Bernanke: `Economy Will… Go Off a Cliff,’ if Deficit Cut Too Sharply

Federal Reserve Chairman Ben Bernanke, who coined the term “fiscal cliff” for that confluence of automatic spending cuts and tax increases set to take effect in January,  says it’s already “having effects on the economy.”

“Even though we’ve not yet even reached the point of the fiscal cliff potentially kicking in, it’s already affecting business investment and hiring decisions by creating uncertainty or creating pessimism,” Bernanke said in response to reporters’ questions today at a Federal Reserve System Board of Governors meeting. “We saw what happened recently to consumer sentiment, which fell presumably in part because of concerns about the fiscal cliff. So clearly this is a major risk factor and a major source of uncertainty about the economy going forward.”

In the economic projections that the Fed’s board has made, he said, “they are assuming… that the fiscal cliff gets resolved in some intermediate way, whereby there is still some fiscal drag, but not as much as implied by the entire fiscal cliff.”

Still, he said, “there’s a lot of uncertainty right now. And if the fiscal cliff situation turns out to be resolved in a way very different from our expectations, I’m sure you would see changes in the forecast.”

Having coined that phrase, he also was asked by Bloomberg’s Peter Cook, does he still feel it’s the most appropriate way to describe what would happen at the start of the year should Congress take no action before then?

“If the economy actually went off the fiscal cliff, our assessment, the CBO’s(Congressional Budget Office’s) assessment, outside forecasters all think that that would have very significant adverse effects on the economy and on the unemployment rate,” he said. “And so, on the margin, we would try to do what we could. We would perhaps increase (the purchases the Fed has been making) a bit.”

“But I just want to, again, be clear that we cannot — we cannot offset the full impact of the fiscal cliff. It’s just — it’s just too big, given the tools that we have available and the limitations on our — on our policy toolkit at this point.”

“People have different preferences about what they want to call things,” he added. “I think it’s a sensible term, because I think of the fiscal policies providing support to the economy, if fiscal policy becomes very contractionary, the economy will, I think, go off a cliff.”

“I think it’s reasonable to be concerned about this,” he said. “I don’t buy the idea that a short-term descent off the fiscal cliff would — would be not costly. I think it would be costly. And in fact, we’re already seeing costs. Why is it that consumer confidence dropped so sharply this week? Why is it that small business confidence dropped so sharply? Why is — why are the markets volatile? Why is business investment among its weakest levels during the recovery?

“I think all of these things, at least to some extent, can be traced to the anticipation and the concern about the fiscal cliff. And I think that, you know, we don’t know exactly what would happen, but I think there is certainly a risk that it could be serious, and therefore, I think it’s very important, the most helpful thing that could — that I  think Congress and the administration can do right now is find a resolution that, on the one hand, achieves long-run fiscal sustainability, which is critical, absolutely critical for a healthy economy, but also avoids derailing the recovery which is currently in process.”

 

 

 

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