Ben Bernanke is testifying at the House today (it’s pretty dull) but he has spelled out the Fed’s estimate of what a $60bn cut to federal spending in FY11 (i.e. in the remaining months until the end of September) would do to the economy.
It would cut 0.1-0.2 percentage points from output this year and 0.1 percentage points next year. At some unspecified time horizon, it would lower employment by 200,000.
In other words, it is not a material issue from the Fed’s point of view, and certainly pales by comparison to the real fiscal question that affects the 2012 outlook: whether the payroll tax break agreed last December is renewed for another year.
But our sense is that $60 billion cut, spread out in the normal way, because, of course, the reduction of an authorization doesn’t mean an immediate reduction in the spending — it usually takes a little time to actually feed through — it would — it would reduce growth.
But we think it’s — given the size, it’s more in the couple of one to two-tenths in the first year, another tenth in the next year, something in that order of magnitude. And that would translate into a couple of hundred thousand jobs.