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The chairman of the US Federal Reserve on Thursday threw his weight behind proposals for near-term actions to stimulate economic growth to ward off an election-year recession, but warned such a plan could do more harm than good unless put together quickly.
Fed chief Ben Bernanke told the US House of Representatives Budget Committee that the US central bank was not forecasting recession, but he repeated it was ready to act aggressively to prop up growth. He said a fiscal package could be effective if used in concert with interest-rate cuts.
Bernanke''s comments, which lent impetus to efforts on Capitol Hill to assemble a package of stimulus steps, also reinforced a view in financial markets that a half-percentage point rate reduction will come at the end of the month.
"Fiscal action could be helpful in principle, as fiscal and monetary stimulus together may provide broader support for the economy than monetary actions alone," Bernanke said.
Other Fed officials, speaking at other locations, said they were worried enough about the economy to back further cuts in interest rates. The central bank has already lowered benchmark rates by 1 percentage point to 4.25 percent since mid-September.
A sense of urgency has set in at the White House and among lawmakers on Capitol Hill about how to prop up an economy that some analysts say may have already fallen into recession. The White House confirmed it was working on a stimulus plan and President George W. Bush was set to consult congressional leaders later on Thursday about measures that might be in it.
House Republican leader John Boehner of Ohio said talks were focusing on a package in the $100 billion to $150 billion range. Bernanke said $50 billion to $150 billion would be a reasonable size and provide "measurable" benefit to the economy. But he specified it was "critically important" that any fiscal measures be designed to spur spending quickly and deliver their maximum impact within the next 12 months.
Bernanke noted that financial markets around the world have been under strain since late last summer, largely because of problems in the US subprime mortgage market, where foreclosures have been rising sharply. He said losses in the US subprime mortgage market may have reached $100 billion so far and would likely climb, but would not top $500 billion.

Copyright Reuters, 2008

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