Bernanke: “Fiscal cliff can cause another recession”

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Ben Bernanke
Ben Bernanke, the chairman of the Federal Reserve, has warned that the fiscal cliff poses a “substantial threat” and could cause another recession. Photo: Medill DC

As the Federal Reserve is going to adjourn its meeting today, it is expected that a fresh round of bond buying will be carried out in order to support the economic recovery. The recovery has been plagued by the government budget talks and investors are keeping a close eye on both sides to see how the markets are expected to react to the developments. The bond buyback is expected to be in form of buying mortgage backed debt and use a new program of money creation.

The latest round is in support of the unemployment rate which has fallen to 7.9% in November and is the first priority of the Obama administration. The latest version will be phased in at each month in order to provide much needed stimulus to the economy at regular intervals. The tap system will also allow it to have a close check on the economy and see how the stimulus is performing and makes changes if it has to.

The tools that the Fed has are either to decrease interest rates or provide liquidity to the markets and as it has already cut interest rates to 0% since December 2008, the bond buying is the only option left on the table for now. Signals have also been given by the Fed chairman, Ben Bernanke that fiscal cliff would lead to another recession for the US economy and seeing how slow the recovery has been before this, it could stretch for a few more years compared to the last one.

On the other side, talks are going on between Speaker of the house John Boehner and President Obama to hash out a deal for the fiscal cliff before the deadline approaches. First offers had been tabled by both sides before this but now as things intensify, it seems that better proposals have been suggested which seem more realistic than the older ones. Obama has cut down his tax revenues target which means that tax hikes would not be as high as first stated.

There are also spending cuts that have been offered but sceptics in the Republican party want details to see if military budget has been encroached upon or not. At this point, it seems that both sides are trying to get a feel of the other before something substantial is agreed upon. The positive sign is that both sides are negotiating and feel that a deal would be reached ;which caused the markets to soar as investors saw reason in the chaos of Capitol Hill.

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