What Fed Chairman Ben Bernanke said on Wednesday that the Republican spending cut plan will not dent the U.S. economic growth but may mean 200,000 lost jobs in 2 years does not go with 700,000 losses mentioned by Democrats nor with the gains expected by Republicans.
He said the $60 billion cut sought by Republicans may decrease growth by 2/10 of the percentage points in year 1 and 1/10 in year 2. When asked of the chances of job losses affecting the recovery, Bernanke said longer-term budget deficit may be raising concerns, unemployment reduction remains as the Fed’s priority.
The current fiscal year budget (including the $61 billion in spending cuts) was already approved by the Republican-dominated House but Senate’s Democrats see this as a threat to the economic recovery. A spending legislation needs the nod of both Congress chambers before it can be made into law.
The budget is strongly debated over by Congress members as the Tea Party fiscal conservative-edged Republicans made deep spending cuts and puts precedence on rapid deficit decrease. On Tuesday, the Senate permitted a bill passed by the House prolonging government funding by 2 weeks. It comes with $4 billion in non-controversial spending cuts.
This is viewed by House Republicans as their bigger objective’s initial payment. It may stop looming federal government shutdown but it does not solve the budget issue.
To bolster the economy and job growth, $600 billion-bond buying program was announced by the Fed in November and although January joblessness rate went down to 9%, it is persistently high. If this is not significantly reduced, Bernanke said it may undercut recovery. Friday’s report is expected by economists to reflect a 9.1% increase in jobless rate.
The 200,000 jobs loss that Bernanke estimated is only 0.1% of today’s labor force because 82,000 monthly jobs were added in the past 12 months. Economists believe this growth is moving fast but economist Mark Zandi said the Republican proposal could result to 700,00 less jobs by 2012’s end.
The office of House Speaker John Boehner said the job losses forecast of economist John Taylor is flawed. Taylor wrote that plan to reduce the deficit will increase economic growth and reduce unemployment by removing uncertainty and lowering the chances of large tax increases in the future.
Goldman Sachs economist Jan Hatzius’ estimate is that about 1.5% to 2% may be reduced off of the yearly economic growth for the 2nd and 3rd quarter of 2011. About 4% of the annual 2nd quarter recoil was already part of the GDP forecast of Goldman Sachs.
Bernanke was not sure why there are conflicting private forecasters’ analyses.
Bernanke said in a separate talk on Wednesday that the better economic outlook should relieve local governments after strains experienced from the downturn.
On the other hand, the growth’s meek growth signals it will take longer before things normalize but municipal bond markets are more relaxed now that budget loss is being addressed.