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Fed chief backs quick action to help US economy

But Bernanke says Fed is not forecasting recession; Bush also sees need for fiscal stimulus

WASHINGTON – FEDERAL Reserve chairman Ben Bernanke yesterday threw his support behind efforts to craft a fiscal stimulus package, and repeated that the United States central bank was ready to act aggressively to counter recession risks.

The remarks came shortly after the White House said President George W. Bush had decided that an economic stimulus package was needed to help the sagging economy.

‘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 told the U.S. House of Representatives Budget Committee late last night.

But he specified that it was ‘critically important’ that any fiscal measures be designed to kick in quickly and deliver

their maximum impact within the next 12 months. Any other effect could do more harm than good, Bernanke warned.

The Bush administration and lawmakers on Capitol Hill have begun to consider what steps might be appropriate to prop up an economy many fear is on the verge of a recession.

As questioning by committee members began, Bernanke said he did not expect a recession this year but did foresee slow growth this year and into 2009.

President George W. Bush, back from a Middle East trip, was to hold a conference call on stimulus proposals on Thursday afternoon with Democratic and Republican congressional leaders.

‘I think the president does believe that over the short term that to deal with this softening in the economy that some boost is necessary,’ White House spokesman Tony Fratto said, offering the first explicit indication that the administration will propose a plan.

Lawmakers have already begun discussing ideas, and leaders from both parties vowed after a meeting on Wednesday to work together to pull a package together quickly.

Bernanke said that while fiscal stimulus could supplement lower interest rates in giving the economy a boost, it was essential not to compromise longer-term budget discipline and that there was a danger in moving too slowly.

‘Stimulus that comes too late will not help support economic activity in the near term, and it could be actively destabilizing if it comes at a time when growth is already improving,’ he said, adding it should also be ‘explicitly temporary.’

Bernanke repeated a bleak assessment of the economy’s health that he delivered last week that was widely seen as a signal that the U.S. central bank would slash interest rates by a hefty half-percentage point at month’s end.

‘Recently, incoming information has suggested that the baseline outlook for real activity in 2008 has worsened and that the downside risks to growth have become more pronounced,’ Bernanke warned.

‘We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks,’ he said.

The U.S. central bank has already cut benchmark overnight borrowing costs by 1 percentage point to 4.25 per cent since mid-September. Fed policy-makers next meet on Jan. 29-30.

Bernanke noted that financial markets around the world have been under strain since late last summer, largely because of problems in the U.S. subprime mortgage market, where foreclosures have been rising sharply.

He said that if all subprime mortgages that were currently delinquent went into foreclosure, that would imply a loss of about $100 billion.

‘More-expensive and less-available credit seems likely to impose a measure of restraint on economic growth,’ Bernanke said, noting that the financial situation was ‘fragile’ and that many funding markets were ‘impaired.’

Meanwhile, US stocks were witnessing volatile trade yesterday.

At press time, the Dow Jones Industrial Average was down 100.47 points, or 0.81 per cent, at 12365.69. The Nasdaq composite index was down 8.92 points, or 0.37 per cent, at 2385.67.

 

Source: REUTERS (The Straits Times 18 Jan 08)

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