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Article posted: 11/20/2012 11:50 AM

Bernanke warns Congress to avoid 'fiscal cliff'

Federal Reserve Chairman Ben Bernanke

Federal Reserve Chairman Ben Bernanke

 

Associated Press

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By Associated Press

WASHINGTON -- Federal Reserve Chairman Ben Bernanke on Tuesday urged Congress and the Obama administration to strike a budget deal to avert tax increases and spending cuts that could trigger a recession next year.

Without a deal, the measures known as the "fiscal cliff" will take effect in January.

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Bernanke also said Congress must raise the federal debt limit to prevent the government from defaulting on Treasurys debt. He said a failure to do so would impose heavy costs on the economy. He said Congress also needs to reduce the federal debt over the long run to ensure economic growth and stability.

Uncertainty about all these issues is likely holding back spending and investment and troubling investors, the Fed chairman said in a speech to the Economic Club of New York.

Bernanke said resolving the fiscal crisis would prevent a sudden and severe shock to the economy, and help move it closer to full employment.

"A stronger economy will in turn reduce the deficit and contribute to achieving long-term fiscal sustainability," Bernanke told the group.

In a statement after its Oct. 23-24 policy meeting, the Fed said that while the economy is improving moderately, job growth remained slow and the unemployment rate remained elevated. The rate is now 7.9 percent.

Economists predict growth in the July-September quarter will be revised up to around 3 percent, higher than the government's initial 2 percent growth estimate. But they think the economy slipped back to a lower rate of less than 2 percent in the current October-December quarter.

Growth below 2 percent is too slow to make a significant improvement in unemployment.

It's unclear what, if anything, the Fed can do to cushion the economic impact of the fiscal cliff beyond the bond purchases it's already making to try to lower long-term borrowing rates and stimulate spending.

The minutes of the Fed's last policy meeting suggest that it will likely unveil a bond buying program in December to try to drive down long-term rates. The new purchases would replace a bond-buying program that expires at year's end. But the minutes also noted that "several' Fed policymakers questioned whether additional bond buying would be needed and that "a couple" worried that keeping rates too low for too long could drive up inflation.

A new bond buying program would come on top of a program the Fed launched in September to buy $40 billion a month in mortgage bonds to try to reduce long-term interest rates and make home buying more affordable. That program represented the Fed's third round of major bond purchases to expand its holdings.

Fed officials also announced at the September meeting that they planned to keep the Fed's benchmark short-term interest rate near zero through mid-2015. This rate for overnight loans has been at a record low since December 2008.

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