Bernanke warns fiscal fights between Congress, Obama could upend economy

Federal Reserve Chairman Ben Bernanke will caution Congress Wednesday that a mishandling of fiscal policy could derail the economic recovery.

The central bank head said that Fed officials believe sequestration will be less of a drag on the economy in the future, but that looming dangers emanating from the Capitol remain, including a pending fight over the debt limit.

“Risks remain that tight federal fiscal policy will restrain economic growth … by more than we expect, or that the debate concerning other fiscal policy issues, such as the status of the debt ceiling, will evolve in a way that could hamper the recovery,” he will tell the House Financial Services Committee, according to prepared testimony.

Bernanke will open his testimony by attributing "strong headwinds" on the economy to federal fiscal policy.

Bernanke will also assure lawmakers that the Fed will pull back on plans to ease away from its unprecedented stimulus programs if the economic recovery cannot tolerate it. 

Bernanke roiled markets in June, when he laid out for reporters how Fed officials were envisioning an end to the third round of “quantitative easing,” which could include paring down the $85 billion in bonds the Fed purchases each month, before halting them sometime in 2014.

Bernanke said then that such a move would be conditional on a continuing economic recovery and would be adjusted according to new data, but nonetheless, his remarks set off the worst sell-off in the stock market all year.

In his testimony, Bernanke emphasized that Fed purchases “are by no means on a preset course.” The Fed could speed up or slow down its exit from the program depending on the economic trajectory, and Bernanke added that the Fed may even keep its foot on the gas if officials determine the economy needs it, and could even do more.

"If needed, the committee would be prepared to employ all of its tools, including an increase [in] the pace of purchases for a time, to promote a return to maximum employment in a context of price stability," his testimony stated.

But if the economy proceeds as expected, the Fed would likely begin to slow the rate of its purchases later this year and would ultimately wrap up somewhere in the middle of 2014.