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Bernanke: Recession likely if Congress doesn't act

Published July 17, 2012 8:50 pm

Economy • Cautious on growth, he offers no hint of new Fed action.
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Washington • Federal Reserve Chairman Ben Bernanke sketched a bleak picture of the U.S. economy Tuesday — and warned it will darken further if Congress doesn't reach agreement soon to avert a budget crisis.

In testimony before the Senate Banking Committee, he also:

• Said that the Fed was seeking greater clarity about the health of the recovery as it weighs the need for a new round of economic stimulus.

• Strongly defended the Fed's actions after it learned of problems in 2008 with the London interbank offered rate, or Libor.

Referring to the budgetary stalemate in Congress, Bernanke renewed his warnings that inaction on fiscal policy threatens to upend the recovery and tip the economy into recession. Noting that without an agreement tax increases and deep spending cuts would take effect at year's end, he said 1.25 million fewer jobs would be created in 2013.

The Fed is prepared to take further action to try to help the economy if unemployment stays high, he said. Bernanke didn't signal what steps the Fed might take or whether any action was imminent. And he noted there's only so much the Fed can do.

But the Fed chairman made clear his most urgent concern is what would happen to the economy if Congress can't resolve its budget impasse before the year ends.

Cuts in taxes on income, dividends and capital gains would expire. So would this year's Social Security tax cut and businesses tax reductions. Defense and domestic programs would be slashed. And emergency benefits for the long-term unemployed would run out.

All that "would greatly delay the recovery that we're hoping to facilitate," Bernanke said near the end of two hours of testimony to the Senate Banking Committee.

Bernanke was giving his twice-a-year report to Congress on the state of the economy. He will testify Wednesday before the House Financial Services Committee.

Congress needs to resolve its impasse well before the year ends, Bernanke said. "Doing so would help reduce uncertainty and boost household and business confidence."

A separate report Tuesday pointed to the budget crises many states are suffering, caused in part by shrinking revenue from the federal government. States are finding it harder to pay for basic services such as law enforcement, local schools and transportation, the report said. It was issued by the State Budget Crisis Task Force, a non-profit co-chaired by former Federal Reserve Chairman Paul Volcker and former New York Lieutenant Governor Richard Ravitch.

Republicans in Congress are demanding deeper spending cuts while extending income tax cuts for everyone. Democrats want to extend the tax cuts for middle- and lower-class Americans. But they want them to expire for people in the highest-income brackets.

Bernanke stopped short of telling Congress what steps to take. He challenged it to think broadly.

"Congress is in charge here, not the Federal Reserve," he said.

Investors had hoped Bernanke would signal another round of bond purchases, to drive down long-term interest rates and encourage more borrowing and spending. But they seemed to shrug off the downbeat outlook and focused on stronger earnings reported by Mattel, Coca-Cola and other big companies.

At least one senator implored Bernanke to take action now.

"Given the political realities of this year's election, I believe the Fed is the only game in town," Sen. Charles Schumer, D-N.Y., said. "I would urge you, now more than ever, to take whatever actions are warranted."

"So get to work, Mr. Chairman," Schumer added.

The other members of the committee seemed little interested in monetary policy, however, instead preferring to question Bernanke about revelations that banks had manipulated Libor, a benchmark rate used in determining the value of a wide range of financial assets.

In response to questions from members of both parties, Bernanke said the Fed has responded properly when it learned of problems with Libor by notifying British regulators, who oversee the index, and by offering suggestions for improvements.

Bernanke said he still lacked "full confidence" in the integrity and accuracy of the index because those suggestions had not been implemented. And he spoke with approval of nascent efforts to supplant Libor with benchmarks based on an "observable market rate."






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