Is Bernanke Right About the Fiscal Cliff?

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After the Federal Reserve announced on Wednesday that the U.S. economy grew at a “measured pace” in recent weeks, Dallas Fed President Richard Fisher pressed the government to give businesses more incentives to use the central bank’s liquidity to create jobs.

Fisher has requested more governmental action because there are limits to what monetary policy can accomplish, Reuters reported. “We at the central bank have been carrying the load and this is a very dangerous predicament,” Fisher said during a lecture in Frankfurt.

The Summary of Commentary on Current Economic Conditions released by the Federal Reserve on Wednesday showed the reality behind Fisher’s statement. Contacts within the Fed’s 12 districts reported that manufacturing was either slowing or contracting as the impending fiscal cliff has made factory owners concerned. The slowdown in manufacturing offset gains made in consumer demand and housing.

“Consumer spending grew at a moderate pace in most districts, while manufacturing weakened,” the central bank said in its Beige Book business survey. “Contacts in a number of districts expressed concern and uncertainty about the federal budget, especially the fiscal cliff.”

In comparison, the Fed’s previous Beige Book report stated that “economic activity generally expanded modestly.”

However, as economic conditions have changed over the last few months, analyst expect that the Federal Reserve will continue its $40 billion per-month purchases of mortgage-backed securities in its most recent round of quantitative easing. Furthermore, the Beige Book survey gave an indication of the potential the fiscal cliff has to affect the economy. As Bloomberg reported, the report also “bolster[ed] Fed Chairman Ben S. Bernanke’s view that an agreement on reducing long-term federal budget deficits without abrupt tax increases and spending cuts would remove a barrier to growth.”

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