Ben Bernanke Warns of Recession with the Coming Fiscal Cliff

Fed Chairman Ben Bernanke is testifying and the market is looking for (and hoping for) any signs of life for more easing measures. While Bernanke did not promise any additional quantitative easing measures immediately, he did warn that the European crisis and the coming fiscal cliff could put the United States into recession in 2013 and warned that more than 1 million fewer jobs would be created if Congress stays on its present course.

Bernanke is talking about growth decelerating, and that the available indicators are pointing to yet smaller growth ahead. He also warned about deceleration in the labor market. While spending had been on the rise, Bernanke also noted a slower spending growth now, even as energy prices being lower should be adding support to the consumer.

It gets worse from here according to Bernanke. Manufacturing production has slowed in recent months; the rise in real business spending on equipment and software appears to have decelerated from the double-digit pace seen over the second half of 2011; investment demand via surveys of business conditions and capital spending plans suggest further weakness ahead. In short, the Fed is talking down its GDP growth expectations from earlier this year.

Here are Bernanke’s comments on the coming fiscal cliff:

U.S. fiscal policies are on an unsustainable path, and the development of a credible medium-term plan for controlling deficits should be a high priority. At the same time, fiscal decisions should take into account the fragility of the recovery. That recovery could be endangered by the confluence of tax increases and spending reductions that will take effect early next year if no legislative action is taken. The Congressional Budget Office has estimated that, if the full range of tax increases and spending cuts were allowed to take effect — a scenario widely referred to as the fiscal cliff — a shallow recession would occur early next year and about 1-1/4 million fewer jobs would be created in 2013. These estimates do not incorporate the additional negative effects likely to result from public uncertainty about how these matters will be resolved.

The Fed still sees conditions likely to warrant exceptionally low levels for the federal funds rate, at least through late 2014.

Bernanke’s full prepared testimony is here.

JON C. OGG