Bernanke warns Feds can’t do much more to help the U.S. economy if fiscal showdown results in government shutdown or debt default

SOURCE: Joint Economic Committee

The Federal Reserve can do very little to help the U.S. economy if this month’s fiscal showdown between House Republicans and the Obama administration results in a government shutdown or default, according to Chairman Ben Bernanke.

“I think that a government shutdown and perhaps even more so a failure to raise the debt limit could have very serious consequences for the financial markets and for the economy,” said Bernanke. “And the Federal Reserve’s policy is to do whatever we can to keep the economy on course…That being said, you know, again our ability to offset these shocks is very limited, particularly a debt limit shock.”

Bernanke pointed out that the Federal Reserve’s chief tool to stimulate the economy has been to lower interest rates, which reduces the borrowing costs for consumers and therefore increases demand for businesses. But the federal interest rate is already at 0% to 0.25%, and Bernanke emphasized that the rate “cannot be lowered meaningfully further.”

Read more: Federal Reserve to continue asset purchase program & keep interest rates near 0%

Furthermore, the Federal Reserve announced last week the continuation of its “highly accommodative” policies, including its asset purchase program to buy about $85 billion worth of Treasury securities and agency mortgage-backed securities per month. The asset purchase program also helps keep borrowing costs low to help stimulate consumer demand.

“I think it’s extraordinarily important that Congress and the administration work together to find a way to make sure that the government is funded, public services are provided, that the government pays its bills and that we avoid any kind of event like 2011, which had – at least for a time – a noticeable adverse effect on confidence and on the economy,” said Bernanke.

Overview of the fiscal showdown:

On the federal budget, the House-approved continuing resolution would de-fund the 2009 Affordable Care Act in exchange for funding the federal government past Oct. 1st. President Barack Obama has stated that he will veto any bill that seeks to de-fund the health care reform law, which is set to take effect in 2014. There could be a government shutdown if a budget is not passed by Congress and signed by the President by the end of the month.

Read more: House Republicans pass bill to de-fund Obamacare, setting up showdown on budget & debt limit

Complicating matters is the approaching deadline for Congress to raise the debt limit to allow the Treasury Department to borrow cash to pay debt obligations – among other things, debt interest, Social Security checks, Medicare and Medicaid reimbursements to health care providers – incurred by Congress. So unless Congress votes to increase the debt limit by mid-October, the Treasury will be forced to default on payments because it will not have enough cash.

The 2011 debt ceiling showdown resulted in an unprecedented downgrade of the U.S. credit rating. And although default was averted at the 11th hour, the Treasury was forced to pay higher interest rates totaling $1.3 billion more due to the uncertainty caused by the delay in raising the debt limit, according to Sen. Amy Klobuchar (D-Minn.), co-chair of the Joint Economic Committee.


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