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.

Just Posted

Half of City of Red Deer employees earn $75,000-plus, data shows

Salaries of 1,441 full- and part-time workers were counted

Canadian recording legends to rock Red Deer’s Westerner Days Friday

Streetheart, Headpins and Holly Wood and Toronto perform tonight

Missing Calgary man spent time in Red Deer

Calgary Police Service seek public’s assistance

Trudeau says Ottawa open to proposals for B.C. refinery as gas prices soar

VICTORIA — Prime Minister Justin Trudeau says Ottawa is open to proposals… Continue reading

Oil price rises on Mideast tensions, stock markets cautious

BANGKOK — The price of oil rose on Friday after the U.S.… Continue reading

Fashion Fridays: 5 casual summer dress styles

Kim XO, helps to keep you looking good on Fashion Fridays on the Black Press Media Network

Golf Canada’s 2020 Olympic preparations on track with qualifying formula helping

Fifteen years ago, golfers didn’t have to worry about making the Olympics.… Continue reading

Canadian women confirmed for second trip to Rugby League World Cup

TORONTO — Canada has been confirmed as one of eight women’s teams… Continue reading

Tom Cruise surprises Comic-Con with ‘Top Gun’ sequel trailer

SAN DIEGO — Tom Cruise has made an unexpected flyby at San… Continue reading

Warm memories, hit singles: Randy Bachman and Burton Cummings reunite for charity show

TORONTO — Former Guess Who bandmates Randy Bachman and Burton Cummings reunited… Continue reading

Calgary Stampeders bounce back with 26-16 win over Toronto Argonauts

Stampeders 26 Argonauts 16 CALGARY — Juwan Brescacin hauled in a pair… Continue reading

Chris Sale snaps Fenway losing streak, beats Blue Jays 5-0

Red Sox 5 Blue Jays 0 BOSTON — That was a relief.… Continue reading

Critics and industry clash over accuracy of Alberta well cleanup cost estimates

CALGARY — An Alberta coalition that says oil and gas producers are… Continue reading

Rapelling from great heights to grant Red Deer wishes

Twenty brave individuals will rappel 13 storeys down Stantec Executive Place on… Continue reading

Most Read