US recession likely if Congress does not act, warns Fed chief Bernanke

WASHINGTON

Federal Reserve Chairman Ben Bernanke waits to testify before the Senate Banking, Housing and Urban Affairs Committee. AFP photo

Federal Reserve Chairman Ben Bernanke sketched a bleak picture of the U.S. economy and warned it will darken further if Congress does not reach agreement soon to avert a budget crisis. Without an agreement, tax increases and deep spending cuts would take effect at year’s end, Bernanke noted: A recession would occur, and 1.25 million fewer jobs would be created in 2013.

The Fed is prepared to take further action to try to help the economy if unemployment stays high, he said. Bernanke did not signal what steps the Fed might take or whether any action was imminent. And he noted there’s only so much the Fed can do.

But the Fed chairman made clear his most urgent concern is what would happen to the economy if Congress can’t resolve its budget impasse before the year ends. Cuts in taxes on income, dividends and capital gains would expire. So would this year’s Social Security tax cut and businesses tax reductions. Defense and domestic programs would be slashed. And emergency benefits for the long-term unemployed would run out.

‘Economy weakened’
All that “would greatly delay the recovery that we’re hoping to facilitate,” Bernanke said near the end of two hours of testimony to the Senate Banking Committee.

Bernanke was giving his twice-a-year report to Congress on the state of the economy. The economy is growing modestly, but has weakened, Bernanke said. Manufacturing has slowed. Consumers are spending less. And job growth has slumped to an average of 75,000 a month in the April-June quarter from 226,000 a month from January through March. The unemployment rate is stuck at 8.2 percent.

Bernanke noted that the economy, after growing at a 2.5 percent annual rate in the second half of 2011, slowed to roughly 2 percent from January through March. And it likely weakened further in the April-June period.

Congress needs to resolve its impasse well before the year ends, Bernanke said. “Doing so would help reduce uncertainty and boost household and business confidence,” he said.

The cuts that would kick in next year could cost as many as 2 million jobs, a trade group that represents manufacturers said in a report released Tuesday. The report came from the Aerospace Industries Association.

“Congress is in charge here, not the Federal Reserve,” Bernanke said.

The economy’s challenges go beyond the budget impasse, Bernanke said. Lawmakers must also produce a long-term plan to shrink federal budget deficits. Otherwise, he said the United States could eventually suffer a financial crisis marked by rising interest rates. Consumers and businesses would have to pay more for mortgages and many other kinds of loans.

“It would be very costly to our economy,” Bernanke said.

Europe’s main stock markets rose slightly yesterday as traders looked ahead to more testimony on the U.S. economy from Federal Reserve Chairman Ben Bernanke and digested a unique German bond auction.

 London’s FTSE 100 benchmark index of leading shares edged up 0.07 percent to 5,633.10 points in late morning trade. Frankfurt’s DAX 30 index gained 0.14 percent to 6,586.56 points and in Paris the CAC 40 won 0.49 percent to 3,192.43.

“European markets have registered mild gains today on hopes that Fed chairman Bernanke will reveal more details on the central bank’s stance on upcoming easing measures at his second day before US Congress,” said Ishaq Siddiqi, an analyst at ETX Capital trading group.

Compiled from AFP and Reuters stories by the Daily News staff in Istanbul.