It would appear that Federal Reserve Chairman has effectively warned the Obama administration that continuing on the current course, as planned, could be destructive to the U.S. economy.

Federal Reserve Chairman Ben Bernanke is urging Congress and the Obama administration to start plotting a strategy to curb record-high U.S. budget deficits. Failing to do so could eventually erode investor confidence and endanger the economy's prospects for long-term health, he said.

Bernanke's comments, in prepared testimony Wednesday before the House Budget Committee, come as concerns grow at home and overseas about the United States' mounting red ink...

At the same time, Bernanke warned politicians not to let those challenges "hinder timely consideration of the steps needed to address fiscal imbalances."

He cautioned: "Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth."...

Observing the recent rise in rates on mortgages and longer-term Treasury securities, Bernanke said the increases appear to reflect concerns about large federal deficits as well as greater optimism about the economic outlook...

Bernanke said getting the budget deficits under control is especially important given the huge wave of baby boomers hitting retirement that will be tapping Social Security and Medicare.

There's so much in these comments from the Federal Reserve Chairman that affirms what I've been saying that it's spooky. The chairman was basically warning about the threat that these massive deficits are posing to the economy.

I wrote about the threat these deficits present to long-term growth in February and March, and in many other comments I've posted over the last few months.

It also seems that the warning by the chairman was presented in such a way as to imply that the Federal Reserve can't just keep printing money to keep interest rates down. That apparently hasn't been said--but the fact that the chairman explained the reasons for the recent jump in interest rates without giving any indication of what the Federal Reserve would do about it, and warning the administration about its deficits, seems to suggest that the Federal Reserve is saying, "If you want lower interest rates, stop borrowing and spending so much money."

It seems clear that the chairman realizes--and has said--that the long-term stability of the economy (in part driven by realistic interest rates) is going to depend more on what the Federal Government borrows and spends than on any magic the administration might hope the Federal Reserve can conduct.

If that's really the correct message we get from reading between the lines of the chairman's statements, that would suggest the Federal Reserve may be shying away from printing more money to artificially lower rates. That'd be a good thing in the long-term since it lets real market forces work--but it would drive interest rates up, possibly stunt the recovery, and very possibly force Obama to cut spending.

With such a potentially drastic impact on the government and the economy, and considering it would seem the Federal Reserve has lost its independence , the Federal Reserve might yet still just engage in the "easy way out" and keep the printing presses running. It does, however, seem that the Federal Reserve is growing increasingly weary of that band-aid solution.

Stopping the printing presses is not going to be comfortable whether we stop them today or a year from now. But the longer we keep printing money, the greater the eventual pain to the economy and to individuals when we eventually do stop.

Update 6/3/2009: More voices are chiming in that agree that the Federal Reserve needs to stop printing money. This voice is from the president of the Kansas City Federal Reserve bank. His comments are basically in support of letting interest rates rise. That would be accomplished by ceasing the printing of money and letting market forces work on their own. The problem is that that would lead to higher interest rates and also make it effectively impossible for the federal government to continue funding all its deficit spending. Of course, that's not really a problem--that's the solution!



Rising yields on long-term Treasury debt is a signal that the Federal Reserve should being raising interest rates, said Thomas Hoenig, the president of the Kansas City Federal Reserve district bank on Wednesday. The higher yields are a signal that the market is concerned with the inflationary pressure from the high federal budget deficit and "very" accommodative monetary policy, Hoenig said in a speech in Wyoming. "I suggest strongly that we need to be alert to the markets' message and begin in earnest to bring monetary policy into better balance before inflation forces get out of hand," Hoenig said.