Bernanke sees risks to economy from Europe to U.S. fiscal policy

Federal Reserve Chairman Ben Bernanke Federal Reserve Chairman Ben Bernanke

June 7 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said the economy is at risk from Europe’s debt crisis and the prospect of fiscal tightening in the U.S., while refraining from discussing steps the central bank might take to protect the expansion.

“The situation in Europe poses significant risks to the U.S. financial system and economy and must be monitored closely,” Bernanke said today in testimony to the Joint Economic Committee in Washington. “As always, the Federal Reserve remains prepared to take action as needed to protect the U.S. financial system and economy in the event that financial stresses escalate.”

Bernanke also warned lawmakers that “a severe tightening of fiscal policy at the beginning of next year that is built into current law -- the so-called fiscal cliff -- would, if allowed to occur, pose a significant threat to the recovery.”

Bernanke on June 19-20 will lead the Federal Open Market Committee in a policy-setting meeting confronting the slowest employment growth in a year and a worsening debt crisis in Europe. The U.S. added 69,000 jobs last month, the fewest in a year, even as the Fed maintained record stimulus.

Vice Chairman Janet Yellen said yesterday weak job growth and deteriorating financial market conditions show the economy “remains vulnerable to setbacks” and may warrant more accommodation. Two regional Fed bank presidents who vote on policy this year, San Francisco’s John Williams and Atlanta’s Dennis Lockhart, said the Fed should be prepared to take action if the economy deteriorates further.

Reviews Size

Bernanke, 58, echoed language from recent Fed statements, saying that the central bank “reviews the size and composition of its securities holdings regularly and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.”

The Fed has already purchased $2.3 trillion of securities in two rounds intended to lower borrowing costs and spur hiring. A program known as Operation Twist lengthening the maturities of the Fed’s assets is due to expire this month.

More easing isn’t necessary, Dallas Fed President Richard Fisher and St. Louis Fed President James Bullard said in separate speeches on June 5. Additional stimulus would be “pushing on a string,” Fisher said, while Bullard said there’s time to assess the economy and no need to change policy now. The two regional bank chiefs don’t vote on policy this year.

The central bank said yesterday in its Beige Book business survey that the U.S. economy maintained a moderate pace of growth from early April to late May as factory output rose and the real-estate market improved.

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