Ben Bernanke warned the Federal Reserve would be powerless to keep the economy from disaster if Congress fails to keep the country from falling off what economists call a looming "fiscal cliff."
In a press conference Wednesday to discuss the Fed's latest policy decision, Bernanke warned that a series of tax increases and spending cuts built into current federal law and scheduled to take effect on January 1, 2013, would be a "significant risk to the economy."
The extension of the Bush tax cuts expires at the end of the year, as does a temporary cut in the payroll tax, Reuters noted on Tuesday. The Alternative Minimum Tax also needs adjustment at the end of the year, as always, to avoid a tax increase for many taxpayers. Meanwhile, some $1.2 trillion in spending cuts take effect at the end of the year, a result of the debt-ceiling debacle last summer.
"If no action is taken by fiscal authorities, the size of the fiscal cliff is so large that the Fed would have no ability to offset that effect on the recovery," Bernanke said.
The Fed on Wednesday decided to keep its key overnight interest rate near zero and pledged anew to keep rates "exceptionally low" until late 2014.
In a question-and-answer session with reporters, Bernanke said the most frustrating aspect of the economy was that it has been "a long slog," with the unemployment rate still above 8 percent three years after the recession technically ended, by at least one measure.
In that light, some academics, including Princeton economist and New York Times columnist Paul Krugman, have accused Bernanke of not being aggressive enough in helping the economy. In a new New York Times Magazine story, Krugman says Fed Chairman Bernanke is ignoring his own advice, given to Japanese policy makers during their own long slog to economic stagnation.
In the press conference, Bernanke strongly disagreed with Krugman's premise, pointing to super-low rates and a series of unusual Fed bond-buying programs as evidence he has aggressively moved to help the economy. Japan was in much worse economic shape than the U.S., he argued, and current Fed policy is just about right under the circumstances. Doing more, he added, might not be worth the risks.
Meanwhile, he also fended off criticism that the Fed is doing too much, most recently from former FDIC chief Sheila Bair, who wrote in Fortune that the Fed needed to "declare victory" and raise interest rates, lest it blow up a bubble in the bond market.
Bernanke grinned miserably when asked about Bair's suggestion and said "I think it's a little premature to declare victory."
In fact, he was downbeat enough about the economy to leave the door open for still more action in the future. The stock market, which is addicted to Fed stimulus and craves more, rallied on his words.
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