Bernanke: Nothing Fed Can Do If Congress Takes Nation Over ‘Fiscal Cliff’


bernankeFederal Reserve Chairman Ben Bernanke on Wednesday warned he won’t be able to save the economy if Congress takes the country over a “fiscal cliff.”

The Fed chairman continued to sound the alarm about the “fiscal cliff” the nation is facing at the end of the year, when a slew of policy changes are set to take effect that could drain billions of dollars from the economy.

Fielding questions from reporters after the latest policy meeting by the central bank, Bernanke’s message to lawmakers was hard to miss: figure out a way to avoid the extreme policy swings set for Jan. 1, or risk throwing the economic recovery down the tubes.

Congress is expected to have a busy lame-duck session following the fall elections, with extensions to the income and payroll tax breaks set to expire, automatic trigger cuts set to take effect, and an increase in the debt ceiling potentially needed to avoid a national default.

Bernanke said he expects the Fed will have to take that busy agenda, and the likely outcomes in Congress, into account as it sets policy. But he took pains to make clear the Fed will not be able to ride in and save the day if Congress fails to take care of its legislative business.

“It’s very important to say that, if no action were to be taken by the fiscal authorities, the size of the fiscal cliff is such that I think there’s absolutely no chance that the Fed could or would have any ability to offset, whatsoever, that effect on the economy,” Bernanke said. “I am concerned that if all the tax increases and spending cuts that are associated with current law would take place, absent congressional actions … that’d be a significant risk to the recovery. ”

Bernanke has told lawmakers for months that the cocktail of policy changes set to take effect in 2013 could throw the recovery off the rails, and that it would be preferable to adopt policies that still achieve fiscal sustainability, but in a more gradual way. He has also indicated that many of the challenges facing the economy now fall outside the Fed’s immediate control.

In its latest statement, the policy-setting Federal Open Market Committee announced it was making no changes to its current monetary policy, as it continued to describe the economy as moderately recovering while the unemployment rate remains too high. Fed officials opted to keep rates near zero percent, as well as announce that the economy will likely warrant “exceptionally low” rates until the end of 2014.

But a recent run of disappointing data on the jobs front, highlighted by March jobs numbers that came in at nearly half the expected number, has driven market speculation that more Fed help might be on the way.

At the briefing, Bernanke faced multiple questions about why, if the economy was failing to gain significant steam, the Fed is not doing more to boost it. In his response, the Fed head listed the number of policy steps the Fed has taken since the downturn to goose the recovery, including two rounds of quantitative easing, an ongoing portfolio reorientation dubbed “Operation Twist,” and further clarification on future interest rate moves.

“The committee has certainly been bold and aggressive,” he said, adding that the central bank remains “prepared to do more as needed to make sure that this recovery continues.”

“Those tools remain very much on the table, and we will not hesitate to use them should the economy require that additional support.”

The Fed has set an inflation target at 2 percent, and said Wednesday it expects inflation to remain stable over the longer term, notwithstanding the recent spike driven by climbing gas prices, which the Fed expects to be temporary.

While the Fed is charged with both controlling inflation and maximizing employment, Bernanke indicated he would not be willing to tolerate higher inflation if it meant deeper cuts to the unemployment rate. He contended that such a move would dent the Fed’s credibility on inflation for what might not amount to much.

“We, the Federal Reserve, have spent 30 years building up credibility for low and steady inflation,” he said. “To risk that asset, for what I think would be quite tentative and perhaps doubtful gains on the real side would be, I think, an unwise thing to do.”

{The Hill/ Newscenter}


  1. Why does everyone rely on the Fed to ride in and save the day? They couldn’t in 2008 – although they did help keep it from being a total disaster. They can’t do it alone now.

    The bottom line is that government can only do so much to influence the economy. The Fed has no miracle cures. The President has no magic wand to wave like Harry Potter. Even Congress has limited power to improve things, although, like Mr. Bernanke points out, if they don’t do their job right they can effectively cripple the economy.

    We’ve become a nation that relies on the latest miracle drug, the latest fad in psychology, or the latest tip from Wall Street. The plain fact is that it all takes work – lots and lots of work – and time and patience. HKBH will help – but only if we first put out our hishtadlus.

  2. The Fed is a private bank that lends paper money to the Treasury. According to the Constitution only the government is allowed to issue money backed by gold and silver!!