Euro crisis, 'fiscal cliff' menace US economy

Federal Reserve Chairman Ben Bernanke The European crisis and mandated budget cuts and tax hikes pose important risks for the US economy, Federal Reserve Chairman Ben Bernanke told Congress Thursday. But with the economy motoring along at a "moderate" pace, he also gave no hint as to whether the central bank would launch a new stimulus program to help growth.
Bernanke kept at arm's length from the idea, despite recent comments by several other senior Fed officials that more stimulus could be merited by the current 2.0 percent pace of growth.
"We have made no decisions," Bernanke said when asked by Congress's joint economic committee about the possibility of a "QE3" quantitative easing program to further push down interest rates.
However, he added, "I wouldn't want to take anything off the table at this juncture."
Bernanke said that the US economy was showing some signs of strength, including in exports and consumer spending.
"Economic growth appears poised to continue at a moderate pace over coming quarters," he said.
He said last year's increases in household spending have been sustained and that falling energy prices should help offset slow income growth for Americans.
He also said that inflation should stay at or below 2.0 percent, within the central bank's comfort zone.
And despite Europe's problems, too, demand for US exports "has held up well."
But the economy remains frail, households and businesses deeply cautious, the housing market still depressed, and unemployment stubbornly high.
Moreover the economy remains vulnerable to two potential shocks: the eurozone crisis and the year-end "fiscal cliff".
The eurozone turmoil has already strained global financial markets, and it has pushed a cloud over US consumer and business confidence, he said.
"The situation in Europe poses significant risks to the US financial system and economy and must be monitored closely," he warned.
"European policymakers have taken a number of actions to address the crisis, but more will likely be needed to stabilize euro-area banks, calm market fears about sovereign finances, achieve a workable fiscal framework for the euro area, and lay the foundations for long-term economic growth."
The other looming threat is the legislation in place that could both raise taxes for Americans and force a drastic cut in government spending at the year's end, moves that economists say could drive the country back to recession if not changed.
"The so-called fiscal cliff would, if allowed to occur, pose a significant threat to the recovery," Bernanke said.
The budget cuts and tax hikes already mandated -- the product of an unhappy political compromise last year in Congress -- could amount to 3-5 percent of gross domestic product, Bernanke said -- "which would be a very significant impact on the near-term recovery."
"What I am saying is that in ways that are up to Congress, steps should be taken to mitigate that overall impact... What is particularly striking here is that this is all preprogrammed," he said.