Urgent need to act

WASHINGTON — Federal Reserve Chairman Ben Bernanke on Tuesday urged Congress and the Obama administration to strike a budget deal to avert tax increases and spending cuts that could trigger a recession next year.

WASHINGTON — Federal Reserve Chairman Ben Bernanke on Tuesday urged Congress and the Obama administration to strike a budget deal to avert tax increases and spending cuts that could trigger a recession next year.

Without a deal, the measures known as the “fiscal cliff” will take effect in January.

Bernanke also said Congress must raise the federal debt limit to prevent the government from defaulting on Treasurys debt. Failure to do so would impose heavy costs on the economy, he said. Bernanke said Congress also needs to reduce the federal debt over the long run to ensure economic growth and stability.

Uncertainty about all these issues is likely holding back spending and investment and troubling investors, the Fed chairman said in a speech to the Economic Club of New York.

Resolving the fiscal crisis would prevent a sudden and severe shock to the economy, help reduce unemployment and strengthen growth, he said. That could make the new year “a very good one for the American economy,” he said.

“A stronger economy will, in turn, reduce the deficit and contribute to achieving long-term fiscal sustainability,” Bernanke told the group.

When asked during a question and answer session after the speech whether the Fed could soften the impact of the fiscal cliff, Bernanke was firm in his warning.

“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,” Bernanke said.

Bernanke also said the severity of the Great Recession may have reduced the U.S. economy’s potential growth rate. He didn’t say by how much or how long slower-than-normal growth might persist.

Over the long run, the U.S. economy has grown an average of about 2.5 per cent each year. Economists predict growth in the July-September quarter will be revised up to an annual rate of around 3 per cent, above the government’s initial 2 per cent estimate. But they think the economy is slowing to an annual growth rate below 2 per cent in the October-December quarter — too slow to make much of a dent in unemployment.

Bernanke said several factors have weighed on growth: Long-term unemployment has eroded many workers’ skills and led some who have lost jobs to stop looking for one.

Companies have spent less on machinery, computers and other goods, reducing their production capacity. Stricter lending rules and uncertainty about the economy may have discouraged would-be entrepreneurs from starting more companies, the Fed chairman said.

Even assuming the economy’s potential growth has declined, Bernanke said that unemployment, now at 7.9 per cent, is abnormally high.

He suggested, though, that the drags on economic growth should fade as the economy heals.

By the end of December, just as the fiscal cliff nears, the federal government is expected to hit its borrowing limit. Treasury Secretary Timothy Geithner has said he will resort to the same manoeuvrs he used during the last debt standoff in 2011 to prevent the government from defaulting on its debt.

But these manoeuvrs would buy only a few weeks’ time, until late February or early March, before the government would face the prospect of a first-ever debt default.

After the last debt standoff in the summer of 2011, Standard & Poor’s downgraded the government’s credit rating on long-term securities one notch from the highest level of AAA to AA+. It was the first ever downgrade of U.S. government debt.

After the presidential election, Fitch Ratings said Obama would need to quickly reach a budget agreement with Congress over the fiscal cliff or risk losing Fitch’s AAA rating on U.S. debt.

It’s unclear what, if anything, the Fed could do to cushion the economy from the fiscal cliff beyond the bond purchases it’s already making to try to lower long-term borrowing rates and stimulate spending.

The minutes of the Fed’s last policy meeting suggest that it will likely unveil a bond buying program in December to try to drive down long-term rates. The new purchases would replace a bond-buying program that expires at year’s end.

Most analysts said Bernanke’s comments suggest that is likely.

A new bond buying program would come on top of a program the Fed launched in September to buy $40 billion a month in mortgage bonds to try to reduce long-term interest rates and make home buying more affordable. That program represented the Fed’s third round of major bond purchases to expand its holdings.

Fed officials also announced at the September meeting that they planned to keep the Fed’s benchmark short-term interest rate near zero through mid-2015. This rate for overnight loans has been at a record low since December 2008.

Get local stories you won't find anywhere else right to your inbox.
Sign up here

Just Posted

RCMP, city, health officials join forces in problem-property crackdown

Eastview property had generated recurring complaints to RCMP

Mag 7.7 quake hits between Cuba and Jamaica, but no injuries

HAVANA — A powerful magnitude 7.7 earthquake struck in the Caribbean Sea… Continue reading

Trump peace plan delights Israelis, enrages Palestinians

WASHINGTON — President Donald Trump unveiled his long-awaited Mideast peace plan Tuesday… Continue reading

GOP squirms as Bolton prepares to dish on Trump White House

WASHINGTON — For much of the last 20 years, John Bolton was… Continue reading

More than 200 cabinet-appointed positions remain empty, says memo to PM

OTTAWA — Prime Minister Justin Trudeau has been warned that more than… Continue reading

Country music fans enjoy free concert at Red Deer mall, ahead of ACMA awards

Fans like to get up close and personal and that’s exactly what… Continue reading

Your community calendar

Feb. 1 A Jump Rope Competition will be held at the Abbey… Continue reading

David Marsden: Let’s see success at Westerner Park

It’s encouraging that Westerner Park has admitted it needs the support of… Continue reading

Mag 7.7 quake hits between Cuba and Jamaica, but no injuries

HAVANA — A powerful magnitude 7.7 earthquake struck in the Caribbean Sea… Continue reading

Trump peace plan delights Israelis, enrages Palestinians

WASHINGTON — President Donald Trump unveiled his long-awaited Mideast peace plan Tuesday… Continue reading

GOP squirms as Bolton prepares to dish on Trump White House

WASHINGTON — For much of the last 20 years, John Bolton was… Continue reading

More than 200 cabinet-appointed positions remain empty, says memo to PM

OTTAWA — Prime Minister Justin Trudeau has been warned that more than… Continue reading

Alberta climate plan part of cabinet decision on oilsands mine: Wilkinson

OTTAWA — The federal cabinet’s decision on a huge new Alberta oilsands… Continue reading

Things for people in Canada to know about the coronavirus

Two cases of the new deadly strain of coronavirus have been identified… Continue reading

Most Read