The actions signaled the Fed’s concerns that high unemployment — what Fed Chairman Ben S. Bernanke called “an enormous waste of human and economic potential” — will cast a long shadow over the nation for years. Fed officials projected that the jobless rate, now at 7.7 percent, would not reach 6.5 percent until near the end of 2015 at the earliest.
The economy faces a possible recession if Congress and the White House fail to avert the “fiscal cliff,” an automatic series of deep spending cuts and tax increases for nearly all Americans set to take effect at the end of the year.
Negotiations appeared to be at an impasse this week, and some in both political parties have said that allowing the budget cuts and tax hikes to kick in for a short while might be acceptable. But Bernanke used stern language Wednesday to warn against such thinking, adding that while the Fed might take action to stem the damage, its powers would be limited.
“If the economy actually went off the fiscal cliff
. . . that would have very significant adverse effects on the economy and on the unemployment rate,” Bernanke said at a news conference. “We would try to do what we could . . . but I just want to again be clear that we cannot offset the full impact of the fiscal cliff. It’s just too big.”
Bernanke added that the risk of going over the fiscal cliff — a term he coined — is already cutting into customer spending and business investment. “The most helpful thing that Congress and [the] administration can do at this point,” he said, “ . . . is to find a solution and avoid derailing the recovery.”
It was not clear whether the Fed’s actions, following a two-day meeting, would have an immediate effect on the economy. The Fed had already said it planned to take continuous action to boost the recovery until at least mid-2015. The reaction of financial markets Wednesday was muted. Stock markets ended the day flat.
Bernanke faces a bit of a conundrum. While he speaks gravely of the ill effects of prolonged high unemployment, his ability to take steps to reduce joblessness are constrained. He has to find consensus on the Fed’s governing committee, where many members are nervous about overheating the economy, causing bubbles or inflation.
And Fed policies work in indirect ways. If the Fed’s actions to keep interest rates low, for example, bring down mortgage costs further, it may lead more people to buy homes, which could create construction jobs. But there are many other factors at play. Banks could choose to charge higher rates and make more profit, for example. Or global trade could continue to decline, further weakening the job market.