WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke’s unusually blunt plea for fiscal help will probably go unanswered, leaving the economy too limp to put millions of the unemployed back to work any time soon.
Nearly 15 million people are still unemployed despite 10 consecutive months of gains in private sector jobs. Economic output remains about $86 billion below where it was at the start of the recession almost three years ago.
Bernanke warned on Friday that the country is on an economic trajectory that will leave millions of people unemployed or underemployed for many years. He said there were limits to what the central bank alone could do to help.
A fiscal program that provided near-term support while addressing long-term budget deficits “would be an important complement to the policies of the Federal Reserve,” he said.
It was a clear call to Congress to do its part to generate faster growth, and perhaps a tacit acknowledgment that the Fed’s controversial $600 billion bond-buying program simply cannot fill the gaping economic hole.
The Fed released updated economic forecasts on Tuesday showing that officials think 2011 growth prospects looked considerably dimmer than they did in June.
They thought unemployment would be higher than previously predicted and remain elevated at least through 2013, and some thought inflation would stay too low for comfort. This would suggest some Fed officials have their doubts the bond-buying campaign alone can provide sufficient economic lift.
Bob Eisenbeis, chief monetary economist at Cumberland Advisors and a former Fed official, said fiscal policy is normally considered a “third rail” for Fed chairmen. The fact that Bernanke dared to touch it shows just how urgently he thinks the economy needs more support.
Nobel prize-winning economist Paul Krugman said there was little chance newly empowered Republicans in Congress -- who campaigned on a smaller-government platform -- would answer the call.
“My immediate thought was, why not ask for a pony, too?” Krugman wrote in his New York Times column on Monday.
Indeed, the response from Congress to the Fed’s bond-buying spree has been anything but friendly and there is no indication a new crop of Republican leaders is in a spending mood.
Some Republicans have proposed stripping the Fed of its mandate to promote full employment. They have harshly criticized the program, announced just one day after they racked up big gains in the November 2 elections, as sowing the seeds of inflation.
Spending cuts, not stimulus, will top the agenda when they take control of the House of Representatives and narrow the Democrats’ margin of control in the Senate in January.
Democrats have stayed quiet, well aware that they lack the backing for another big government spending program.
“It is often said that one of the functions of an independent central bank is to take the political heat when pursuing politically unpopular policies,” Cumberland’s Eisenbeis said. “Well, the oven is hot and the turkey is roasting.”
If Bernanke is to get any help from Congress, it will probably be in the form of modest steps that preserve the status quo.
President Barack Obama’s Democrats managed to pass an $814 billion stimulus package in early 2009 with only two Republican votes. A second, less costly effort failed earlier this year.
Republicans not only oppose further spending, they want to cut some $100 billion in government outlays next year. Representative Jerry Lewis of the House Appropriations Committee even proposed using the remaining unspent $12 billion from the first round of stimulus to pay down the deficit.
The first test of whether Democrats can work with Republicans could come as early as next month, when lawmakers consider whether to extend Bush-era tax cuts that will otherwise expire at the end of the year.
Democrats want to extend the tax cuts for families earning less than $250,000 per year, while Republicans would like to extend them for everyone. One possible compromise would be agreeing to extend them for everyone for one or two years.
“If Congress and the president can reach a quick compromise on taxes in early December, it will be a sign that they can work together in at least a minimal fashion, and we believe should reduce some of the psychological headwinds in the economy,” said Ethan Harris, an economist with Bank of America-Merrill Lynch in New York.
“On the other hand, if they agree to disagree, we believe downside risks to U.S. growth will likely intensify,” he said.
Editing by Dan Grebler