By Paul R. La Monica
January 17, 2008
Federal chairman tells lawmakers they should tailor efforts to boost consumer spending within 12 months.
NEW YORK (CNNMoney.com) -- Federal Reserve Chairman Ben Bernanke told Congress Thursday that legislators should enact a fiscal stimulus package in order to help beleaguered consumers as recession fears grow.
Bernanke testified at a hearing before the House Budget Committee. His comments come as more economists and politicians are expressing concerns about the state of the economy, which has begun to weaken due to the subprime mortgage meltdown.
"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 twelve months or so," Bernanke said in his prepared remarks.
Experts: Congress must act fast to fix economy
Some economists have suggested that the economy is heading into a recession or may already be in one. Stocks have plummeted this year due to worries about a recession, and big banks Citigroup (C, Fortune 500) and Merrill Lynch (MER, Fortune 500) reported huge quarterly losses this week resulting from bad mortgage investments.
Former Treasury Secretary Larry Summers told lawmakers at a hearing of the Joint Economic Committee on Tuesday that Congress should immediately consider a stimulus package of $50 billion to $75 billion through a combination of tax cuts and increased spending on unemployment benefits and other programs. He also advocated that another $50 billion to $75 billion be set aside in case economic conditions weaken further.
Bernanke cautioned though that any stimulus "should be explicitly temporary" in order "to avoid unwanted stimulus beyond the near-term horizon and, importantly, to preclude an increase in the federal government's structural budget deficit."
Rep. John Spratt, D-S.C., the chairman of the House Budget Committee, said during opening remarks that he and other members of Congress would heed Bernanke's warning about the budget deficit.
But Spratt maintained that something must be done to help consumers now. He said the economy is in a "slump" - if not an outright recession - and cited concerns about "meager" jobs growth in December.
Bernanke said "it would be a mistake to read too much into one month's data" but conceded that "developments in the labor market will bear close attention."
Nonetheless, Bernanke said a stimulus package, in addition to further actions by the Fed, could help jumpstart the economy again.
"Fiscal action could be helpful in principle, as fiscal and monetary stimulus together may provide broader support for the economy than monetary policy actions alone," Bernanke said.
The Fed has already cut its key federal funds rate three times since September and is widely expected to slash this rate, which impacts how much consumers pay on credit card debt, home equity lines of credit and auto loans, by another half of a percentage point on Jan. 30. The central bank has also loaned a combined $70 billion to banks since December through a series of three auctions.
But Rep. Paul Ryan, R-Wisc., said in an opening statement that he is concerned that further interest rate cuts could "lead to further inflation down the road" and this could be costly to the long-term health of the economy.
To that end, Bernanke said the Fed continued to remain on inflation watch.
"Some important developments have occurred on the inflation front. Most notably, the same increase in oil prices that may be a negative influence on growth is also lifting overall consumer prices," Bernanke said, adding though that "overall and core inflation should moderate this year" as food prices and energy prices ease.
Those comments echoed remarks Bernanke made last week about inflation during a speech in Washington.
Bernanke, during a question and answer session, reiterated that he did not believe the economy would enter a recession, but he did say he expected the economy to grow at a "slow pace" this year and possibly into the beginning of 2009.
But he added that the contraction in the housing market should finally begin to "wane" later this year.
Source: CNNMoney.com
Bernanke: Juice the economy 'quickly'
