By Joshua Zumbrun and Caroline Salas Gage Bloomberg News
WASHINGTON -Federal Reserve Chairman Ben S. Bernanke said that an agreement on ways to reduce long-term federal budget deficits could remove an impediment to growth, while failure to avoid the so-called fiscal cliff would pose a “substantial threat” to the recovery.
“Cooperation and creativity to deliver fiscal clarity --in particular, a plan for resolving the nation’s longer-term budgetary issues without harming the recovery -- could help make the new year a very good one for the American economy,” Bernanke said today in a speech in New York. “The realization of all of the automatic tax increases and spending cuts that make up the fiscal cliff, absent offsetting changes, would pose a substantial threat to the recovery.”
Bernanke’s efforts to bring down 7.9 percent unemployment and spur the three-year expansion with purchases of $40 billion in housing debt each month are being impeded by Congress’s inability to reach agreement to stabilize U.S. outlays and revenues and avoid the so-called fiscal cliff. Bernanke also said Fed policy will remain accommodative until the recovery is on a firmer footing.
Bernanke, 58, said that “uncertainty” about imminent tax and spending cuts, the ability of Congress to raise the debt ceiling in a timely manner, and the long-term challenges of balancing the U.S. budget appear “already to be affecting private spending and investment decisions and may be contributing to an increased sense of caution in financial markets, with adverse effects on the economy.”
Some businesses are pulling back on concern that hurtling over the fiscal cliff will damage the economy. Spending on equipment and software was little changed from June through September, the weakest reading since the second quarter of 2009, according to figures from the Commerce Department.
The Fed chief repeated his warning that over $600 billion in spending cuts and tax increases that could take effect in January could send the economy “toppling back into recession.”
While Fed policy is “by no means a panacea,” Bernanke said it is helping the economy.
“We will want to be sure that the recovery is established before we begin to normalize policy,” he said in remarks to the Economic Club of New York at the Marriott Marquis Hotel in Times Square.
Stocks pared gains after Bernanke’s remarks. The Standard & Poor’s 500 Index was little changed at 1,386.48 at 12:47 p.m. in New York after rising as much as 0.2 percent. The yield on the 10-year Treasury note climbed to 1.65 percent from 1.61 percent yesterday.
The Fed is also purchasing about $45 billion a month of longer-term Treasury securities as it replaces the same amount of short-term debt on its balance sheet. The program, known as Operation Twist, is designed to lower longer-term interest rates without increasing the overall size of the central bank’s securities holdings.
Bernanke’s large-scale asset purchases have pumped up the central bank’s balance sheet to $2.88 trillion, close to a record. The so-called quantitative easing has helped reduce borrowing costs and push down unemployment from a peak in October 2009 of 10 percent. The Fed cut its target interest rate to zero in December 2008 and forecasts it will probably hold it there through at least mid-2015.
Bernanke used his remarks to offer a detailed analysis of the U.S. economy since the recession and said that the potential growth has been damaged by the recovery.