Fed Sees Sharp U.S. Budget Cuts as 'Sizable Risk'

May 16, 2012
Measures aim to trim an estimated $6.8 trillion off the U.S. deficit over a decade.

The Federal Reserve sees a quick, sharp tightening of U.S. spending as a "sizable risk" to the economy, minutes from a recent top-level policy meeting revealed Wednesday.

"Several" members of the Fed's top interest rate-setting panel expressed fears that uncertainty about dramatic budget cuts could curb business hiring and economic growth.

At the end of this year, if Congress does not act, automatic budget cuts will hack $1.2 billion off government spending at the same time that billions of dollars worth of tax cuts expire.

Taken together, the measures aim to trim an estimated $6.8 trillion off the U.S. deficit over a decade.

But they would also force a sudden contraction in government spending, crucial to the economy.

While Fed officials have previously spoken publicly about the looming fiscal cliff, the minutes of Federal Open Market Committee's April 24-25 show the depth of that concern.

"If agreement is not reached on a plan for the federal budget, a sharp fiscal tightening could occur at the start of 2013," the minutes noted. "Uncertainty about the trajectory of future fiscal policy could lead businesses to defer hiring and investment."

In April Fed Chairman Ben Bernanke warned Congress that the central bank would not be able to act as a savior for the economy if Congress failed to act.

"The size of the fiscal cliff is such that there is, I think, absolutely no chance that the Federal Reserve could or would have the ability whatsoever to offset that effect on the economy," he said.

Yet the subject remains highly contentious in Washington, which is mired in partisan sniping as the country rushes toward presidential elections in November.

Republican Speaker of the House John Boehner has indicated he wants a showdown with President Barack Obama over the issue.

"I will again insist on my simple principle of cuts and reforms greater than the debt limit increase," Boehner said Tuesday, raising the specter of another damaging budget fight.

Last year the failure of America's political parties to reach a deal resulted in a first-ever downgrade of the country's credit rating.

Meanwhile the Fed warned that the rolling debt crisis in Europe could hit the United States.

The minutes also show some support for further stimulus if the recovery slows.

"The economy continued to expand moderately," participants noted. "Labor market conditions improved in recent months."

There was also some skepticism that recent strong economic data could be the start of a rapid improvement in the world's largest economy.

Some members of the committee "thought it was premature to infer a stronger underlying trend from the recent positive indicators, since those readings may partially reflect the effects of the mild winter weather or other temporary influences."

Copyright Agence France-Presse, 2012

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