MercoPress. South Atlantic News Agency

Fed support for “quick” stimulus support package

Fed CEO Ben Bernanke

Federal Reserve chairman Ben Bernanke on Thursday backed the introduction of emergency economic measures aimed at helping the US economy avoid recession.

Testifying to the House of Congress, he said that any measures such as tax cuts should be implemented quickly, and on a temporary basis, to be most effective. Bernanke also hinted that the Fed may be willing to cut interest rates. However, Bernanke warned that any stimulus plan should not compromise the economy's longer-term stability. "To be useful, a fiscal stimulus package 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," Mr Bernanke said. "Stimulus that comes too late will not help support economic activity in the near term, and it could be actively destabilising if it comes at a time when growth is already improving," he warned. Mr Bernanke's comments come as banks, including Wall Street giants Merrill Lynch and Citigroup, reel from losses linked to the US housing market. Many observers have warned that the US economy is on a knife edge, even though the Fed has cut interest rates three times since last summer, bringing its main borrowing cost down to 4.25%. The situation is looking so bad, that many analysts are now predicting that the Fed will have to cut interest rates a number of times this year if it is to stave off a recession. Figures released by the US Commerce Department show housing starts fell 14% to an annual rate of 1.006 million in December, the weakest showing since May 1991 and building permits, seen as a measure of future construction plans, fell 8.1% to an annual rate of 1.068 million. During his speech Bernanke reiterated comments he made last week that the Fed was prepared to take "substantive action" to promote economic growth and adequately insure the US economy against downside risks. To this end, he said the Fed would cut interest rates further "if necessary". But he was also keen to emphasise the need for the Fed to maintain its credibility in keeping inflation under control. Inflation has spiralled recently on higher energy and food costs. Government data out earlier in the week showed inflation rising by 4.1% in 2007, the fastest rate for 17 years. Bernanke said the last few months had been "challenging" trying to deal with the threats of a cooling housing market and slower consumer spending, and rising inflation. But over the coming year he said inflation should ease and prices stabilise. Over the last two weeks Democrat and Republican leaders have been meeting to work on a stimulus package to help the US economy out of recession. The election-year package of 100 to 125 billion US dollars would contain tax rebates of about 250 to 600 US dollars to stimulate consumption. The plan is targeted for the "middle class and certain spending programs such as additional unemployment insurance and food stamps". House Democratic Leader Steny Hoyer said the whole package could be wrapped up in a month. In a sign that lawmakers are serious about working together, Republican leaders no longer were demanding that the stimulus package include a controversial initiative to extend 2001 and 2003 Bush tax cuts that are set to expire in 2010.