Fed sounds the alarm on effects of European debt crisis

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Despite the political opposition, “Bernanke was making the case for additional quantitative easing,” said Paul Edelstein, economist at IHS Global Insight, adding that further “drastic action” may be on the way.

“The Fed is keeping it’s powder dry in case things spin out of control in Europe,” said Terry Connelly, dean emeritus at the Golden Gate University’s business school. He expects the Fed will launch a new round of bond-buying after the Fed’s annual meeting in Jackson Hole, Wyo., in August.

Investment strategist Andrew B. Busch was surprised that the Fed is resurrecting its controversial bond-buying programs.

“They risk serious political blowback if they act overly aggressive in the middle of an election that is extremely close and centered on the economy,” he said.

Mr. Bernanke also did not hesitate to insert himself into the growing political brawl over what to do about the “fiscal cliff” at the end of the year. The Fed chairman was the first to warn Congress this year about the dangers the fiscal crunch poses for the economy.

But Wednesday, Mr. Bernanke appeared to downplay concern about the deadline and instead encouraged Congress and the administration to use the occasion to take major action to address the budget deficit. He said Congress should avoid any simple extension of tax cuts or suspension of planned cuts in discretionary spending, which he said would risk rousing fears in global markets about U.S. debts and deficits getting out of control.

Brian Gardner, senior vice president at Keefe, Bruyette & Woods, said the Fed is more worried than Mr. Bernanke let on, and likely is making plans to offset any damage to the economy at the turn of the year if Congress fails to avert a fiscal crunch.

“If Congress fails to extend the tax cuts and lets [budget cuts] proceed as planned, then the Fed may step in to counter the expected fiscal drag,” he said.

According to Wednesday’s Business Roundtable report, 75 percent of CEOs expect sales to increase over the next six months, down 6 percent from the previous survey.

Boeing Chief Executive W. James McNerney Jr., chairman of the Roundtable, blames the slowdown in part on the federal regulatory environment.

“The attitude [about regulations] is different [than in the past],” he added. “We’d just like to see it balanced. We’re not arguing regulation is bad. We need regulation, but it’s gone way beyond that, and it has an effect on business.”

Tim Devaney contributed to this report.

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