WASHINGTON (Reuters) - There are limits to how much aid the Federal Reserve can provide to the economy, Fed Chairman Ben Bernanke warned on Wednesday as he urged politicians to tackle a year-end fiscal cliff that could derail the country’s gradual recovery.
“We have innovated quite a bit in the last few years, and (it) is always possible we could find new ways to provide support for the economy,” he told a news conference after the Fed announced another round of bond buying to spur growth.
“But it is certainly true ... that with interest rates near zero and the (Fed‘s) balance sheet already large, that the ability to provide additional accommodation is not unlimited.”
The U.S. central bank announced it would keep buying $85 billion of Treasury and mortgage-backed bonds a month until it saw a substantial improvement in the outlook for the labor market. Its balance sheet would increase to almost $4 trillion by the end of next year if it kept up that pace of purchases.
Bernanke said it was “critical that fiscal policymakers come together” to deliver a package of spending cuts and tax revenue increases that would help lower the deficit without stalling the recovery.
He acknowledged that the Fed would try to do what it could to offset the negative consequences for the economy if it did go over the fiscal cliff, and would “perhaps increase a bit” the support that it was able to provide businesses and households.
“But I just want to again be clear, that we cannot offset the full impact of the fiscal cliff. It is just too big, given the tools that we have available, and the limitations on our policy toolkit at this point,” he said.
The Fed chopped overnight interest rates to near zero nearly four years ago. The U.S. central bank has already bought about $2.4 trillion in securities to drive other borrowing costs lower.
Critics of the central bank’s aggressive actions to engineer a quicker reduction in the level of U.S. unemployment charge that it risks stoking both future inflation and credit bubbles by massively expanding its balance sheet.
Bernanke made clear that he took those threats seriously, while emphasizing inflation expectations remained well-anchored.
Underlining his frustration with the sluggish pace of growth and the country’s still high level of unemployment, which stood at 7.7 percent last month, Bernanke also spelled out that the Fed had no magic bullet to deliver a quicker improvement in U.S. hiring.
“If we could wave a magic wand and get unemployment down to 5 percent tomorrow, obviously, we would do that,” he said.
“But there are constraints in terms of the dynamics of the economy, in terms of the power of these tools, and in terms of the fact that we do need to take into account the possibility of other costs and risks that might be associated with a large expansion of our balance sheet.”
Reporting by Alister Bull; Editing by Tim Ahmann and Jan Paschal