Bernanke warns threat from 'fiscal cliff'

WASHINGTON - US Federal Reserve chairman Ben Bernanke Tuesday urged the Congress and Obama administration to strike a deal to avert the looming "fiscal cliff", saying the combination of tax hikes and spending cuts would pose a "substantial threat" to the country's economic recovery.

US Federal Reserve Chairman Ben Bernanke speaks to the Economic Club of New York in New York, November 20, 2012. [Photo/Agencies]

Despite the "constructive" meeting between Obama and congressional leaders on how to avert the looming "fiscal cliff" on Friday, differences remained in their preferred approaches. Bernanke said the fiscal uncertainty is already weighing down spending decisions of households and businesses.

"Congress and the administration will need to protect the economy from the full brunt of the severe fiscal tightening at the beginning of next year that is built into current law - the so-called fiscal cliff," the US central bank chief said in a speech in New York.

"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," he said, according to the prepared text.

Bernanke's warning came as the Democrats and Republicans tried to search for common ground in talks to pull back from the cliff and craft a plan to reduce the long term deficit.

"Coming together to find fiscal solutions will not be easy, but the stakes are high," he said.

Bernanke reminded the policymakers that the federal budget is on "an unsustainable path" and they should avoid "unnecessarily adding to the headwinds that are already holding back the economic recovery".

He pointed out that the great recession may have reduced the US economy's potential growth rate, and the economy has continued to recover but at a pace slower than the expectation of the Fed officials.

Bernanke hinted little in his speech on whether the Fed would take additional easing measures to fill the gap for the Operation Twist, a program set to expire at the year end. Instead, he noted that "cooperation and creativity to deliver fiscal clarity - in particular, a plan for resolving the nation's longer-term budgetary issues without harming the recovery - could help make the new year a very good one for the American economy."