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Bernanke warns Congress to avoid ‘fiscal cliff’
Question of the Day
After the last debt standoff in the summer of 2011, Standard & Poor’s downgraded the government’s credit rating on long-term securities one notch from the highest level of AAA to AA+. It was the first ever downgrade of U.S. government debt.
After the presidential election, Fitch Ratings said Obama would need to quickly reach a budget agreement with Congress over the fiscal cliff or risk losing Fitch’s AAA rating on U.S. debt.
It’s unclear what, if anything, the Fed could do to cushion the economy from the fiscal cliff beyond the bond purchases it’s already making to try to lower long-term borrowing rates and stimulate spending.
The minutes of the Fed’s last policy meeting suggest that it will likely unveil a bond buying program in December to try to drive down long-term rates. The new purchases would replace a bond-buying program that expires at year’s end.
But the minutes also noted that “several’ Fed policymakers questioned whether additional bond buying would be needed and that “a couple” worried that keeping rates too low for too long could drive up inflation.
A new bond buying program would come on top of a program the Fed launched in September to buy $40 billion a month in mortgage bonds to try to reduce long-term interest rates and make home buying more affordable. That program represented the Fed’s third round of major bond purchases to expand its holdings.
Fed officials also announced at the September meeting that they planned to keep the Fed’s benchmark short-term interest rate near zero through mid-2015. This rate for overnight loans has been at a record low since December 2008.
By Matt Kibbe
The short-term deal will assure long-term overspending
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