Federal Reserve Chairman Ben Bernanke on Tuesday warned Congress that putting off a decision on the fate of expiring Bush administration tax cuts could unsettle businesses and households, undercutting the U.S. economic recovery.
With presidential and congressional elections looming in November, many analysts think Congress is unlikely to act until the final months of the year. The tax cuts expire on January 1.
Bernanke told the Senate Budget Committee that lawmakers might not have the luxury of waiting.
"I don't know exactly when the uncertainty would become a factor, but surely as we get closer to January 1 and Congress has not given a clear road map for how it plans to proceed, that would certainly affect planning, business decisions, household decisions, as they look ahead to the next year," he said.
Bernanke did not go beyond comments he made on the outlook for the economy and monetary policy he made last week in an appearance before a House of Representatives panel and did not comment on a surprising upswing in hiring in January.
Bernanke repeated that the jobs situation had improved modestly over the past year, but there was a long way to go before jobs markets return to normal.
Government data released on Friday showed employers added a surprisingly hefty 243,000 jobs in January, with the jobless rate dropping to 8.3 percent. It bumped up market expectations of a January 2014 Fed interest rate hike to a 38 percent chance from a 28 possibility beforehand.
The second month of solid job growth prompted some Wall Street firms, including BNP Paribas and Deutsche Bank, to raise their forecasts for first-quarter U.S. economic growth to an annual rate of 2.5 percent and 2.8 percent from 2.0 percent.
The Fed cut rates to near zero more than three years ago and has bought $2.3 trillion in bonds to spur growth. The Fed in late January said the sluggish recovery likely warranted keeping rates near zero until the end of 2014, and Bernanke left open the possibility of another round of asset buying if growth shows signs of flagging.
However, Bernanke gave no indication of whether the sunnier jobs picture had changed his views about further asset purchases, and lawmakers' questions were focused largely on fiscal topics on Tuesday.
Democrats and Republicans are expected to mostly tread water on major tax and decisions, leaving voters to decide in November whether the main focus in 2013 should be continuing to downsize government spending - as lawmakers tied to the conservative Tea Party movement have insisted - or to also revamp the tax code in a way that raises rates and closes loopholes for the rich.
The Congressional Budget Office has said that if all the Bush tax cuts were allowed to expire, U.S. economic growth would slow to 1.1 percent in 2013, more than a full percentage point below where Fedofficials expect it to land this year.
Forecasts released by the Fed last month showed most policymakers at the U.S. central bank expect growth next year to come in a 2.8 percent to 3.2 percent range, suggesting they foresee at least some of the tax cuts being extended.
"I want to be very clear that I'm in no way stepping back from my strong advocacy of maintaining fiscal stability in the longer term," Bernanke said. "But I think there is a concern there that this very sharp change in the fiscal position in a very short time might slow the recovery."
President Barack Obama wants to continue the Bush tax cuts for the middle class while ending them for upper-tier earners.
Republicans oppose any tax hikes, while saying they want to reform the entire tax code and lower top rates. The more radical Republicans want steep spending cuts immediately.
In his testimony, Bernanke coupled his plea that Congress come up with a credible long-term plan to cut U.S. budget deficits, with a caution against any steps that could undercut the still-fragile recovery. "The more you can demonstrate a will and commitment to sustainability over the longer term ... the more flexibility there will be to address near-term concerns relating to the recovery," he said.
Congress must not push the issue off to "manana," Bernanke added.
"Just simply promising future action risks at least an adverse market reaction, an adverse reaction in terms of confidence and so on," he said.
(Additional reporting by Pedro Nicolaci da Costa; Editing by Tim Ahmann and James Dalgleish)