Bernanke: Federal Reserve can’t “offset” fiscal cliff damage

The Federal Reserve won’t be able to lessen the damage to the economy if the U.S. goes over the “fiscal cliff” on Jan. 1st. 

Federal Reserve Chairman Ben Bernanke warned there’s little that the Federal Reserve can do to prevent a recession if lawmakers fail to strike a deal in time to avert the fiscal cliff. The fiscal cliff refers to a combination of steep spending cuts and tax increases that are scheduled to go into effect next year.

Read more: CBO analysis shows ‘fiscal cliff’ will sharply reduce long-term deficits but lead to a recession in 2013

“I hope it won’t happen but if the fiscal cliff occurs, as I’ve said many times, I don’t think the Federal Reserve has the tools to offset that event,” said Bernanke. “We cannot offset the full impact of the fiscal cliff. It’s just too big given the tools that we have available and limitations on our policy tool kit at this point.”

Read more: Federal Reserve will keep interest rates at historic low until unemployment rate drops to 6.5%

Given that the Federal Reserve is keeping interest rates at a historic low – near 0% – to sustain the slow economic recovery, there’s not much more it can do to counteract another recession at this point.

“On the margin, we would try to do what we could,” said Bernanke. “We obviously have to temper our expectations about what we can accomplish.”

Bernanke also warned that going over the fiscal cliff, even for a brief period, would be very “costly” to the U.S. economy.

“If the fiscal cliff was allowed to occur – and certainly if it were sustained for any period – it could have a very negative effect on hiring, jobs, wages, economic activity, investment,” Bernanke said. “I’m hoping that Congress will do the right thing on the fiscal cliff.”


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One Comment on “Bernanke: Federal Reserve can’t “offset” fiscal cliff damage

  1. Pingback: Overview of the White House's counter-offer to avert the fiscal cliff | What The Folly?!

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