The fiscal cliff refers to the numerous tax increases and steep spending cuts slated to go into effect Jan. 1, and will throw the already struggling U.S. economy back into a recession.
In his semi-annual monetary report to the U.S. Senate, the chief voiced his concerns. What was missing though was what Congress should actually do to hammer out a budget deal that would prevent a fiscal cliff.
"I don't have a specific recommendation, other than to think not just about the individual policies, but of the collective impact. Congress is in charge here," Bernanke said.
We Must Avoid the Fiscal CliffBernanke stressed that U.S. fiscal policies are on an "unsustainable path" that must be corrected with a "credible" plan to control deficits.
The effects from the fiscal cliff would propel the economy into a "shallow recession" early next year, Bernanke commented, citing estimates from the Congressional Budget Office.
Furthermore, "additional negative effects would result from public uncertainty about spending plans, including the debt ceiling," the Fed chairman told lawmakers.
And then there is the Eurozone debt crisis which just keeps growing. The Eurozone's woes are noticeably weighing on the economic recovery here in the U.S.
Bernanke also told lawmakers that progress in alleviating the elevated unemployment level is "frustratingly slow."
While the Fed did hint at its last meeting that it might implement some "new tools" to boost the economy, there was no mention of what these new tools might be. In fact, the testimony was long on warnings and short on measures.
In keeping with the watch-and-wait stance the Federal Open Market Committee (FOMC) maintained in June, the Fed chairman said, "Reflecting its concerns about the slow pace of progress in reducing unemployment and the downside risks to economic growth, the committee made clear at its June meeting that it is prepared to take further action."
Bernanke remained mum on whether the central bank was inching closer to giving the markets what they are waiting for-a new round of monetary stimulus, or QE3, if needed.
Signs that a third round of quantitative easing may be warranted continue to emerge. A recent spate of economic data has showed the U.S. economic recovery has hit a roadblock.
Most recent was Monday's report from the U.S. Commerce Department that showed retail sales fell for the third consecutive month. From autos to electronics to building materials, receipts were sluggish at best.
In response to the myriad questions he was peppered with while testifying, Bernanke said the tools he and his colleagues have to goose the economy include further purchases of assets such as mortgage-backed securities, reducing the interest rate the Fed pays on reserves backs keep with the Fed, and altering its communications on the outlook for interest rates.
In June, the Fed decided to extend its program of swapping short term maturities for longer ones, dubbed Operation Twist. Critics argue the twisting has done little to help.
But Bernanke lectured that Operation Twist has been "effective in easing financial conditions and promoting strength in the economy." He also noted that there are "risks and side effects" that may be associated with these programs and "therefore they should not be used lightly."
U.S. stocks fell during and immediately after Bernanke's testimony, but managed to gain ground in the afternoon. The Dow Jones Industrial Average finished the day up almost 80 points, and kicked off Wednesday in the green.
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