ANN ARBOR, Michigan (Reuters) - Federal Reserve Chairman Ben Bernanke urged U.S. lawmakers on Monday to lift the country’s borrowing limit to avoid a potentially disastrous debt default, warning that the economy was still at risk from political gridlock over the deficit.
“Not raising the debt ceiling is like a family, which is trying to improve its credit rating saying, ‘Oh, I know how we can save money, we won’t pay our credit bills,'” he told an event sponsored by the University of Michigan.
In a wide-ranging question and answer session, Bernanke painted a cautiously optimistic outlook for U.S. growth but gave no clear hints on when the Fed would curb its aggressive bond purchases, despite speculation that it will halt this year.
He also chided Congress for casting doubts over the country’s commitment to pay its debts, echoing remarks by President Barack Obama earlier in the day.
“It’s very, very important that Congress takes the necessary action to raise the debt ceiling to avoid a situation where our government doesn’t pay its bills,” the Fed chief said.
The United States scraped up against its $16.4 trillion debt ceiling on December 31 and is now employing special measures to meet its financial obligations. The Treasury Department said those steps could be exhausted by mid-February.
Republicans want to use the need to increase the nation’s borrowing authority as leverage to push for deep government spending cuts. Obama told a news conference that he would not negotiate over the borrowing limit.
U.S. leaders agreed at the beginning of January to extend tax cuts for all American families earning less than $450,000 a year to avoid a portion of a “fiscal cliff” of policies that Bernanke had said would likely tip the economy into recession.
But lawmakers must still navigate the debt limit as well as thrash out a deal over drastic automatic spending cuts that were postponed until March 1, and the Fed’s influential chairman warned that a fiscal impasse could still hurt the recovery.
“We’re not out of the woods because we are approaching a number of other fiscal critical watersheds coming up,” Bernanke said.
Bernanke said the economy appeared to be responding to the Fed’s aggressive easing of monetary policy, but not as fast as the central bank would like. “I want to be clear that while we’ve made progress, there’s still quite a ways to go before we’ll be satisfied,” he said.
The Fed has held interest rates near zero since December 2008 and last month decided to keep buying $85 billion worth of Treasury bonds and mortgage-backed securities a month until it saw a significant improvement in the labor market outlook.
Minutes of the Fed’s December 11-12 policy meeting released this month showed several policy makers favored ending bond buying well before the end of this year, while a few officials thought purchases would be warranted until the end of 2013.
Those minutes led to a sharp selloff in the bond market, and investors are keen for a clearer signal on how soon the asset purchases will ended.
Bernanke largely kept them guessing.
“He might be a little more optimistic because of the ‘fiscal cliff’ deal. He’s still pretty dovish and still unsatisfied with where the economy is,” said Craig Dismuke, chief economic strategist at Vining Sparks in Memphis, Tennessee.
Bernanke said the purchases seemed to be effective in lowering the cost of borrowing, but stressed the Fed was closely watching for any unintended consequences amid concern from some critics that it could fuel an asset price bubble.
“We have found this to be an effective tool, but we are going to continue to assess how effective because it is possible that as you move through time and a situation changes that the impact of these tools could vary,” he said. “When something is more costly, you do a little bit less of it.”
San Francisco Federal Reserve Bank President John Williams said earlier on Monday that he expected the central bank’s bond buying would be needed ”well into the second half of 2013.
A third policy-maker, Atlanta Fed chief Dennis Lockhart, stressed that the open-ended or meeting-to-meeting nature of the Fed’s bond-buying program did not mean the policy would continue indefinitely.
“‘Open ended’ does not mean ‘without bound.’ The program is not ‘QE Infinity,'” he told the Rotary Club of Atlanta.
Additional reporting by Ann Saphir in Half Moon Bay, Calif., Pedro Nicolaci da Costa in Atlanta and Richard Leong in New York; writing by Alister Bull; editing by Leslie Adler and Bob Burgdorfer