News Column

Bernanke: Fiscal Cliff Hurting US; Fed Can't Offset Fallout

Dec 12, 2012

Federal Reserve Chairman Ben Bernanke said Wednesday that the looming fiscal cliff was already producing fallout in the US economy and warned that the US central bank would not be able to offset the impact the severe austerity measures would have on the country.

Uncertainty has already hurt consumer and business confidence, Bernanke said, as Republican lawmakers and President Barack Obama seek to come to an agreement on deficit reduction measures that avoid the sharp government spending cuts and taxes set to take effect in January.

"Clearly this is a major risk factor, a major source of uncertainty moving forward," Bernanke said.

He suggested that an agreement would be reached to solve the crisis in an "intermediate way," resolving the immediate danger, but not fully solving it for the long term.

If however a deal cannot be reached and current law is followed, he warned of "significant" impact on the US economy and said "the economy will, I think, go off a cliff."

The central bank would not be able to avert the most severe damage such a move would cause, he said.

"I don't think the Federal Reserve has the tools to offset that event," he said, stressing that he believes some kind of deal will be reached.

Earlier Wednesday, the leader of opposition Republicans in Congress dismissed Obama's offer to solve the looming fiscal cliff as too focussed on tax increases while largely ignoring spending cuts.

"As of today, the president's plan to avert the fiscal cliff still does not meet the two standards that I laid out the day after the election. His plan does not fulfill his promise to bring a balanced approach to solving this problem," Boehner told reporters after a telephone call with the president the previous evening.

Republican lawmakers laid out a counter-proposal Tuesday to an offer made by Obama earlier in the week in a bid to reach agreement on averting the budget cuts and tax increases that take effect in January. Both sides hope to replace the planned measures with less severe cuts, but are stalled over tax increases for the wealthy and how much to cut government entitlement programmes.

In interview excerpts released late Tuesday by broadcaster ABC News, Obama struck a hopeful tone.

"I'm pretty confident that Republicans would not hold middle-class taxes hostage to trying to protect tax cuts for high-income individuals," he said. "I don't think they'll do that."

The combined federal budget cuts and tax increases are projected to take a bite of more than 600 billion dollars out of the economy in 2013 alone, which could throw the United States back into recession.

Source: Copyright 2012 dpa Deutsche Presse-Agentur GmbH

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