Federal Reserve Policy vs. Fiscal Cliffs

The following is an excerpt from an article in:


The New York Times
Sunday, October 28, 2012

Federal Reserve Policy vs. Fiscal Cliffs

By JEFF SOMMER

ANYWHERE investors turned last week, they seemed to be approaching a cliff. But the Federal Reserve provided a margin of safety, and said it stood ready to do so for many months to come.

The stock market, which had climbed so steadily for so long, has been stumbling. The Standard & Poor’s 500-stock index is up more than 12 percent for the year, but it has declined 3.7 percent since its peak on Sept. 14.

“Cliffs are in fashion this fall,” Ed Yardeni, an independent economist, wrote on Thursday. There are fiscal cliffs, earnings cliffs, revenue cliffs and political cliffs — notably, the stark uncertainty of a presidential election lurching to a razor-close finish.

Mr. Yardeni said the market “is already stumbling off an ‘earnings cliff,’ ” and investors worry that political gridlock could render the nation unable to avert a fiscal precipice, too.

That dreaded fiscal cliff came into unexpected view on Monday night, in a presidential debate that was putatively focused on foreign policy. President Obama told Mitt Romney, his Republican challenger, that an automatic cut in military spending simply “will not happen” on Jan. 1. But it wasn’t clear how Mr. Obama would manage to avoid the fiscal cliff — a crushing combination of tax increases and budget cuts — if he cannot reach agreement with a lame-duck Congress on how to avoid it.

The nonpartisan Congressional Budget Office estimated in August that a crash off the fiscal cliff would mire the economy in a “significant” recession. And the International Monetary Fund warned this month that the “fiscal cliff” would trim roughly 4 percent from the growth rate of the American economy. Gross domestic product is already growing at an anemic annual rate: 2 percent in the third quarter, the Commerce Department reported on Friday.

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