The Federal Reserve chairman, Ben S. Bernanke, again strongly urged Congress on Tuesday to ward off the sudden and severe combination of tax increases and federal spending cuts coming at the end of the year.
“Uncertainties about the situation in Europe and especially about the prospects for federal fiscal policy seem to be weighing on the spending decisions of households and businesses as well as on financial conditions,” Mr. Bernanke said in a speech at the New York Economic Club. “Such uncertainties will only be increased by discord and delay.”
Mr. Bernanke summarized the Fed’s recent actions to purchase additional agency mortgage-backed securities and continue extending the maturity of its Treasury holdings.
Asked after the speech whether the Fed would provide specific unemployment and inflation thresholds that would prompt officials to tighten monetary policy, as some analysts have been expecting, Mr. Bernanke said that officials were considering this and that he did not want to “front run” those discussions. He said one advantage of this approach would be to better distinguish between how the Fed thinks the economy is going to evolve and how the Fed will react to conditions.
But he also said that monetary policy is a complex process and that officials have “an enormous amount of material” prepared for them at every meeting that might be difficult to boil down to just two or three numbers that represent when officials would begin to tighten policy. Even if they could do that, he said, it was unclear whether there would be sufficient agreement on the committee about which numbers would initiate a policy change.
Analysts have also been expecting that the Fed will start replacing its current program to extend the maturity of its Treasury holdings with straight purchases of Treasury securities. In the prepared text of his speech, Mr. Bernanke did not address this question.
He said that while the details of a Congressional agreement to avert a so-called fiscal cliff were important, so were speed and a general impression of a functional and cooperative legislative branch.
“The economic confidence of both market participants and the general public likely will also be influenced by the extent to which our political system proves able to deliver a reasonable solution with a minimum of uncertainty and delay,” he said.
Financial crises are always followed by painfully slow recoveries, Mr. Bernanke said, but this recovery has also been hampered by several frustrating “headwinds,” including a healing but still scarred housing market, clogged credit channels, the European debt crisis and, perhaps most pressingly, fiscal gridlock in Washington.
Citing several outside economic assessments of the coming tax increases and spending, he said “a fiscal shock of that size would send the economy toppling back into recession.”
He also expressed concern about the approaching debt limit.
The United States is expected to reach the limit on how much it can borrow in early 2013. The last time the debt limit was about to be reached, Congressional Republicans held the decision to raise the limit hostage until the very last minute.
“As you will recall, the threat of default in the summer of 2011 fueled economic uncertainty and badly damaged confidence, even though an agreement ultimately was reached,” Mr. Bernanke said. “A failure to reach a timely agreement this time around could impose even heavier economic and financial costs.”
He said that averting the fiscal tightening at the end of this year should not preclude fixing the country’s longer-run problems with the fiscal budget, which he said was on “an unsustainable path.”
Avoiding a fiscal tightening when the recovery is still fragile would help bolster economic growth, he said, which would help bring down the deficit as businesses and individuals make more money and as a result pay more in taxes.
“At the same time, a credible plan to put the federal budget on a path that will be sustainable in the long run could help keep longer-term interest rates low and boost household and business confidence, thereby supporting economic growth today,” he said.
Mr. Bernanke was also asked why the Fed does not lower or eliminate the interest rate — already at 0.25 percent — it pays banks for excess reserves kept at the central bank to encourage more lending.
He said that Fed officials have not ruled out this idea but that so far it appears the benefits would be very small and that there were concerns that eliminating this interest takes away a tool the Fed uses to control broader interest rates. Additionally, if there is no return on excess reserves, he said, then a variety of other institutions like money-market funds might also become more illiquid.
Bernanke Urges Swift Action on a Fiscal Accord
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Bernanke Urges Swift Action on a Fiscal Accord
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Bernanke Urges Swift Action on a Fiscal Accord
