Federal Reserve Chairman Ben Bernanke warned Capitol Hill today that any modest gains the economy is making could all be lost if Congress doesn't take action to avert the so-called " taxmageddon " by the end of the year.
"As is well known, U.S. fiscal policies are on an unsustainable path," Bernanke told the Senate Banking Committee. "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."
Congress is facing a year-end "fiscal cliff," the intersection of several tax provisions - notably, the expiration of Bush-era tax cuts, $1.2 trillion in automatic spending cuts because of the sequester and expiring payroll tax breaks, which, if not addressed, could cost American taxpayers $310 billion in tax increases next year.
"Recovery could be endangered by the confluence of tax increases and spending reductions that will take effect early next year if no legislative action is taken," Bernanke said.
But as leadership from both sides of the aisle continue to wage an increasingly polarized battle over taxes, Sen. Chuck Schumer, D-N.Y., today urged the Federal Reserve on measures to take economic recovery into its own hands.
"The bottom line is very simple: We're not going to get the fiscal relief we want, at least over the next short while," Schumer said. "Given the political realities, Mr. Chairman, particularly in this election year, I'm afraid the Fed is the only game in town."
Bernanke testified on Capitol Hill to deliver his semiannual report, painting a picture of slowing job growth, tepid manufacturing rates and weakened progress on the housing market in the second-quarter of 2012. The U.S. economy has continued to recover, he said, but growth indicators are moving at a pace that he called "disappointing."
While the unemployment rate has fallen about a percentage point since late 2011, average growth in payroll employment has dwindled to 75,000 per month, down from 200,000 then. Bernanke said jobs related to the warm weather last winter might be to blame for some - but not all - of the languid jobs momentum.
The housing sector is seeing "moderate" growth, he said, with construction and home sales gradually increasing, thanks to unprecedentedly low mortgage rates. But factors like tough lending standards for would-be buyers, plus an abundance of vacant or foreclosed homes, continues to hamper growth.
Bernanke projected unemployment rates would remain at 7 percent or higher until the end of 2014, with the GDP growing at a lower-than-expected pace of 2.2 to 2.8 percent in the next year.
He indicated the Federal Reserve is willing to take action to avert a second financial crisis but would not elaborate on possible plans or a timeline for implementation.
"We will evaluate our options going forward," he said, adding that it's important to weigh the costs and risks associated with some non-conventional measures to spur economic growth. "If we are not getting sustainable improvements, we'll have to seriously consider taking additional action."