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Obama adviser: Congress inaction clouding U.S. outlook

New Chairman of the Council of Economic Advisers Alan Krueger looks on in Washington
New Chairman of the Council of Economic Advisers Alan Krueger looks on in Washington

By Rick Rothacker

CHARLOTTE, North Carolina (Reuters) - Congressional deadlock has clouded the U.S. economic outlook and may force banks to revise their growth forecasts for next year, President Barack Obama's chief economist said on Wednesday.

In a speech in Charlotte, Council of Economic Advisers Chairman Alan Krueger said the "uncertain future" for payroll tax cuts on Capitol Hill made it difficult to know whether the United States would manage to put in place needed remedies.

"Many economists have boosted their forecasts of economic growth for next year on the assumption that the payroll tax cut and extended unemployment benefits will stay in effect," Krueger said told a World Affairs Council meeting.

"Forecasting the economy is hard in part because it is hard to forecast whether Congress will continue the policies that are helping the economy to recover from the deepest recession in the post-war period," he said.

Republicans in the House of Representatives blocked a two-month extension of U.S. payroll tax cuts on Tuesday, saying they should be sustained for a full year in order for companies and families to plan.

But because the Democratic-controlled Senate has left Washington for year-end holidays, the move has thrown into doubt whether a deal can be reached to avoid having middle-class taxes go up on January 1.

Obama called on Tuesday for congressional lawmakers to end their brinkmanship and reach a deal as soon as possible, but has not stepped directly into the negotiations.

White House officials believe the conflict will reflect poorly on Congress and less so on the president if he keeps his hands clean, even if payroll taxes do go up. For the average family the increase would be an estimated $80 per month.

Krueger, in North Carolina, a key state for the president's re-election chances in 2012, said output and job growth remained too weak for the United States to fully shake off the financial crisis that took hold before Obama took office in early 2009.

But he told reporters after the speech that U.S. banks and financial institutions had returned to good health in the wake of the crisis and that needed to be maintained.

"We have to strike the right balance when it comes to financial regulation," he said. "I think we are in a stronger position now to weather some of the risk that we're facing from sovereign debt issues in Europe because banks were required to improve their balance sheets, raise additional capital."

In his remarks, Krueger also stressed that the sheer size of the U.S. economy and markets would keep attracting businesses, immigrants and foreign students and said investors worldwide had continued confidence in the United States despite the strains on Capitol Hill.

"Faith in our fiscal, economic and financial institutions is a key reason why the U.S. is a safe haven when uncertainty increases anywhere in the world," he said.

"The dollar is the world's reserve currency because of the strength of our economic system and institutions. I think we can be confident that the U.S. will continue to play this role in the foreseeable future."

(Writing By Laura MacInnis; Editing by Eric Beech)

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