Federal Reserve Chairman Ben Bernanke delivered a stark warning to policymakers in a high-profile speech Tuesday, saying that the U.S. economy is at risk if they bungle negotiations over the looming austerity crisis.
Bernanke’s remarks were notable less for their substance than for their tone and timing. In his most prominent public speech in almost three months, Bernanke made clear that he sees grave risks should the bargaining over the “fiscal cliff" — a phrase he coined — lead to either steep, immediate fiscal austerity or prolonged, confidence-rattling brinksmanship. But he suggested that 2013 could be a good year for the U.S. economy if lawmakers reach a deal quickly and amicably.
Uncertainty over U.S. fiscal policy “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," Bernanke said at the Economic Club of New York. And the nation’s future prospects may be shaped in part by whether policymakers act in ways that instill confidence in the stability of U.S. policy, he said.
The economy is already bearing the weight of that anxiety, Bernanke said, and “such uncertainties will only be increased by discord and delay. In contrast, cooperation and creativity to deliver fiscal clarity ... could help make the new year a very good one for the American economy."
As he has before, Bernanke warned that the tax increases and spending cuts scheduled to take effect after Jan. 1 would harm the economy. “The Congress and the administration will need to protect the economy from the full brunt of the severe fiscal tightening at the beginning of next year that is built into current law," Bernanke said. A failure to act would, by the reckoning of analysts at the Congressional Budget Office and elsewhere, “send the economy toppling back into recession."