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Fed Chief Warns of Economic Headwinds From Budget Stalemate

Some $85 billion in automatic spending cuts will kick in Friday unless Congress and the Obama administration can agree on an alternate plan to reduce the deficit.  "Sequestration," as it's called, was initially agreed upon as a threat to force lawmakers to reach a compromise.  But U.S. Federal Reserve Chairman Ben Bernanke warned Tuesday that without a deal soon, the massive spending cuts pose a significant threat to the U.S. recovery. 

With no progress in Washington to avoid looming spending cuts, Federal Reserve Chairman Ben Bernanke warned lawmakers that inaction would sharply slow U.S. economic growth.
 
"Moreover, besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run," said Bernanke.

Despite the high stakes, the action from Washington has been mostly - finger pointing.

Republican House Speaker John Boehner says it's time for the president and the Democratically controlled Senate to take the lead.

"The House has acted twice. We shouldn't have to act a third time before the Senate begins to do their work," said Boehner.

The automatic spending cuts, roughly three percent of the federal budget, would slash defense spending and affect government services from border security to meat inspections.
 
The White House wants a more balanced approach that includes cuts and higher taxes.
 
But as it stands, President Barack Obama calls the sequester arbitrary and irresponsible.

"These cuts do not have to happen," said President Obama. "Congress can turn them off anytime with just a little bit of compromise.'

Republicans say the president is grandstanding.
 
Louisiana Governor Bobby Jindal accused Obama of fear-mongering.

"The president needs to stop trying to scare the American people that, absolutely, you can cut less than three percent without all these awful consequences - without people losing access to critical vaccines, without people, without us jeopardizing food inspections," said Jindal.

But economist William Gale says Republicans' insistence on across the board spending cuts ignores economic reality.

"We should be talking about boosting the economy, boosting spending, not cutting spending right now," said Gale.

Reports suggest Republicans may be willing to modify the sequester to give the administration discretion in deciding which programs to cut. Analysts say such a move would give Republicans political cover but place responsibility for the economic impact squarely on the president.

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