WASHINGTON (Reuters) – Federal Reserve Chairman Ben Bernanke on Thursday threw his support behind efforts to craft a fiscal stimulus package and repeated that the U.S. central bank was ready to act aggressively to counter recession risks.
“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 in remarks to the House of Representatives Budget Committee.
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 recession.
The Fed chief echoed a bleak assessment on the economy’s health he delivered last week that was widely seen as a signal the U.S. central bank would slash benchmark U.S. 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 percent since mid-September. Fed policy-makers next meet on January 29-30.
Bernanke noted that financial markets around the world have been under strain since late last summer, largely because of problems in the market for risky U.S. subprime mortgages, where foreclosures have been rising sharply.
The increase in mortgage defaults has led to heavy losses on securities backed by these loans, and several large Wall Street firms have reported big losses.
“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.”
He said that inflation expectations were “reasonably well anchored” so far and predicted that overall and core inflation — which excludes food and energy items — could fall this year and next provided that the public remained convinced of the Fed’s commitment to fight any inflationary spiral.
(Additional reporting by Alister Bull; Editing by James Dalgleish)
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