Fed Chairman Ben S. Bernanke said a tightening in fiscal policy is a “major risk factor” that is already harming investment and hiring decisions by causing “uncertainty” or “pessimism.” The central bank “doesn’t have the tools” to offset that event, he said during a Dec. 12 press conference.
Central bank officials in the U.S. last week linked the outlook for the Fed’s main interest rate to unemployment and inflation for the first time and said they will expand the bank’s asset purchase program in January to spur the economy.
A Commerce Department price gauge that is tied to consumer spending and strips out food and energy costs climbed at a 1.1 percent annual pace, matching the prior estimate.
Changes in fiscal policy also threaten to reduce household spending, the largest part of the economy, first by hurting Americans’ confidence and then by raising their tax bill. The Thomson Reuters/University of Michigan consumer sentiment index fell in December to a four-month low, a Dec. 7 report showed.
In addition, weaker global economies indicate limited demand for U.S.-made goods. Some economists also project that the superstorm Sandy, which struck the East Coast Oct. 29, will reduce GDP in the fourth quarter.
Housing is a bright spot. The number of building permits, a proxy for future construction, issued in November was at a four- year high, according to Commerce Department figures released yesterday. Record-low mortgage rates and rising home prices suggest the housing recovery will extend into 2013.