Deficit, Europe May Spark Fed Action
July 18, 2012 by Sam Rolley
Federal Reserve Chairman Ben Bernanke testified before the Senate Banking Committee yesterday, saying that the economy is still floundering and hinting that another round of Federal Reserve action is on the horizon.
Much of Bernanke’s focus was placed on European economic markets and U.S. lawmakers’ inability to agree on a plan to reduce the budget deficit at home without drastically sharp cuts and tax hikes.
On Europe, Bernanke said: “The Federal Reserve remains in close communication with our European counterparts. Although the politics are complex, we believe that the European authorities have both strong incentives and sufficient resources to resolve the crisis.”
But he concluded that European developments that resulted in a disruption in global financial markets would inevitably pose significant challenges for the U.S. economy that the Fed is ready to combat.
At home, the Fed chairman said that “U.S. fiscal policies are on an unsustainable path” said lawmakers should put high priority on a “medium term” deficit-reduction plan.
“The most effective way that the Congress could help to support the economy right now would be to work to address the nation’s fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery,” he said. “Doing so earlier rather than later would help reduce uncertainty and boost household and business confidence.”
Economic experts say that Bernanke’s testimony alludes to his willingness to enter another round of Fed economic manipulation; but expect it to occur months from now, as it is the Fed chairman’s only remaining option.