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Score one for the deficit terrorists
This is one of the largest risks to the recovery:
by Robert Schmidt
May 21 (Bloomberg) — Treasury Secretary Timothy Geithner said the Obama administration is committed to reducing the federal budget deficit after concerns rose that the U.S. debt rating may eventually be threatened with a downgrade.
â€œItâ€™s very important that this Congress and this president put in place policies that will bring those deficits down to a sustainable level over the medium term,â€ Geithner said in an interview with Bloomberg Television. He added that the target is reducing the gap to 3 percent of gross domestic product or smaller, from a projected 12.9 percent this year.
The dollar, Treasuries and American stocks slumped today on concern about the U.S. governmentâ€™s debt rating. Bill Gross, the co-chief investment officer of Pacific Investment Management Co., said the U.S. â€œeventuallyâ€ will lose its AAA grade.
Geithner, 47, also said that the rise in yields on Treasury securities this year â€œis a sign that things are improvingâ€ and that â€œthere is a little less acute concern about the depth of the recession.â€
Benchmark 10-year Treasury yields jumped 17 basis points to 3.37 percent at 4:53 p.m. in New York. The Standard & Poorâ€™s 500 Stock Index fell 1.7 percent to 888.33, and the dollar tumbled 0.8 percent to $1.3890 per euro.
Gross said in an interview today on Bloomberg Television that while a U.S. sovereign rating cut is â€œcertainly nothing thatâ€™s going to happen overnight,â€ financial markets are â€œbeginning to anticipate the possibility.â€
Britain saw its own AAA rating endangered earlier today when Standard & Poorâ€™s lowered its outlook on the nationâ€™s grade to â€œnegativeâ€ from â€œstable,â€ citing a debt level approaching 100 percent of U.K. GDP.
Itâ€™s â€œcritically importantâ€ to bring down the American deficit, Geithner said.
Ten-year Treasury yields have climbed about 1 percentage point so far this year, in part after U.S. economic figures indicated that the worst of the deepest recession in half a century has passed. The yield on 30-year bonds has jumped to 4.31 percent, from 2.68 percent at the beginning of the year.
The Treasury chief said itâ€™s still â€œpossibleâ€ that the unemployment rate may reach 10 percent or higher, cautioning that the economic recovery is still in the â€œearly stages.â€
â€œThe important thing to recognize is that growth will stabilize and start to increase first before unemployment peaks and starts to come down,â€ he said. â€œThese early signs of stability are very importantâ€ although â€œthis is still a very challenging period for businesses and families across the United States.â€
Initial claims for unemployment insurance fell by 12,000 in the week ended May 16 to 631,000, according to Labor Department statistics released today. Still, the number of workers collecting unemployment checks rose to a record of more than 6.6 million in the week ended May 9.
As of April, the unemployment rate was 8.9 percent, the highest level since 1983. The economy has lost 5.7 million jobs since the recession started in December 2007.