If the U.S. economy goes over the fiscal cliff, there's really nothing the Federal Reserve can do to help.
Fed Chairman Ben Bernanke repeated that oft-stated warning at a dour press conference on Wednesday, in which he discussed the Fed's latest steps to bolster the economy.
"I hope it won't happen, but if the fiscal cliff occurs, as I've said many times, I don't think the Fed has the tools to offset that event," Bernanke said.
Central-bank policy makers said they planned to keep buying billions of dollars' worth of Treasury and mortgage bonds indefinitely, to keep interest rates low and spur economic growth. They also adopted a groundbreaking new approach to policy, tying their next steps to specific targets for unemployment. The plan is to keep their key short-term interest rate near zero at least until unemployment is below 6.5 percent, which they currently don't see happening until at least mid-2015.
In the past, the Fed's offered promises to hold their key policy interest rate near zero until certain calendar dates. The new approach doesn't change much about their actual policy, however -- they don't see unemployment hitting their target until mid-2015, at least. In other words, the job market is in terrible shape and will stay in terrible shape for a long time, even with the Fed doing everything it thinks it can to help.
Other policy makers in Washington are doing nothing to help. "The Fed is really the only game in town," said Dean Baker, co-founder of Center for Economic and Policy Research. "We should be happy they are doing something, and acting aggressively.
Bernanke warned that policy makers could do a lot of damage if they do nothing to stop the so-called "fiscal cliff" of tax increases and spending cuts due to take effect next year. Bernanke, in fact, coined the phrase "fiscal cliff" and has warned early and often that going over it could cause serious damage to the economy.
He has also pointed out repeatedly that the damage could be so extensive that the Fed might not be able to fight it. He repeated the warning again on Wednesday.
"We cannot offset the full impact of the fiscal cliff -- it's just too big, given the tools we have available and the limitations on our policy toolkit," he said later on in his speech.
Critics of the "fiscal cliff" terminology have pointed out that not all of the austerity will hit the economy all at once, meaning the effect will be more like a "fiscal slope" or "fiscal escarpment." Bernanke stood by his "cliff" terminology on Wednesday.
"I think it's a sensible term," he said. "Because I think fiscal policy is providing support to the economy. If fiscal policy becomes very contractionary, the economy will I think go off a cliff. I think it's reasonable to be concerned about this."
He also dismissed the sentiment, seen by some analysts on both the left and on the right, that going over the fiscal cliff might not be so bad, particularly compared to a bad deal to avoid the cliff. He pointed out that worries about the cliff might already be hurting the economy.
"Why is it that consumer confidence dropped so sharply this week?" he asked. "Why is it that small business confidence dropped so sharply? Why are markets volatile? Why is business investment among the weakest levels during the recovery? All these things can be traced to concern about the fiscal cliff."
Even without the full effects of the austerity bomb, as Paul Krugman has dubbed it, the economy will still be in bad shape, according to the Fed's forecasts. Bernanke said the Fed's expectation that unemployment will not drop below 6.5 percent until mid-2015 at the earliest assumes at least a partial resolution of the fiscal cliff.
--Joe Van Brussel contributed reporting