November 20, 2012 / 6:40 PM / 5 years ago

WRAPUP 2-Bernanke sees good 2013 if U.S. 'fiscal cliff' avoided

* Bernanke: Removing budget worries could boost U.S. growth
    * Bernanke says U.S. jobless rate still well above normal
    * Fed chief offers no new guidance on bond-buying plans
    * Effort to set thresholds for Fed policy "very promising"

    By Jonathan Spicer and Leah Schnurr
    NEW YORK, Nov 20 (Reuters) - Federal Reserve Chairman Ben
Bernanke said on Tuesday that 2013 could be a "very good year"
for the U.S. economy if politicians can strike a quick deal to
avoid the so-called fiscal cliff.
    The powerful central bank chief said a credible long-term
framework to put the federal budget on a sound path was needed,
but warned against drastic action that would harm the recovery.
    He repeated a warning that failing to halt the fiscal
cliff's $600 billion in expiring tax cuts and government
spending reductions could lead to recession, and said worries
over how budget negotiations will be resolved were already
damaging growth.
    "Such uncertainties will only be increased by discord and
delay," he told the Economic Club of New York. "In contrast,
cooperation and creativity to deliver fiscal clarity - in
particular, a plan for resolving the nation's long-term
budgetary issues without harming the recovery - could help make
the new year a very good one for the American economy."
    Bernanke said it appeared likely there would be some
tightening of U.S. fiscal policy next year, and that the Fed's
bond purchases would help offset that drag. But he sounded a
note of caution on the Fed's powers. 
    "The ability of the Fed to offset headwinds is not
infinite," he said. "In the worst-case scenario where the
economy goes off the broad fiscal cliff ... I don't think the
Fed has the tools to offset that." 
    U.S. stocks gave up gains as Bernanke spoke, with the Dow
Jones industrial average trading 43 points lower in
    Bernanke appeared to be dangling the prospect of a stronger
economy before Congress as an added incentive for lawmakers to
strike a deal.
    "I do think there is important potential for the economy to
strengthen significantly if there is a greater level of security
and comfort about where we are going as a country," he said.
    The Fed chief even joked about his own research into the
effect of uncertainty on investment spending.
    "I concluded it is not a good thing, and they gave me a PhD
for that," he said to laughter.
    The economy grew at a tepid 2 percent annual rate in the
third quarter, and economists expect the final three months of
the year will be even weaker. The U.S. unemployment rate remains
elevated at 7.9 percent, which Bernanke said was still well
above levels the Fed thinks are achievable without sparking
waged-related price pressures.
    Bernanke reiterated the U.S. central bank's guidance that it
expects to keep benchmark interest rates near zero until at
least mid-2015, but offered few clues as to how the Fed might
tweak its bond-purchase program at the start of next year.
    "We will want to be sure that the recovery is established
before we begin to normalize policy," he said.
    U.S. central bank officials have been debating setting
numerical guideposts for policy, and Bernanke said this was a
promising path for the Fed's communications strategy.
    The Fed has held overnight rates near zero since December
2008 and has bought about $2.3 trillion in securities in a
so-called quantitative easing of monetary policy to drive other
borrowing costs lower.
    In its third round of quantitative easing, or QE3, the Fed
vowed in September to buy $40 billion in mortgage-backed bonds
per month and to continue purchasing securities until there is
substantial improvement in the outlook for jobs creation.
    Despite worries that the Fed's bloated balance sheet could
cause inflation, Bernanke said this is not an immediate concern
given restraints on wages and subdued measures of inflation
    Bernanke said it was too soon to assess the impact of the
Fed's latest round of monetary easing, but he pointed to
research showing prior waves of asset buys were effective in
bolstering the frail economy.
    The Fed chief said the 2007-2009 financial crisis may have
temporarily lowered the U.S. economy's potential rate of growth,
partly explaining the recovery's unusual sluggishness.
    But he said a series of "headwinds" facing the economy
appeared to be a more important cause, citing the damage to the
housing sector and mortgage markets, and a sharp tightening in
    Those impediments appear to be fading, he said. The U.S.
housing market has shown "some clear signs of improvement," and
"gradual and significant progress" had been made toward moving
toward more normal financial conditions, Bernanke said.
    Even so, he warned that a third headwind, U.S. fiscal
policy, could intensify in coming quarters, with the drag from a
tighter federal budget likely to outweigh looser budgets at the
state and local level.
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