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Bernanke: Fed Unable To Offset Economic Damage From "Fiscal Cliff"

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TWC News: Bernanke: Fed Unable To Offset Economic Damage From "Fiscal Cliff"
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Speaking in Midtown on Tuesday, Federal Reserve Chairman Ben Bernanke sounded the alarm to Congress about the so-called fiscal cliff, saying the sudden tax increases and spending cuts would plunge the country into another recession. NY1's Diane King Hall filed the following report.

Addressing the Economic Club of New York in Midtown on Tuesday, Federal Reserve Chairman Ben Bernanke said if the automatic tax increases and spending cuts are allowed to kick in at the beginning of the new year, they will pose a significant threat to the economic recovery.

"Indeed, by the reckoning of the Congressional Budget Office and that of many outside observers, a fiscal shock of that size would send the economy toppling back into recession," said Bernanke.

If the problem is not addressed, almost every working person who pays income tax will see their rates increase.

Bernanke has spoken about the fiscal cliff before, and some credit him with coining the term. But on Tuesday he said the Fed is limited in what it can do to blunt the impact.

"The ability of the Fed to offset headwinds is not infinite. We have certain tools, we've obviously used our easiest tools," he said.

Audience members, including former Fed officials, thought the message was very clear.

Former Federal Reserve Vice Chairman Alan Blinder said if the nation goes over this fiscal cliff, the Fed has virtually unloaded its guns, and there are only pellets left.

"It was a very frank admission. In older days when the Fed had more loaded guns, more interest rate-cutting they could do, one would expect that the Fed would try to offset something like that. And he was quite frank that we don't have the ammunition," Blinder said.

Not just central bankers were worried.

"I guess if there is a slight negative to the message, it's that the Federal Reserve offered its limitations in terms of being able to help the overall economy," said Anthony Chan, the chief economist of Chase Private Wealth Management. "If the fiscal cliff occurred in its full force the Federal Reserve would be unable to prevent a recession from occurring."

Unless Congress acts, the Tax Policy Center estimates that the average middle-class family will have have to shell out about $2,000 more next year.

Bernanke urged lawmakers to play nice and make a deal, because his hands are virtually tied.

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