US Federal Reserve Chairman Ben Bernanke stepped up his warnings on Tuesday over the looming “fiscal cliff,” saying its mandatory tax hikes and spending cuts posed a “substantial threat” to US economic recovery.
With US President Barack Obama’s administration and the US Congress locked in crunch talks on avoiding the cliff and slashing the budget deficit, Bernanke said rising cuts to federal spending were already holding back growth.
“Congress and the administration will need to protect the economy from the full brunt of the severe fiscal tightening at the beginning of next year that is built into current law — the so-called fiscal cliff,” Bernanke said in a speech in New York.
“The realization of all of the automatic tax increases and spending cuts that make up the fiscal cliff, absent offsetting changes, would pose a substantial threat to the recovery,” he said, according to the prepared text.
“Indeed, by the reckoning of the Congressional Budget Office and that of many outside observers, a fiscal shock of that size would send the economy toppling back into recession,” he said.
Bernanke said the US Federal Reserve already views growth as disappointingly slow and troubled by threats from the eurozone crisis, slow job creation and the reticence of banks to loosen lending standards — which Bernanke said is holding back recovery in the housing sector.
The unemployment rate, currently 7.9 percent, remains “well above” what Federal Reserve officials want to see, Bernanke said, adding that the country has “some way to go before the labor market can be deemed healthy again.”
However, Bernanke pointed out that pressures to wind up the stimulus programs and other policy actions designed to pull the country out of recession, and stepped-up efforts to rapidly reduce the federal budget deficit, are now “restraining” GDP growth.
“Indeed, under almost any plausible scenario, next year the drag from federal fiscal policy on GDP growth will outweigh the positive effects on growth from fiscal expansion at the state and local level,” he said.
The cliff comprises two challenges: A drastic spending reduction program and the expiration of a broad range of “temporary” tax decreases.
Both are to take place on Jan. 1, and together would suck at least US$500 billion out of the economy, forcing it into recession.
Asked after the speech how the central bank could mitigate the impact of the fiscal cliff, Bernanke replied: “I don’t think the Fed has the tools to offset that.”