Bernanke holds closed-door meeting with senators on fiscal cliff

Federal Reserve Chairman Ben Bernanke underlined his concerns about the fiscal cliff in a closed-door meeting with senators Wednesday.

The head of the nation's central bank met privately with members of the Senate Finance Committee, as he continued to make his case to lawmakers that they must adjust policy before the end of the year to avert a fiscal cliff of tax hikes and spending cuts that economists argue could thrust the nation back into a recession.

Bernanke himself was mum going in and out of the meeting, but senators described the hour-long discussion on the Hill as productive, focused on the economy and short on politics.

"It was not a political meeting at all," said Committee Chairman Max Baucus (D-Mont.) afterwards. "There were substantive questions asked about what happens if we endure the fiscal cliff, what happens under different scenarios. It was very constructive."

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Senators in attendance also said the group also spent time discussing other economic matters, including the European debt crisis and the Fed's recent decision to embark on a third round of "quantitative easing."

Senators made clear that Bernanke warned them of the consequences of allowing the nation to go over the fiscal cliff. This would involve allowing all of the Bush tax rates to expire, as well as a payroll tax reduction that has been a political hot potato the last two years. Spending cuts agreed to as part of last year's decision to raise the deadline are also set to begin in January, and have prompted warnings of layoffs from defense contractors. 

"You want to try to hit a place where the economy is growing, but you're sending a signal to the marketplace that you're doing the long-term debt and deficit reduction you need to do," said Sen. John Kerry (D-Mass.). "It was very helpful to see where you go if you don't make the right choices."

“He says it’s really dire if we go off the cliff. If we go into sequestration, we are going to go into a recession, he restated that,” said Sen. Orrin Hatch (R-Utah), the ranking Republican on the committee. “He made it very clear, frankly, that something has to be done… that if we don’t do something about the fiscal cliff we will go into a recession, and maybe even worse than that."

Senators said Bernanke did not make specific policy recommendations about how to address the expiring tax cuts and automatic spending cuts, noting that fiscal policy is the purview of Congress. And the Fed chairman reiterated that the central bank does not have the ability to ward off the damage inflicted by the cliff if Congress cannot come to an agreement.

"He made it very clear what the limitations are on the Fed, and where our obligations couldn't be more clear," said Kerry.

Republicans have been critical of the Fed's Sept. 13 decision to launch further monetary easing. It committed to buying $40 billion of bonds every month in an effort to lower borrowing costs until the central bank saw significant gains in the labor market. 

Hatch said he questioned Bernanke on the further easing, raising GOP concerns that it could lead to runaway inflation.

“I asked him about quantitative easing, if inflation starts to rise, and he said he would have to back off,” Hatch said. “His response was that inflation is under control, that there is very little likelihood that we would get into an inflationary spiral. But if we did, he would have to back off quantitative easing. At least that’s the way I interpreted it.”

He said that there were no surprises in Bernanke's economic assessment, compared to previous Fed statements.

Sen. Kent Conrad (D-N.D.) said Bernanke did not strike a dour tone on the economy. 

"In fact as he said clearly we got good news on the housing front this morning. We are growing in this economy in fact we are doing better than virtually all the countries of Europe, we are also doing better than Japan,” he said.

Bernanke’s message, according to Conrad, was that “we have got to keep this recovery going but we also need a longer term plan” on the deficit.

“He said, look, just as I have described here it would be very helpful if we here were to make changes that would put us on firmer fiscal footing,” he said.