eurozone countries, where governments believe action to reduce budget deficits cannot be delayed.

Share prices rose as the Fed chairman's pledge to take action to avoid a double-dip recession raised the spirits of Wall Street, which was also buoyed up by news of strong corporate earnings. The Dow Jones industrial average closed up 201 points, more than making up for the 100-point drop the previous day.

"We are ready and will act if the economy does not continue to improve, if we don't see the kind of improvements in the labour market that we are hoping for and expecting," Bernanke told the House of Representatives financial services committee. His remarks were seen as a hint that the Fed would resume its programme of quantitative easing – the creation of electronic money through the purchase of bonds – should the economy continue to struggle over the coming months.

Stocks had sagged on Wednesday after Bernanke indicated that the Fed was unlikely to take immediate steps to help the economy through its latest soft patch. He stressed that the central bank was concerned about the 9.5% unemployment rate and continued weakness in the housing market, where one in four homebuyers are suffering from negative equity.

Figures released yesterday from the US labour department showed new claims for unemployment insurance climbed by a seasonally-adjusted 37,000 to 464,000 last week. The National Association of Realtors said sales of existing homes had dropped 5.1% in June, the second monthly decline following the expiry of a US government tax break for property buyers.

After rising steadily since the spring of 2009, the leading indicator of future US economic activity published by the Conference Board edged lower by 0.2% last month. This followed a 0.1% decline in April and a 0.5% rise in May.

Conference Board economist Ken Goldstein said the figures pointed to slower growth ahead. He said that the rebound in manufacturing was likely to lose momentum and that there was "little indication" of a pick-up in the service sector.

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