WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke warned on Thursday the U.S. economic recovery could be in jeopardy if lawmakers can’t stop automatic year-end spending cuts and tax hikes from taking effect.
Bernanke said potent new central bank stimulus efforts would not be enough to protect the economy from the twin shocks.
“If the fiscal cliff isn’t addressed, as I’ve said, I don’t think our tools are strong enough to offset the effects of a major fiscal shock so we’d have to think about what to do in that contingency,” the Fed chairman said at a press conference. “So I think it’s really important for the fiscal policymakers to, you know, work together to try and find a solution for that.”
The Fed jolted financial markets on Thursday with a new, open-ended round of bond buying and a promise to hold benchmark short term rates at rock bottom levels even longer than previously anticipated.
The central banks hopes the moves will spur faster growth in what has been a disappointingly sluggish recovery from a deep recession in 2007-2009.
Because Congress and the White House failed to reach a deal to cut the budget deficit by $1.2 trillion over ten years, they put themselves on track for draconian spending cuts in 2013 and beyond unless they can agree on an alternative.
In addition to an estimated $109 billion in spending cuts next year through the process called sequestration, a series of tax cuts is also due to expire at the end of the year.
The nonpartisan Congressional Budget Office estimated last month that the blow from these two events would result in a “significant” recession and the loss of around 2 million jobs.
Members of Congress are locked in a stalemate over how to avoid the so-called fiscal cliff. Both sides agree that reducing the massive U.S. deficit over the medium term is desirable but are at loggerheads over how to do so.
Bernanke said the possibility that lawmakers may not reach a deal to forestall the fiscal shock was among factors holding back a faster pace of economic growth.
“A lot of firms are waiting to see whether that problem will be resolved, and if so, how?” he said. “I think it is a concern. It is something that is affecting behavior now.”
A White House report on how the automatic spending cuts would bite will be sent to Congress on Friday, White House spokesman Jay Carney told reporters traveling with the president in Nevada and Colorado. The report could stir renewed finger pointing, but chances for a deal before the November 6 general election are slim.
House Speaker John Boehner earlier this week said Obama had failed to pressure the Democrat-led Senate to work toward a solution with the Republican-held House of Representatives.
“The House has done its job on both the sequester and on the looming tax hike,” Boehner said, a reference to legislation passed in the House but not taken up in the Senate that would exempt defense spending from the automatic cuts and renew expiring tax cuts. The Senate rejected the measure.
“And on both of these, where’s the president, where’s the leadership?” Boehner asked.
Carney said the prospect of painful spending cuts is due to Congress’ failure to agree on deficit reduction steps, not a lack of effort on the president’s part.
“The speaker of House announcing he has done his job when in fact Congress has failed to do its job is a remarkable statement,” Carney told reporters.
Additional reporting by Andy Sullivan in Golden, Colo., Pedro da Costa, Alister Bull and Rachelle Younglai; editing by Fred Barbash and Andrew Hay