FALLING over the fiscal cliff could shock the US back into recession, Federal Reserve chairman Ben Bernanke warned in a speech yesterday evening.
The fiscal adjustment, though necessary in the long run, would be too much for the weak recovery to absorb in one dose, Bernanke told an audience at the New York Economic Club.
“The realisation of all the automatic tax increases and spending cuts that make up the fiscal cliff, absent offsetting changes, would pose a substantial threat to the recovery,” he said.
“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,” he added.
Bernanke’s warning came in a speech in which he promised that the Fed’s monetary stance will not return to normal until “a considerable time after the economic recovery strengthens”.
“We want to be sure that the recovery is established before we begin to normalise policy,” he said.
Since the Fed expects the economy to remain weak until mid-2015, his commitment means the unprecedented asset purchase programme – known as QE3 – and the close-to-zero federal funds rate could persist for years longer.
Bernanke used the rest of his speech to explain why he thought Fed policy was working, despite the abnormally slow economic recovery.
“Research suggests that our previous asset purchases have eased overall financial conditions and provided meaningful support to the economic recovery in recent years,” Bernanke claimed. He put weak growth down to crisis in Europe, the financial and housing crash and resultant tight credit conditions, combined with slowly tightening fiscal policy.