Federal Reserve chairman Ben Bernanke warned that none of the actions being taken by the Fed to stimulate the economy could outweigh the economic pain that would be caused by sharp tax increases and government spending cuts that are set to kick in next month, as a standoff between President Barack Obama and Republican legislators continues.
But Mr. Bernanke said on Wednesday the Fed believes the crisis will be resolved without significant long-term damage.
“Clearly, the fiscal cliff is having effects on the economy,” with the uncertainty leading businesses to cut back on investment, Bernanke said during a news conference after the Fed’s final meeting of the year.
The Fed’s latest forecasts for stronger economic growth next year and slightly lower unemployment assume that none of the spending cuts and tax increases involved in the so-called “fiscal cliff,” will come to pass.
But if the issue is not resolved before the December 31 deadline, the Bush-era tax cuts will expire and across-the-board spending cuts take effect in January, something many economists predict would send the country back into a recession.
Mr. Bernanke said the most helpful thing that Congress and the Obama administration can do is resolve the issue quickly.
“I’m hoping that Congress will do the right thing on the fiscal cliff,” Bernanke said. “There is a problem with kicking the can down the road.”
“We cannot offset the full impact of the fiscal cliff. It’s just too big,” Mr. Bernanke said.
Mr. Bernanke is not alone in showing increasing concern about the result of Washington’s failure to complete a deficit-reduction deal last year. Even if an agreement can be reached, the halting pace of negotiations is jeopardizing chances that it could be written into proper legislative form and passed through both House of Representatives and Senate before the new Congress convenes on January 3, 2013.
Republicans aren’t budging on tax rates, and Democrats are resisting steps like raising the eligibility age for Medicare, the federal health care program for the elderly. Negotiations on averting a year-end fiscal train wreck combining big automatic tax hikes and sweeping spending cuts again appear stalled.
There are less than three weeks before the government could careen off this “fiscal cliff,” but the chief Republican negotiator, House Speaker John Boehner, said on Wednesday that “serious differences” remain between him and President Barack Obama after an exchange of offers and a pair of conversations this week.
Mr. Boehner spoke after a closed-door meeting with fellow Republicans in which he advised them not to make plans for the week after Christmas.
Neither side has given much ground, and his exchange of proposals with Mr. Obama seemed to generate hard feelings more than progress. The White House has slightly reduced its demands on taxes from $1.6 trillion over a decade to $1.4 trillion but isn’t yielding on demands that rates rise for wealthier earners.
Mr. Boehner responded with an offer very much like one he gave the White House more than a week ago that offered $800 billion in new revenue, half of Mr. Obama’s demand. Boehner is also pressing for an increase in the Medicare eligibility age and a stingier cost-of-living adjustment for Social Security pensioners.
Both sides accuse the other of slow-walking the talks. Democrats say Mr. Boehner is unwilling to crack on the key issue of raising tax rates on family income over $250,000 because he’s afraid of a revolt on his right flank and from younger, ambitious members of his leadership team.
Many conservatives say they would oppose a deficit-cutting package negotiated by Mr. Boehner that included higher tax rates. Others wouldn’t rule it out completely.
“Don’t go there,” Ms. Pelosi said on “CBS This Morning.” She said raising the retirement age wouldn’t contribute much savings toward an agreement in the short term, adding, “Is it just a trophy that the Republicans want to take home?”
Raising the Medicare age from 65 to 67 could cut Medicare costs by $162 billion over a decade, according to a Congressional Budget Office estimate last year. But by 2035, it would cut Medicare’s projected budget by 7 percent.
That estimate, however, assumes the eligibility age would increase rather abruptly and hit people just about to retire. Republicans have instead in the past that their Medicare proposals won’t affect now those 55 and above.
In an ABC interview on Tuesday, Mr. Obama did not reject a Republican call to raise the age of Medicare eligibility from 65 to 67. The proposal is “something that’s been floated,” Mr. Obama said, not mentioning that he had tacitly agreed to it in the deficit-reduction talks with Mr. Boehner more than a year ago that ended in failure.