Federal Reserve Chairman Ben Bernanke warned again that driving off the fiscal cliff could be detrimental to the U.S. economy. However, if a grand bargain is reached by politicians in Washington, Bernanke said during a speech a the Economic Club of New York, it could be a good new year for the U.S.
"There's important potential for the economy to strengthen significantly if there's a greater level of security and confidence about where we're going," Bernanke said. "A plan for resolving the nation's longer-term budgetary issues without harming the recovery could help make the new year a very good one for the American economy."
"Bernanke, 58, identified the threat of $607 billion in automatic tax increases and spending cuts set to take effect next year as one of the impediments to a faster expansion as companies hold back on hiring and investment. The Fed chief repeated his warning a failure to reach an agreement could send the economy 'toppling back into recession.'
"The central bank is buying $40 billion in housing debt each month and has pledged to keep its benchmark interest rate near zero through mid-2015 as it seeks to spur growth and reduce a 7.9 percent jobless rate."
Reuters reports that Bernanke's speech also put a dent on the good mood that Wall Street had been on for the past two days. Bernanke said that the central bank lacked the tools "to cushion the U.S. economy from the impact of the 'fiscal cliff.'"
"The statement caused a downdraft in the market, though the equity market cut most of its losses before the end of the day.
"'This is a more realistic and pragmatic picture of where we are, compared to what we've been hearing for the past couple of days from politicians that are mostly PR stunts,' said James Dailey, portfolio manager at TEAM Asset Strategy Fund in Harrisburg, Pennsylvania."