WASHINGTON — Federal Reserve Board Chairman Ben Bernanke on Tuesday warned policymakers not to delay taking steps to avert a fiscal shock that would cause the economy to fall back into recession.
"Continuing to push off difficult policy choices will only prolong and intensify these uncertainties," said Bernanke, in a speech before the New York Economic Club. "Uncertainty about how the fiscal cliff, the raising of the debt limit, and the longer-term budget situation will be addressed appears already to be affecting private spending and investment decisions and may be contributing to an increased sense of caution in financial markets, with adverse effects on the economy."
Despite efforts by the Fed to improve the 7.9% unemployment rate and jumpstart a housing recovery by keeping the federal fund rates near zero, the U.S. economy continues to face several headwinds, he said.
"Uncertainties about the situation in Europe and especially about the prospects for federal fiscal policy seem to be weighing on the spending decisions of households and business as well as on financial conditions," said Bernanke. "Such uncertainties will only be increased by discord and delay."
Bernanke has repeatedly warned the White House and Congress to avoid going over the so-called fiscal cliff on Jan. 1 when a package of automatic tax increases and spending cuts take effect.
Doing so would "pose a substantial threat to the recovery," he has said.
Even the Congressional Budget Office has suggested that a "fiscal shock of that size would send the economy toppling back into recession."
However, if policymakers are able to broker a deal that would reduce the government's budget deficit, it could remove a barrier to growth.
"Cooperation and creativity to deliver fiscal clarity — in particular, 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," said Bernanke.
Policymakers next year will also be responsible for approving an increase in the federal debt limit to avoid a "catastrophic default" on the country's obligations, Bernanke said. Last summer, lawmakers neared the brink before reaching an agreement, causing the United States' credit rating to be downgraded for the first time in history.
"A failure to reach a timely agreement this time around could impose even heavier economic and financial costs," Bernanke warned.
Fiscal policymakers, he said, should consider creating a framework to set federal fiscal policy on a "stable path," such as one where the ratio of debt to gross domestic product "eventually stabilizes or declines" in order to promote economic growth.