Bernanke warns about fiscal cliff, spending cutbacks 

(MENAFN - AFP) US Federal Reserve chairman Ben Bernanke warned Tuesday that the looming 'fiscal cliff' tax hikes and spending cuts "pose a substantial threat" to the country's economic recovery.

With government leaders locked in crunch talks on avoiding the cliff and slashing the budget deficit, Bernanke also said that the rising cuts to federal government spending were already holding back economic growth.

"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.

"Indeed, by the reckoning of the Congressional Budget Office and that of many outside observers, a fiscal shock of that size would send the economy toppling back into recession."

He said the Fed already views growth as disappointingly slow and troubled by threats from the eurozone crisis, slow job creation and the reticence of banks to loosen lending standards -- which Bernanke said is holding back recovery in the housing sector.

On top of that, he said, "the phasing-out of earlier stimulus programs and policy actions to reduce the federal budget deficit have led federal fiscal policy to begin restraining GDP growth."

"Indeed, under almost any plausible scenario, next year the drag from federal fiscal policy on GDP growth will outweigh the positive effects on growth from fiscal expansion at the state and local level."