Share “Bernanke warns Congress to avoid 'fiscal...”

Bernanke warns Congress to avoid 'fiscal cliff'

Associated Press Modified: November 20, 2012 at 2:48 pm •  Published: November 20, 2012
Advertisement

Even assuming the economy's potential growth has declined, Bernanke said that unemployment, now at 7.9 percent, is abnormally high. He suggested, though, that the drags on economic growth should fade as the economy heals.

By the end of December, just as the fiscal cliff nears, the federal government is expected to hit its borrowing limit. Treasury Secretary Timothy Geithner has said he will resort to the same maneuvers he used during the last debt standoff in 2011 to prevent the government from defaulting on its debt.

But these maneuvers would buy only a few weeks' time, until late February or early March, before the government would face the prospect of a first-ever debt default.

After the last debt standoff in the summer of 2011, Standard & Poor's downgraded the government's credit rating on long-term securities one notch from the highest level of AAA to AA+. It was the first ever downgrade of U.S. government debt.

After the presidential election, Fitch Ratings said Obama would need to quickly reach a budget agreement with Congress over the fiscal cliff or risk losing Fitch's AAA rating on U.S. debt.

It's unclear what, if anything, the Fed could do to cushion the economy from the fiscal cliff beyond the bond purchases it's already making to try to lower long-term borrowing rates and stimulate spending.

The minutes of the Fed's last policy meeting suggest that it will likely unveil a bond buying program in December to try to drive down long-term rates. The new purchases would replace a bond-buying program that expires at year's end.

Most analysts said Bernanke's comments suggest that is likely.

A new bond buying program would come on top of a program the Fed launched in September to buy $40 billion a month in mortgage bonds to try to reduce long-term interest rates and make home buying more affordable. That program represented the Fed's third round of major bond purchases to expand its holdings.

Fed officials also announced at the September meeting that they planned to keep the Fed's benchmark short-term interest rate near zero through mid-2015. This rate for overnight loans has been at a record low since December 2008.