Bernanke: 'critical' to deal with cliff challenge

US Federal Reserve chief Ben Bernanke called on politicians Wednesday to compromise on a deficit deal to avoid the looming fiscal cliff.

"It will be critical that fiscal policy makers come together soon to achieve longer term fiscal sustainability without adopting policies that could derail the ongoing recovery," Bernanke warned at a news conference.

"Clearly the fiscal cliff is having effects on the economy," he told journalists after a Fed policy board meeting.

"Even though we have not even reached the point of the fiscal cliff potentially kicking in, it's already affecting business investment and hiring decisions by creating uncertainty or creating pessimism."

He said the recent fall in consumer sentiment was tied to concerns about the fiscal cliff.

Bernanke repeated his warning that the Fed has few tools at hand to deal with the combined harsh tax increases and spending cuts that will hit from January 1, likely sending the country back to recession, if politicians did not agree on another course.

"It's just too big given the tools we have available."

With politicians appearing still deadlocked over how to address long-term deficits less than three weeks ahead of the deadline, Bernanke said that a combined short-term fix to the cliff program and a firm pact on a long-term plan would ease worries.

"It's in the best interest of the economy to come to a two-part solution, if you will," Bernanke said.

"Part one is to modify fiscal policy in a way that doesn't create enormous headwinds for recovery in the near term.

"And part two is to at least take important steps towards achieving a framework by which, perhaps through further negotiations, the Congress and administration can achieve a sustainable path for fiscal policy."

"I don't buy the idea that a short-term descent off the fiscal cliff would be not costly," he added.

"I think it would be costly, and in fact we're already seeing the costs."

Bernanke meanwhile called lack of substantial improvement in the unemployment situation, especially the number of long-term unemployed, as a huge loss of potential for the country and the economy.

He said that more than 40 percent of the unemployed have been out of work more than six months, and that millions of others have either dropped out of the labor market altogether or been consigned to part-time work.

"The conditions now prevailing in the job market represent an enormous waste of human and economic potential," he said.

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