US Fed chief backs stimulus, eyes rate cuts

17 January 2008 16:26  [Source: ICIS news]

WASHINGTON (ICIS news)--US central bank chief Ben Bernanke said on Thursday that a federal stimulus package could help the nation’s economy if enacted quickly to boost consumer spending within the next 12 months.

 

Testifying before Congress about increasingly worrisome forecasts for the US economy this year, the Federal Reserve Board chairman also gave another strong hint that the central bank will cut interest rates still further when its rate policy panel meets on 29-30 January.

 

Bernanke told a hearing of the House Budget Committee that the financial turmoil triggered by the subprime home mortgage collapse “may continue to be a drag on growth for a good part of this year”.

 

In addition, he said, “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”.

 

He said business investment in equipment and non-residential construction - two segments of the US economy that have largely been immune to the effects of the housing slump - “seem likely to slow in the coming months”.

 

However, he noted, “economic activity in our major trading partners has continued to expand vigorously” and on that strength “US exports will likely continue to grow at a healthy pace in coming quarters, providing some impetus to the domestic economy”.

 

In light of declining economic prospects and the related risks to growth, Bernanke said that “additional policy easing may well be necessary”, meaning that further interest rate cuts may be needed.

 

“We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks,” Bernanke said.

 

In what has become known as “Fed-speak,” that statement would be generally regarded as virtually a promise of additional rate cuts.

 

For a federal economic stimulus package, now being discussed between the White House and the Democrat-majority Congress, Bernanke urged that an engineered boost to the economy “should be implemented quickly and structured so that its effects on aggregate spending are felt as much as possible within the next 12 months or so”.

 

A stimulus programme, he added, should be explicitly temporary to avoid overstimulating the economy and to avoid unduly increasing the federal debt.

 

By: Joe Kamalick
+1 713 525 2653

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