Federal Reserve Chairman Ben Bernanke was in New York City Tuesday to send a message back to Washington: Cut a deal to avoid the fiscal cliff, and don’t play politics with the federal debt limit again.
Confusion over the course of U.S. tax and spending policy is weighing on the spending decisions of households and businesses, as well as on financial markets, Bernanke said in remarks to the New York Economic Club.
“Uncertainty about how the fiscal cliff, the raising of the debt limit and the longer-term budget situation will be addressed appears already to be affecting private spending and investment decisions, and may be contributing to an increased sense of caution in financial markets,” he said.
Economists say the most visible sign of uncertainty over the fiscal cliff is in the lack of capital-spending growth since the summer.
Orders for nondefense capital goods excluding aircraft, a key metric of demand, was flat in September after a 0.2% gain in the prior month. This came on the heels of close to an 8% slide in June and July.
“Such uncertainties will only be increased by discord and delay,” according to Bernanke.
He urged the members of Congress not to kick the can down the road. Putting off policy choices would only “prolong and intensify these uncertainties,” he said.
“In contrast, 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 make the new year a very good one for the American economy.”
Without action by the White House and Congress on the fiscal cliff, about $500 billion in spending cuts and tax increases are set to begin in 2013. Economists, the Congressional Budget Office, and Fed economists have warned that America could slip back into recession if the so-called fiscal cliff is not addressed before the end of the year.
In a question-and-answer session, Bernanke warned that Fed policy could not protect the economy if it goes over the cliff.
“I don’t think the Fed has the tools to offset that,” he said.
Yet the Fed chairman elaborated that he thought the economy could “strengthen significantly if there is a greater level of security and comfort about where we are going as a country.”
President Barack Obama and congressional leaders met last week to reopen budget talks and pledged to work together to reach a deal.
Via – MarketWatch