With deadlines and sequestration looming, the president of the Federal Reserve Bank of Richmond said he's "cautiously optimistic" Congress will work to ensure the country doesn't fall off the so-called fiscal cliff.
Speaking in Charleston Nov. 15 during the West Virginia University College of Business and Economics' annual Economic Outlook Conference, Jeffery Lacker said he thinks Congress will work together to better align taxing and spending.
"Everyone is affected by something on the table right now," he said.
If Congress doesn't act before the end of the year, a second albeit smaller recession is likely.
"The total size of these changes is such that, should they all take effect and remain in effect for a considerable period, the economy is likely to contract and move back into recession," he said.
That optimism leads Lacker to believe the economy will not contract, but instead grow. He said he thinks the U.S. economy could have a vibrant future if three aspects play out as he hopes.
"First I expect to see meaningful progress in federal budget issues now that the election is behind us," he said. Kicking the can down the road would only cause more problems. Because of uncertainty, businesses are less likely to create jobs or invest in capital projects.
"Until we get a fiscal plan that is sustainable, consumers and businesses are going to be making decisions under this immense cloud of uncertainty," Lacker said.
To achieve that stable fiscal plan, Lacker suggested Congress take a look at its taxing and spending structures. According to projections by the Congressional Budget Office, Lacker noted, the deficit is likely to decline somewhat for a few years before moving higher, both in terms of dollars and as a fraction of the gross domestic product. That implies the outstanding stock of federal debt will increase without bond as a ratio to GDP.
"This is not a feasible scenario and it cannot persist indefinitely," Lacker said. "At some point Congress will have to bring taxes and spending into closer alignment. The set of policy choices that are likely to be considered would affect almost every household or business in a meaningful way. Until a fiscal plan is adopted that is sustainable over the long run, consumers and businesses will make decisions under a cloud of uncertainty."
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