Bernanke Once Again Warns Congress on the Fiscal Cliff

Jul 19, 2012 | Budgets & Projections

Federal Reserve Chairman Ben Bernanke addressed Senate Finance Committee on Tuesday and the House Finance Committee yesterday with more warnings about the fiscal cliff at the end of the year. Bernanke told Congress the best way they could help the economy was remove the fiscal cliff and replace it with a long-term comprehensive deficit reduction plan. In particular, Bernanke warned of the impact of the fiscal cliff with a weak economy and the Federal Reserve unable to use monetary policy to offset it.

Fiscal decisions should take into account the fragility of the recovery. That recovery could be endangered by the confluence of tax increases and spending reductions that will take effect early next year if no legislative action is taken.

In addition, Bernanke recommended that Congress go long with their fiscal solution to maximize the benefit for the economy and to allow for policies to be phased in gradually.

You might want to go beyond the ten year window. Consider implications of actions for even longer horizons.

Solutions will be difficult and will require compromise. But as we have said before, the worst thing Congress could do is punt. A compromise should be achieved now to give the markets some confidence that our long-term fiscal future is secure. On this, Bernanke agreed, saying "I think just delaying everything, just saying we’re not going to do it, put it off for another year, I think would be a very bad outcome."