Euro crisis, 'fiscal cliff' menace US economy: Fed

Posted at 06/08/2012 9:15 AM | Updated as of 06/08/2012 2:41 PM

WASHINGTON - The European crisis and mandated budget cuts and tax hikes pose big risks for the US economy, Federal Reserve Chairman Ben Bernanke told Congress on Thursday.

But with the economy motoring along at a "moderate" pace, he also gave no hint as to whether the central bank would launch a new stimulus program to help growth.

Bernanke kept at arm's length from the idea, despite recent comments by other senior Fed officials that more stimulus could be merited by the current 2.0 percent annual pace of growth.

"We have made no decisions," he said when asked by the Joint Economic Committee about the possibility of a "QE3" quantitative easing program to further push down interest rates.

However, he added, "I wouldn't want to take anything off the table at this juncture."

Bernanke said that the US economy was showing some signs of strength, including in exports and consumer spending.

"Economic growth appears poised to continue at a moderate pace over coming quarters," he said.

The Fed chief said last year's increases in household spending have been sustained and that falling energy prices should help offset slow income growth for Americans.

He also said that inflation should stay at or below 2.0 percent, within the central bank's comfort zone.

And despite Europe's problems, too, demand for US exports "has held up well."

But the economy remains frail, households and businesses deeply cautious, the housing market still depressed and unemployment stubbornly high.

Moreover, the economy remains vulnerable to two potential shocks: the eurozone crisis and the year-end "fiscal cliff."

The eurozone turmoil has already strained global financial markets, and it has pushed a cloud over US consumer and business confidence, Bernanke said.

"The situation in Europe poses significant risks to the US financial system and economy and must be monitored closely," he warned.

"European policymakers have taken a number of actions to address the crisis, but more will likely be needed to stabilize euro-area banks (and) calm market fears about sovereign finances."

The other looming threat is the legislation in place that could both raise taxes for Americans and force a drastic cut in government spending at year's end, moves that economists say could drive the country back to recession if not changed.

"The so-called fiscal cliff would, if allowed to occur, pose a significant threat to the recovery," Bernanke said.

The budget cuts and tax hikes already mandated -- the product of an unhappy political compromise last year in Congress -- could amount to between three and five percent of gross domestic product, "which would be a very significant impact on the near-term recovery," Bernanke added.

"What I am saying is that in ways that are up to Congress, steps should be taken to mitigate that overall impact... What is particularly striking here is that this is all pre-programmed."

Analysts noted that Bernanke gave away little as concerns policy in his testimony despite growing discussion of more Fed stimulus.

"If anything, he seemed to try to walk back market expectations of another round of easing at the June 19-20 meeting" of the Fed's policy board, said Paul Edelstein of IHS Global Insight.

"The big takeaway from Bernanke's testimony is that he expects the recovery to endure, though it faces several risks.:

The Fed could namely put off any new move until it sees more economic data, putting the focus on the Fed's July 31 meeting, according to Edelstein.

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