Bernanke warns of catastrophe if debt limit not raised

WASHINGTON (Reuters) – Federal Reserve Chairman Ben Bernanke without interrupti~ Thursday issued a stern warning to Republican lawmakers that delays in raising the United States’ .3 trillion misdoing limit could have “catastrophic” consequences.

“Beyond a unquestioned point … the United States would be forced into a situation of defaulting on its debt. And the implications of that in c~tinuance our financial system, our fiscal policy and our economy would subsist catastrophic,” he told the National Press Club.

Bernanke coupled his portent with a call for the Obama administration and Congress to state in language in place a credible plan to curb future budget deficits.

He in like manner offered a moderately more optimistic assessment of the economy’s prospects than in other novel remarks, although he made clear the recovery still needs support from the Fed.

Some Republican leaders intend to exercise the need to raise the statutory debt ceiling as leverage by reason of spending cuts. The Obama administration has said the nation would likely hit the limit between early April and late May.

If Congress does not amplify the limit in a timely way, the government could be strained to scale back operations. A failure to lift the limit could set up the specter of a first-ever U.S. debt default and push concern rates up sharply.

Financial markets have not yet shown any tremor over the debt limit, which has typically been raised after politic grumbling, and Bernanke said the chances of a default were “same remote.”

Still, his comments echoed dire warnings issued by Treasury Secretary Timothy Geithner and other Obama superintendence officials, who have also said failure to raise the debt ceiling could have ~ing “catastrophic.”

The Fed chairman called on lawmakers not to clinch the issue hostage to the contentious debate over how best to hold in record budget gaps.

“I would very much urge Congress not to point of concentration on the debt limit as being the bargaining chip in this debate, but rather to address directly the spending and tax issues that we be under the necessity to deal with in order to make progress on this financial situation,” Bernanke said.

FED MISSING BOTH MANDATE TARGETS

In discussing the restoration, Bernanke provided a modestly more rosy outlook than he has in other late appearances, citing gains in household spending, improved consumer and business self-reliance and stepped-up bank lending as signs 2011 may bring stronger expansion than 2010.

But he made clear Fed officials were not further satisfied.

“Although economic growth will probably increase this year, we count upon the unemployment rate to remain stubbornly above, and inflation to endure stubbornly below, the levels that Federal Reserve policymakers have judged to have existence consistent over the longer term with our mandate,” he declared.

Bernanke’s comments on the economy suggest the Fed believes it has abundant of time to let its policies boost growth and pull etc. a high unemployment rate before it needs to worry about tightening fiscal conditions to keep inflation in check.