Fed can’t offset shock from ‘fiscal cliff’ plan, says Bernanke

Now that QE3 has been announced, the next big elephant in the room would be the potential budget cuts that will happen in Jan 2013 if nothing is done to prevent it. One would think that politicians would be able to resolve this quickly especially when both Republicans and Democrats agree that allowing the cuts to happen will unravel all the good work that the Fed is doing/has been doing to keep employment afloat. However, lets not forget last year kerfuffle surrounding US’s borrowing cap last year. Both House and Senate waited until the last possible moment to come up with a resolution to prevent US from defaulting, something that the world has taken for granted. Will this time round be the same? Or has the politicians learnt their lesson?

Federal Reserve Chairman Ben Bernanke warned on Thursday that the Fed does not have the means to offset the shock from the “fiscal cliff’ plan for severe budget cuts and tax hikes scheduled for January 1.

“If the fiscal cliff isn’t addressed, as I’ve said, I don’t think our tools are strong enough to offset the effects of a major fiscal shock, so we’d have to think about what to do in that contingency,” he said in a press conference.

“I think it’s really important for the fiscal policymakers to work together and try to find a solution for that,” he added.

At the meeting of the Fed’s policy board over the past two days, Bernanke said, “there was considerable discussion of uncertainty, including policy uncertainty, fiscal policy uncertainty and the implications of that for hiring and investment decisions.”

“A lot firms are waiting to see whether that problem will be resolved, and if so, I think it is a concern. It is something that’s affecting behaviour now.”

US politicians agreed a year ago on the “fiscal cliff” austerity plan in a poison-pill political deal that was never intended to be followed through on.

The law requires sudden drastic spending cuts and tax increases from the beginning of 2013, which the Congressional Budget Office has warned will send the country into recession and force unemployment much higher.

The original intention was to put pressure on Republicans and Democrats to come together and reach a deal on a less austere plan for cutting the country’s deficit by the end of this year.

But since then both parties have remained far apart, and no progress has been seen or is expected before the November 6 presidential and congressional elections.

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