Federal Reserve Chairman Ben Bernanke chastised Washington on Wednesday, saying the failure of President Obama and Congress to agree on a deal to avoid the “fiscal cliff” is already inflicting damage on the economy.
In his last scheduled public remarks before tax hikes and spending cuts kick in automatically on Jan. 1, Bernanke linked the political standoff to falling consumer confidence and said a failure to reach a deal would wreak havoc on a faltering recovery.
Consumer confidence earlier this month dipped to its lowest level in four months, while on Tuesday, the National Federation of Independent Business’s optimism index fell to 87.5 for November, a drop of more than 5 points and its lowest reading since March 2010.
Bernanke underlined his warning with new policy actions, as the Fed announced it would expand its monthly asset purchases in the new year.
The central bank said it would begin buying $45 billion in Treasury bonds per month in addition to the $40 billion in mortgage debt per month that it is already purchasing to drive down interest rates and spur economic activity. It said the move was necessitated by lackluster economic growth and a stubbornly high unemployment rate.
Rep. Jeb Hensarling (R-Texas), who will chair the House Financial Services Committee in the next Congress, quickly criticized the steps.
“There are limits to what monetary policy can achieve. Unfortunately, it’s clear the Fed plans to continue with a high-risk strategy,” he said.
Bernanke’s remarks came as the White House and Republicans dug in on their positions on taxes and entitlement reforms.
House GOP leaders told their members to prepare to work through the Christmas holiday, given the “serious differences” between the two sides.
“We’re going to stay here right up until Christmas Eve and throughout the time period before the new year because we want to make sure we resolve this in an acceptable way for the American people,” House Majority Leader Eric Cantor (R-Va.) said following a meeting of his conference.
President Obama and House Speaker John Boehner (R-Ohio) exchanged new offers earlier this week, but both sides made it clear Wednesday that while talks are cordial, they are not yet close to a deal.
Boehner said he and Obama had a “frank” conversation on Tuesday. “I remain the most optimistic person in this town, but we’ve got some serious differences,” Boehner said.
Obama remains “confident” a deal is possible, according to White House press secretary Jay Carney. “The parameters of what a deal would look like are clear,” he said.
Obama’s latest offer included a request of $1.4 trillion in new tax revenues, down from an initial bid for $1.6 trillion. Republicans have offered $800 billion in new tax revenues but say they will not agree to raising tax rates on households with annual family income above $250,000, something Obama insists they must.
“The president has made clear that he will not support legislation that hands another tax cut to the wealthiest 2 percent of American earners,” Carney said Wednesday.
Obama also wants a hike to the debt ceiling, an extension of federal unemployment benefits and billions in new stimulus.
Republicans say Obama and Democrats must accept deeper cuts in spending and reforms to entitlements that they say are the main drivers of the deficit.
Carney said Obama is “willing to make tough choices on the spending side” and that the president is “eager to find a compromise.”
“He understands that that would require tough choices by him and Democrats,” he said.
Back in February, Bernanke famously coined the term “fiscal cliff,” which refers to the combination of tax hikes and spending cuts scheduled for next year. All of the George W. Bush-era tax rates are set to expire, and $1.1 trillion in spending cuts triggered by last summer’s debt-ceiling deal are set to begin.
Bernanke on Wednesday said he had no misgivings about his term of art.
“If fiscal policy becomes very contractionary, the economy, I think, will go off a cliff,” he said. “I don’t buy the idea that a short-term descent off the fiscal cliff would not be costly … in fact, we’re already seeing costs.”
He also warned lawmakers and the White House they shouldn’t expect the Fed to come to the rescue if there’s no deal.
“We cannot offset the full impact of the fiscal cliff. It’s just too big,” he said.
“There’s a problem with kicking the can down the road,” he said. “It could create concerns about our longer-term fiscal situation … it’s in the best interest of the economy to come to a two-part solution.”
Bernanke also suggested it was inconceivable that the two sides wouldn’t broker a deal, given the consequences.
“It’s always a delicate balance. You don’t want to scare people, and I actually believe that Congress will come up with a solution,” he said. “It’s exceptionally urgent and important that Congress and the administration come to a sensible agreement.”