Federal Reserve Chairman Ben Bernanke said an agreement on ways to reduce long-term federal budget deficits could remove an impediment to growth, while failure to avoid the so-called fiscal cliff would pose a "substantial threat" to the recovery.
"There's important potential for the economy to strengthen significantly if there's a greater level of security and confidence about where we're going," he said Tuesday to the Economic Club of New York. "A plan for resolving the nation's longer-term budgetary issues without harming the recovery could help make the new year a very good one for the American economy."
Bernanke, 58, identified the threat of $607 billion in automatic tax increases and spending cuts set to take effect next year as one of the impediments to a faster expansion as companies hold back on hiring and investment. The Fed chief repeated his warning a failure to reach an agreement could send the economy "toppling back into recession."
The central bank is buying $40 billion in housing debt each month and has pledged to keep its benchmark interest rate near zero through mid-2015 as it seeks to spur growth and reduce a 7.9 percent jobless rate.
"We're going to do what we can to support ongoing recovery in growth and jobs and create the demand for output, the demand for firms' products that will remove that uncertainty about the future sustainability of the recovery," Bernanke said.
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"This is probably the most upbeat speech he has given, but it's still guarded optimism," said Harm Bandholz, chief U.S. economist at UniCredit Group in New York. "It's still Bernanke. He has been so cautious about everything throughout the recovery."
Bernanke also said Fed policy will remain accommodative until the recovery is on a firmer footing. "We are not saying that we expect the economy to remain weak until mid-2015," he said. "We want to be sure that the recovery is established before we begin to normalize policy."