Chairman Bernanke Addresses the Fiscal Cliff

Federal Reserve chairman Ben Bernanke held a press conference yesterday following the conclusion of the Federal Open Market Committee meeting. Questions spanned a variety of topics including the Fed's current monetary policy stance, the economic outlook, the possible threat posed by European troubles, and Fed transparency. But one question did come up about the fiscal cliff and how the Fed would react if no action were taken. Here are his remarks:

I think we'll have to take fiscal policy into account to some extent, but I think it's important to say if no action were to be taken by the fiscal authorities, the size of the fiscal cliff is such that there's, I think, absolutely no chance that the Federal Reserve could, or would, have any ability whatsoever to offset that effect on the economy. So, as I have said many times before, it is imperative for Congress to give us a fiscal policy that achieves two principle objectives. The first is, of course, to achieve fiscal sustainability over the longer term. That is critical and that is something that needs to be addressed. At the same time, I think that can be done in a way that doesn't endanger the short-term recovery of the economy, and I am concerned that if all the tax increases and spending cuts that are associated with the current law--and which would take place absent any Congressional action--were to occur on January 1, that that would be a significant risk to the recovery. So I'm looking and hoping that Congress will take actions that will address both requirements of the fiscal policy.

Bernanke's message to Congress boils down to this: It's all on you. The Fed could loosen monetary policy if we fell into the fiscal cliff, but it would not come close to bailing the economy out. Bernanke continued to recommend the fiscal path that balances short-term economic vulnerability with long-term fiscal sustainability - which is a path that we have frequently advocated, one that would make the country's economic situation much better.