Federal Reserve official: If Congress dawdles, economy will fall 3 percent

If Congress waits to resolve its differences over spending and taxes until next year, it could have a very unpleasant affect on the economy.

That’s the concern one of the Federal Reserve’s most prominent members, William Dudley, the president of the Federal Reserve Bank of New York.

In an appearance on CNBC and also in a speech before the Council on Foreign Relations on Thursday, Mr. Dudley warned that Congress could damage the economy if it cannot resolve its differences. If Congress cannot reach an agreement on extending the Bush-era tax cuts as well as cutting the budget, Dudley warns that a 3 percent contraction of gross domestic product would automatically begin on January 1.

“That would be a huge shock to an economy that isn’t that strong yet,” he warned in an interview with CNBC’s Steve Liesman.

Even the uncertainty of what Congress might do leading into year-end might be enough to cause economic damage, he warned. “Businesses might be more reluctant to hire, more reluctant to invest, because of uncertainty about how the fiscal cliff is going to be resolved,” he said. “So I think it’s a negative both now, in terms of uncertainty, and potentially later, because it could be resolved in a way that’s not good for the economy.”

Dudley’s warning followed a similar storm warning on Tuesday by the Congressional Budget Office which used the phrase “fiscal cliff” in describing the possibility of both taxes going up and fiscal spending coming down. The CBO went one step further saying the economy would slip into a recession in the first half of 2013 if Congress does not act.

Working against any agreement is the presidential race. In a forthcoming issue of Time magazine, presumptive GOP presidential nominee Mitt Romney said that he did not want President Obama and Congress to deal with the issues in a lame-duck session.

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