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US Fed says too early for austerity

world Updated: Jul 23, 2010 23:31 IST
America's central bank

The head of America's central bank, Ben Bernanke, warned against immediate European-style budget austerity measures 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 on Thursday that the Obama administration should delay measures to reduce Washington’s record budget deficits by cutting spending or raising tax.

"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. "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.