Bernanke pleads with lawmakers to take action to avoid coming ‘fiscal cliff’

Federal Reserve Chairman Ben Bernanke pleaded with lawmakers Tuesday to take action swiftly to avoid taking the nation’s economy over a “fiscal cliff.”

In testimony to the Senate Banking Committee, Bernanke said the economy has leveled off, and he warned Congress it will add to economic instability if it does not take action to avoid steep tax hikes and spending cuts set to begin in January.

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“Fiscal decisions should take into account the fragility of the recovery,” Bernanke said. “That recovery could be endangered by the confluence of tax increases and spending reductions that will take effect early next year if no legislative action is taken.”

Addressing the cliff is the “most effective way Congress could help to support the economy right now.”

The George W. Bush-era tax rates are set to expire on all income brackets on Jan. 1, and spending cuts for defense and non-defense programs are also set to begin that month.

If lawmakers fail to act, Bernanke said, they could see a repeat of the drama from last summer, when stocks plunged amid uncertainty over whether Congress would raise the nation’s debt limit.

“Doing so earlier rather than later would help reduce uncertainty and boost household and business confidence,” he said, calling on members to find a balanced policy that makes the nation's finances sustainable, but not in so dramatic a fashion it endangers the recovery.

In particular, Bernanke warned that if Congress punts on a deal, the economy could suffer significantly — as would the already weak reputation of the nation’s policymakers.

“I think just delaying everything, just saying we’re not going to do it, put it off for another year, I think would be a very bad outcome,” he said.

Bernanke took pains to make his warnings to Congress not seem like a lecture, emphasizing that the apolitical Fed is not picking sides in the perpetual fight over taxes and spending.

“I’ve been assigned to focus on maximum employment and price stability, not to hold threats over Congress’s head,” he said. “Congress is in charge here, not the Federal Reserve.”

Bernanke kept his distance even as lawmakers on both sides of the aisle sought to pull the economic expert to their side.

Republicans have been increasingly critical of the Fed’s novel efforts to boost the economy in the wake of the financial crisis. On Tuesday, Sen. Bob Corker (R-Tenn.) suggested those easy-money policies were making it easier for Congress to continue its profligate ways and pressed the chairman to take a harder line.

“I candidly wish we had a chairman of the Fed that sometimes would say, ‘Look, we’re not doing anything else ... and it’s up to you to act responsibly to deal with these fiscal issues,’” he said.

Meanwhile, Sen. Charles Schumer (D-N.Y.) pressed the Fed to do even more to boost the economy, citing the logjam in Congress.

“Given the political realities ... I’m afraid the Fed is the only game in town, and I would urge you to take whatever actions you think will be most helpful,” he said. “Get to work, Mr. Chairman.”

Bernanke refused to pick sides.

“We will act in an apolitical, nonpartisan manner to do what’s necessary for the economy,” he said.

Bernanke made it clear the recent uptick in the unemployment rate is not a seasonal blip, but an indication of broader weaknesses facing the nation's labor market.

“Issues related to seasonal adjustment and the unusually warm weather this past winter can account for a part, but only a part, of this loss of momentum in job creation,” he said.

He said unemployment has “leveled out” at slightly above 8 percent and is unlikely to drop significantly further.

“The reduction in the unemployment rate seems likely to be frustratingly slow,” he added.

Bernanke’s latest remarks mark a shift from recent months, as he previously indicated that while data on the economy had cooled, it was not clear how much of it was a genuine slowdown versus a seasonal correction brought on by the warm winter. In June testimony before Congress, Bernanke said the “apparent slowing in the labor market may have been exaggerated” by seasonal issues.

Bernanke gave no hints that the Fed is preparing to do more to boost the laggard economy. Instead he pointed to Federal Open Market Committee's (FOMC) decision in June to continue "Operation Twist" for six months, buying up longer-term debt in an attempt to spur lower borrowing rates.

The committee also agreed to maintain its policy of predicting near-zero interest rates through the end of 2014.

The markets are watching Bernanke's every move as the recovery staggers, and the chairman told lawmakers the Fed is “prepared to take further action as appropriate.” The FOMC meets again to set policy at the end of July.

After the economy added jobs at a clip of roughly 200,000 per month at the end of 2011 and beginning of 2012, the last three months have shown a substantial slowdown, with monthly gains of about 75,000 per month. That’s not enough to keep up with the nation's population growth, let alone cut into the jobless rate.

The slow growth of the job force is just one indication of an economy that “appears to have decelerated somewhat,” as Bernanke said, over the last several months.

In discussing why the U.S. economy seems to be hitting the brakes, the Fed chairman identified a number of obstacles, including the “fiscal cliff” and continued financial drama in Europe.

On Europe, Bernanke warned that the continent still poses substantial risk to the United States, even as policymakers there have taken steps to address the situation.

“The possibility that the situation in Europe will worsen further remains a significant risk to the outlook,” he said. “Although the politics are complex, we believe that the European authorities have both strong incentives and sufficient resources to resolve this crisis.”

— Posted at 10 a.m. and updated at 1:49 p.m.