Federal Reserve Chairman Ben Bernanke said yesterday that 2013 could be a "very good year" for the United States economy if politicians can strike a quick deal to avoid the so-called fiscal cliff.

The central bank chief called for a credible long-term framework to put the federal budget on a sound path, but warned against action that would needlessly add to the "headwinds" facing the economy.

He repeated a warning that running over the US$600-billion (S$735-billion) "cliff" of expiring tax cuts and government spending reductions could derail the US recovery, and said worries over how budget negotiations will be resolved were already damaging growth.

Mr Bernanke reiterated the central bank's guidance that it expects to keep benchmark interest rates near zero until at least mid-2015, but offered few clues into how the Fed might tweak its bond-purchase programme at the start of next year.

Despite worries that the Fed's bloated balance sheet could cause inflation, Mr Bernanke said this was not an immediate concern given restraints on wages and subdued measures of inflation expectations.

He said it was too soon to assess the impact of the Fed's latest round of monetary easing implemented in September, but pointed to research showing prior waves of asset buys were effective at bolstering the frail economy.

Mr Bernanke said a series of "headwinds" appeared to have temporarily lowered the US economy's potential rate of growth, partly explaining the recovery's unusual sluggishness. He cited the damage to the housing sector and mortgage markets, and a sharp tightening in credit.

Those impediments appear to be fading, he said. The US housing market had shown "some clear signs of improvement" and "gradual and significant progress" had been made towards moving towards more normal financial conditions.

But he warned that a third headwind, US fiscal policy, could intensify in coming quarters, with the drag from a tighter federal budget likely to outweigh looser budgets at the state and local level.

TODAY