Bernanke: ‘Fiscal cliff’ should be avoided

WASHINGTON – Federal Reserve Chairman Ben Bernanke on Tuesday urged Congress and the Obama administration to strike a budget deal to avert tax increases and spending cuts that could trigger a recession next year.

Without a deal, the measures known as the “fiscal cliff” will take effect in January.

Bernanke also said Congress must raise the federal debt limit to prevent the government from defaulting on Treasury’s debt. Failure to do so would impose heavy costs on the economy, he said. Bernanke said Congress also needs to reduce the federal debt over the long run to ensure economic growth and stability.

Uncertainty about all these issues is likely holding back spending and investment and troubling investors, the Fed chairman said in a speech to the Economic Club of New York.

Resolving the fiscal crisis would prevent a sudden and severe shock to the economy, help reduce unemployment and strengthen growth, he said. That could make the new year “a very good one for the American economy,” he said.

“A stronger economy will, in turn, reduce the deficit and contribute to achieving long-term fiscal sustainability,” Bernanke told the group.

When asked during a question-and-answer session after the speech whether the Fed could soften the impact of the fiscal cliff, Bernanke was firm in his warning.

“In the worst-case scenario where the economy goes off the broad fiscal cliff … I don’t think the Fed has the tools to offset that,” Bernanke said.

By the end of December, just as the fiscal cliff nears, the federal government is expected to hit its borrowing limit. Treasury Secretary Timothy Geithner has said he will resort to the same maneuvers he used during the last debt standoff in 2011 to prevent the government from defaulting on its debt.