“The way the current law is set up, we are going to have a very, very sharp contraction in the fiscal situation, increased taxes and cuts [in] spending that are very dramatic and that occur almost simultaneously on January 1 of 2013,” Bernanke told the House Financial Services Committee. “If that all happens, that will no doubt do serious damage to the recovery and probably would cost a significant number of jobs.”
Bernanke defended the central bank’s efforts to stimulate the economy, including buying up U.S. Treasury bonds and maintaining near-zero short-term interest rates.
When Rep. Jeb Hensarling (R-Tex.) pointedly pressed the Fed chief on whether the stimulus actions had done much to help the economy, Bernanke responded that the bond-buying program, called quantitative easing, has triggered improvement.
“I think that the previous efforts did have productive effects,” Bernanke said. “QE 1, for example, was followed a few months later by beginning the recovery. . . . And QE 2 came at a time when we were seeing increased risk of deflation which was eliminated by the QE2.”
But Bernanke added, as he has suggested repeatedly in urging action from Congress and the White House, that the Fed’s role in boosting the economy remains limited, “that monetary policy is not a panacea.”
As Bernanke’s testimony has shown over the last two days, it has become increasingly clear that the greatest concern for the economy is shifting from what’s happening abroad to what’s happening at home.
For much of the year, economists worried about the impact of the slowdown in Europe on the U.S. economy. Now, analysts say anxiety about the impact of the fast-approaching fiscal cliff — the series of federal spending cuts and tax hikes set to take effect at the beginning of 2013 if Congress and the Obama administration do not act — is displacing Europe as the primary threat to the nation’s sputtering economy.
Morgan Stanley said this week that fears about the fiscal cliff are reaching new heights across a wide range of industries. It is already seeing reductions in business orders and hiring, among other areas.
“While our analysts are somewhat less worried about the impact of European bank strains,” a Morgan Stanley report said Monday, “the negative impact of fiscal cliff uncertainty is becoming more widespread.”
The potential economic impact could smother the flickering recovery and further stifle job creation, analysts warn.