There's no shortage of finger-pointing over whose job it is to save the U.S. from slipping back into recession.
Federal Reserve Board Chairman Ben Bernanke told a Senate panel Tuesday there's little he can do to offset the likely economic damage if Congress steers the U.S. economy over a fiscal cliff. Nor, he told lawmakers, is that his job.
"I don’t think that’s my responsibility," he told the Senate Banking Committee. "I've been assigned to focus on maximum employment and price stability, not to hold threats over Congress’ head. Congress is in charge here, not the Federal Reserve.”
But with Congress deadlocked in an election year and unable or unwilling to head off a package of massive tax increases and spending cuts that threaten to snuff out the faltering U.S. recovery, it's not clear who's in charge.
“We can talk all we want -- everyone gives speeches how fiscal policy should be the way to go and we don't do anything," Sen. Charles Schumer, D- N.Y., told Bernanke. “Given the political realities, Mr. Chairman, particularly in this election year, I am afraid the Fed is the only game in town. And I would urge you to take whatever actions you think would be most helpful in supporting a stronger economic recovery.”
Bernanke’s semi-annual briefing to Congress, watched carefully by businesses and investors, was expected to bring hints of the central bank’s next move to stave off the latest slowdown in the U.S. economy. Since the financial panic of 2008, the Fed has taken a series of steps to push cash into the banking system to lower interest rates and to spur borrowing and investing.
For a time, it looked as if those moves could offset the economic damage inflicted by the worst financial collapse since the Great Depression. Last winter, as job growth picked up and the housing market appeared to stabilize, the Fed seemed to have succeed in its “dual mandate” of managing the supply of money to promote job growth and keep inflation in check.
But this spring, the economy’s momentum began to fade. Job growth has slowed. Consumers are pulling back on spending. Corporate profit growth is slowing. Economists have begun paring back their growth estimates for the rest of the year. Only inflation seems tame, as long as gas prices remain relatively cheap.
The latest data has fueled speculation that the Fed may soon announce another round of cash injection, possibly through the purchase of mortgage bonds to help spur lending to boost home sales. But after pumping roughly $2 trillion into the system, and with interest rates already near zero, some Fed watchers caution there may be little left Bernanke and his central bank colleagues can do to revive growth.
“Monetary tools are not unlimited in their effect,” said Dino Kos, an analyst at Hamiltonian Associates and a former New York Fed official. “You can't achieve all objectives through managing money. And this is what we're finding out.”
To make the Fed’s job even more impossible, Congress has set in place fiscal policies -- locking in massive tax increases and spending cuts -- that are set to kick in abruptly at the end of the year. Unless diffused, those measures will lop as much 5 percent off the growth in gross domestic product within a matter of months, according to economists.
It would also send the job market back into contraction. Bernanke cited Congressional research estimating the full package of tax increases and spending cuts would destroy about 1.2 million jobs. And that forecast doesn’t take into account the wider turmoil if Congress embarks on another self-inflicted financial crisis like last summer’s debt-ceiling debate that created the ruinous fiscal policy in the first place.
“As you recall, market volatility spiked and confidence fell last summer, in part as a result of the protracted debate about the necessary increase in the debt ceiling,” Bernanke warned the Senate panel. “Similar effects could ensue as the debt ceiling and other difficult fiscal issues come into clearer view toward the end of this year.”
To some Fed watchers, Bernanke and his colleagues have accomplished what they set out to do. Though credit is still tight for many borrowers, U.S. banks are in much better shape than they were in 2008 and much stronger that their European counterparts. The housing market, still languishing at recession levels, appears to have stabilized. Though the economy remains weak four years into recovery, it has so far avoided the double-dip contraction that is now sweeping Europe.
Now, with growth slowing again, the biggest obstacle to recovery has become the widening uncertainty gripping business and consumers over the fallout from the paralysis in Congress.
“How can monetary policy at this point offset the uncertainty about whether or not we get a $400 billion to $500 billion tax increase in 2013?” said John Ryding, chief economist at RDQ Economics.
Even if Congress steps back from the “fiscal cliff” following the November election, the Fed has even fewer options in dealing with the more immediate threat of the U.S. economy from the ongoing slowdown in Europe. On Monday, the International Monetary Fund lowered its forecast for global growth, citing the continued inability of Europe’s leaders to come to grips with the slow-motion unwinding of the eurozone.
For more than two years, European leaders have been struggling unsuccessfully with a deepening debt crisis that is now threatening Europe’s banking system. Weeks after agreeing to a 100 billion euro ($122 billion) bailout of Spain’s banks, finance ministers are still haggling over the terms. On Monday, Germany’s highest court postponed until September a decision on whether the bailout fund itself violates the country’s constitution.
But Spain’s bankers may not be able to hold out that long. As investors and depositors become increasingly skittish, Europe lacks the political and governmental infrastructure to backstop its banking system and quell a panic the way the Fed, Treasury and Congress did in 2008 with programs like the $800 billion Troubled Asset Relief Program.
“There is no TARP, or any meaningful policy response in Euroland,” Carl Weinberg, chief economist High Frequency Economics, wrote in a note to clients. “We therefore expect the crunch to be deeper than in the United States … where it was plenty deep enough.”