Can Ben Bernanke save the job market if 'fiscal cliff' talks fail?
The Federal Reserve said this week it would maintain ultralow interest rates until the unemployment rate falls to at least 6.5 percent, unless inflation starts looming as a near-term risk.
The Federal Reserve this week sought to further buoy a weak economy. But will it be enough?Skip to next paragraph
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That's an important question for the US job market, as elected leaders struggle to reach a deal on fiscal policy to avoid steep tax hikes and spending cuts in the new year.
A new US recession is possible. And right now, the fact that the "fiscal cliff" is unresolved means that unelected officials at the Federal Reserve are operating virtually alone as a policy bulwark for the economy.
FISCAL CLIFF 101: 5 basic questions answered
The Fed's move this week was significant. The US central bank sought to clarify and strengthen communication about its resolve to aid the economy, by saying it would maintain ultralow interest rates until the unemployment rate falls to at least 6.5 percent, unless inflation starts looming as a near-term risk. Currently, the jobless rate is 7.7 percent.
The Fed also said it will continue a plan known as "quantitative easing" of monetary policy, by buying sizable quantities of bonds. The idea of the bond purchases is to keep interest rates low and support investor confidence – thus aiding job creation.
"The Fed remains the only proactive game in town, as Congress continues to spin ... wheels" on fiscal policy, writes Sam Stovall, chief equity strategist at Standard & Poor's Capital IQ. "We think equity prices will be aided by two things that the Fed did today: the increase in asset purchases and their change in communication."
But even if the Fed's action is successful, that doesn't mean it will have such a large impact that it could fully compensate for a lack of action by elected officials. The Fed can help. It can buy time. But it can't control all the economy, all the time, all by itself.
Fed Chairman Ben Bernanke said as much back in September.
"If the fiscal cliff isn’t addressed, as I’ve said, I don’t think our tools are strong enough to offset the effects of a major fiscal shock," he said in a press conference. "So I think it’s really important for the fiscal policymakers to, you know, work together and try to find a solution for that."
The fiscal policymakers are working on it.
For now, although the talks don't appear anywhere near conclusion, the prevailing expectation among investors and economists is that President Obama and Congress will reach a deal in time to avoid a recession. A bargain would scale back the tax hikes and spending cuts set to take effect Jan. 1, thus softening the immediate risks to job growth.
But a deal is also expected to contain sizable deficit reduction over the next few years, to give financial markets assurance that the United States is responding seriously to the threat posed by ever-rising national debt.