18th July 2012
"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. Doing so earlier rather than later would help reduce uncertainty and boost household and business confidence," Ben Bernanke told Congress Tuesday.
Bernanke's pleas come on the heels of a report by Morgan Stanley in which it anticipates that the so-called ‘fiscal cliff' would represent a 5 percent drag on gross domestic product. The report said: "While our analysts are somewhat less worried about the impact of European bank strains, the negative impact of fiscal cliff uncertainty is becoming more widespread."
Furthermore, in a study conducted on behalf of Aerospace Industries Association, two academics, Dr. Stephen S. Fuller and Dwight Schar, found that 2.14 million American jobs could be lost if the Budget Control Act's sequestration mandate takes effect on January 2, 2013. That is the date that budget cuts of $1.2 trillion start throughout government unless Congress and the administration agree on a solution.
"The results are bleak but clear-cut," said Fuller. "The unemployment rate will climb above 9 percent, pushing the economy toward recession and reducing projected growth in 2013 by two-thirds. An already weak economy will be undercut as the paychecks of thousands of workers across the economy will be affected from teachers, nurses, construction workers to key federal employees such as border patrol and FBI agents, food inspectors and others."
Politics of QE3
Meanwhile, even as Bernanke gave no indication as to whether the Fed would take additional steps to boost the economy; Justin Lahart of the WSJ says electoral politics could pose a potential problem for the Chairman in his decision-making.
"With long-term rates already at historic lows, it is hard to claim that it is needed to make debt even cheaper. The main aim of QE3 likely would be to push investors into stocks and other risky assets. The trouble is, artificially juicing a stock market, which is only a few percentage points off its recent highs, would be controversial for the independent Fed heading into November's elections."
"Nobody really believes the Fed's well-worn protests that it doesn't weigh politics in its decision-making process. However, if the Fed thinks it should move but doesn't, it would open itself up to a different kind of onslaught. While some Fed members will continue to worry that more QE could carry as many risks as benefits, the politics of the situation argue that if the Fed is going to launch QE3, it will do so at its two-day meeting that concludes Aug. 1.
"After all, the last thing Mr. Bernanke wants is for Fed-obsessed markets to de disappointed, only to force another round of QE even closer to the election."
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