Federal Reserve Chairman Ben S. Bernanke spoke to a group of senators today about the potential harm to the economy from the expiration of several pro-growth policies, according to senators who attended the meeting.
Bernanke discussed the scheduled end of programs including the Bush tax cuts, the payroll tax holiday and extended unemployment benefits, as well as budget cuts that are set to take effect in January of 2013, said Kent Conrad, a North Dakota Democrat.
“It’s clear to all of us and he stressed that if all of these things occur it could drive us back into a worse recession,” said Richard Durbin of Illinois, the chamber’s No. 2 Democrat, after the meeting. “The sooner we can resolve these issues, the more likely we are to give confidence to consumers and investors across America.”
Bernanke has warned before of a possible setback to growth from the expiration of tax cuts and reductions in federal spending. The policy changes could more than offset the economy’s progress in recovering from the longest recession since the Great Depression, he said in an April 25 press conference.
“If no action were to be taken by the fiscal authorities, the size of the fiscal cliff is” so large that there’s “absolutely no chance that the Federal Reserve would have any ability whatsoever to offset that effect on the economy,” Bernanke said.
Durbin said Bernanke was “careful not to get into the politics of any specific” policy. “But I don’t think there’s anyone who quarrels with his premise,” Durbin said.
Signs of Improvement
The Fed’s concerns about potential government cuts come as labor and housing markets have shown signs of improvement. Growth should “pick up gradually,” Bernanke and his colleagues on the Federal Open Market Committee said in a statement after their April 24-25 meeting. The committee renewed its plans to keep interest rates near zero through at least late 2014.
That meeting occurred before a May 4 report from the Labor Department showed the economy added 115,000 jobs in April, less than the 160,000 median forecast in a Bloomberg News survey of 85 economists. The unemployment rate fell to 8.1 percent, the lowest since January 2009.
The slowdown in job gains followed data showing the pace of economic expansion cooled in the first quarter, prompting concerns that another pickup in growth may be sputtering.
Senator Tom Harkin, an Iowa Democrat, said Bernanke told lawmakers that there is good progress on the economy. The Fed chairman noted a 1 percentage point drop in the unemployment rate in the last nine months, and he pointed out that oil prices are down and could decline more over the summer.
“Things are getting better, it’s just going to take some time,” Harkin said. “He thinks we’re making steady progress.”
Stocks have fallen as U.S. growth appeared weaker and as fears rose about Europe’s ability to contain the continent’s debt crisis. The Standard & Poor’s 500 Index has fallen 4.1 percent since reaching its highest level of the year on April 2. Stocks rose 0.3 percent to 1,359.19 at 3:35 p.m. in New York.
Bernanke also warned against taking steps on policy that might undermine consumer confidence, Harkin said. The Fed chairman said it’s important to keep momentum at this time, according to Harkin.