Fed
Officials: US Facing ‘Fiscal Cliff’
Two
Federal Reserve officials warned Tuesday that the U.S. could be
heading for a "fiscal cliff" at year's end if mandated tax
increases and spending cuts are implemented
CNBC,
1
May, 2012
Charles
Evans of the Chicago Fed called the cliff a "big uncertainty"
while Atlanta Fed President Dennis Lockhart said there could be a
"financial shock" if markets begin to anticipate that
Congress and the White House do little to address this situation.
The
expected tax increases and spending cuts were triggered when a
congressional "super committee" failed to come up with a
way of closing the federal budget deficit.
Both
Fed officials spoke during the Milken conference in Los Angeles.
Earlier Tuesday, on CNBC, both agreed the slowing U.S. economy is
disappointing, but differed on the need for continued stimulus.
"I’d
like nothing better than to start raising rates before late 2014 on
the strength of a stronger economy," Evans told Squawk on the
Street.
Noting
there's "tremendous room" for more accommodation, the
Chicago Fed chief said that "more liquidity would be helpful.
It would ratify the idea that [Fed] policy is going to be
accommodative for a very long time to get things going. Look, we
might get lucky in the sense that ... the channel opens up and we get
a greater lift in the economy."
Rather
than keeping rates low until late 2014, Evans thinks the Fed should
use "economic triggers" on which to base accommodation such
as keeping low rates if the unemployment rate is above 7.5 percent
"unless inflation unexpectedly goes up to a very high level, say
3 percent."
Lockhart
is more skeptical and also concerned about triggering higher
inflation . The Atlanta Fed president said that while the
first-quarter GDP and March jobs data were disappointing, "I
am a bit reticent to pull the trigger on any action. We have to see
how the economy evolves. Pulling a number out of the air is a bit too
simplistic."
He
added, "There’s only so much we can do to stimulate loan
demand, and to change the risk appetite of the financial system or
banks, so I’m not sure that more really active stimulus in the form
of quantitative easing , for example, would have that much of an
effect. But the longer-term costs have to be kept in mind, costs
related to inflation expectations, for example."
Both
Fed presidents said they know the continued low interest rates are
hurting savers.
"We're
in a tough situation and the current slow recovery is hurting
everybody," said Evans.
Lockhart
noted that "we can only have one policy, and that policy is
designed to support the recovery. So unfortunately there are winners
and losers."
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