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Originally published Tuesday, November 20, 2012 at 10:00 PM

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Bernanke forecast: ‘Very good’ year ahead if fiscal deal reached

The Federal Reserve chairman sounded an upbeat note about the future of the American economy. But it all depends on the so-called “fiscal cliff” being avoided.

Bloomberg News

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Federal Reserve Chairman Ben Bernanke said an agreement on ways to reduce long-term federal budget deficits could remove an impediment to growth, while failure to avoid the so-called “fiscal cliff” would pose a “substantial threat” to the recovery.

“There’s important potential for the economy to strengthen significantly if there’s a greater level of security and confidence about where we’re going,” he said Tuesday to the Economic Club of New York. “A plan for resolving the nation’s longer-term budgetary issues without harming the recovery could help make the new year a very good one for the American economy.”

Bernanke, 58, identified the threat of $607 billion in automatic tax increases and spending cuts set to take effect next year as one of the impediments to a faster expansion as companies hold back on hiring and investment. The Fed chief repeated his warning a failure to reach an agreement could send the economy “toppling back into recession.”

The central bank is buying $40 billion in housing debt each month and has pledged to keep its benchmark interest rate near zero through mid-2015 as it seeks to spur growth and reduce a 7.9 percent jobless rate.

“We’re going to do what we can to support ongoing recovery in growth and jobs and create the demand for output, the demand for firms’ products that will remove that uncertainty about the future sustainability of the recovery,” Bernanke said.

“This is probably the most upbeat speech he has given, but it’s still guarded optimism,” said Harm Bandholz, chief U.S. economist at UniCredit Group in New York. “It’s still Bernanke. He has been so cautious about everything throughout the recovery.”

“Uncertainty” about the fiscal outlook “may be contributing to an increased sense of caution in financial markets, with adverse effects on the economy,” Bernanke said at the Marriott Marquis Hotel in Times Square.

Bernanke also said Fed policy will remain accommodative until the recovery is on a firmer footing. “We are not saying that we expect the economy to remain weak until mid-2015,” he said. “We want to be sure that the recovery is established before we begin to normalize policy.”

Bernanke identified the slow recovery in housing, weakness in bank lending and the European debt crisis as additional headwinds to the recovery.

While monetary policy is “by no means a panacea for our economic ills,” Bernanke said, it has provided an “important offset to the headwinds that have slowed the cyclical recovery.” He said purchases of mortgage debt had pushed down borrowing costs, helping the housing market.

“Recently, the housing market has shown some clear signs of improvement, as home sales, prices and construction have all moved up since early this year,” he said. “These developments are encouraging, and it seems likely that, on net, residential investment will be a source of economic growth and new jobs over the next couple of years.”

Record low mortgage rates have helped spur the revival. The average fixed rate on a 30-year home loan fell to 3.34 percent last week, the lowest in four decades of data, Freddie Mac data show.

New-home construction unexpectedly climbed to a four-year high in October, a report Tuesday showed.

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