Bernanke ¨we are on life support¨

Ben Bernanke, the chairman of the Federal Reserve, has warned that the fiscal cliff poses a "substantial threat" to the US recovery.

In his first speech since president Barack Obama's re-election, Bernanke said that the year-end expiration of Bush-era tax cuts and imposition of deep spending cuts would send the US "toppling back into recession."

Speaking at the New York Economic Club, Bernanke called the US recovery "disappointingly slow". He added: "Indeed, since the recession trough in mid-2009, growth in real gross domestic product (GDP) has averaged only a little more than 2% per year."

He acknowledged some positive indicators: the job market continues to improve, inflation remains low and the housing market appears to be improving. But Bernanke said the Federal Reserve remained concerned about the fragility of the recovery, not least because of threats from abroad.

"The elevated levels of stress in European economies and uncertainty about how the problems there will be resolved are adding to the risks that US financial institutions, businesses, and households must consider when making lending and investment decisions," Bernanke said.

He also said the row over the fiscal cliff presented a major challenge to the US economy. "The realization of all of the automatic tax increases and spending cuts that make up the fiscal cliff, absent offsetting changes, would pose a substantial threat to the recovery – indeed, by the reckoning of the Congressional Budget Office (CBO) and that of many outside observers, a fiscal shock of that size would send the economy toppling back into recession."

In his speech, Bernanke warned that a row over increasing the US debt ceiling in Washington would have dire consequences. A row over raising the debt limit in the summer of 2011 led to a historic downgrade of US debt by ratings agencies and triggered panic on financial markets around the world. "A failure to reach a timely agreement this time around could impose even heavier economic and financial costs," said Bernanke.

David Semmens, senior US economist at Standard Chartered, said the speech signaled the Fed was unlikely to raise interest rates any time soon. "This is certainly a speech that is signally the risks remain firmly to the downside. We are likely to see the Fed on hold for longer rather than shorter and that they will only be hiking when they are assured of a self-sustaining recovery," he said.

Guardian