Heed Bernanke’s Warning about the Fiscal Cliff

Nov 21, 2012

Federal Reserve Chairman, Ben Bernanke speaks to the Economic Club of New York. Photographer: Scott Eells/Bloomberg.

Before leaving for the Thanksgiving holiday, White House and Congressional staffers worked on avoiding the fiscal cliff’s massive tax increases and automatic spending cuts that will begin to take effect on January 1. But according to Politico, participants are “pessimistic about their ability to reach a quick deal.”

In a speech yesterday, Federal Reserve Chairman Ben Bernanke urged Congress and the White House to get a deal done soon because uncertainty surrounding the cliff “appears already to be affecting private spending and investment decisions and may be contributing to an increased sense of caution in financial markets, with adverse effects on the economy.”

He reaffirmed what’s been said by the Congressional Budget Office and other economists that “a fiscal shock of that size would send the economy toppling back into recession.”

Bernanke went on to say that if Washington comes to an agreement on the fiscal cliff and creates a “credible framework to set federal fiscal policy on a stable path” then we should see improved economic growth:

Preventing a sudden and severe contraction in fiscal policy early next year will support the transition of the economy back to full employment; a stronger economy will in turn reduce the deficit and contribute to achieving long-term fiscal sustainability. At the same time, a credible plan to put the federal budget on a path that will be sustainable in the long run could help keep longer-term interest rates low and boost household and business confidence, thereby supporting economic growth today.

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