Thursday, 17 January, 2008

Bernanke Says Fiscal Stimulus `Could Be Helpful'

Federal Reserve Chairman Ben S. Bernanke said a ``temporary'' fiscal stimulus would help the central bank to buttress economic growth, while warning against worsening the longer-term outlook for budget deficits.

``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 in testimony to the House Budget Committee. He repeated remarks from last week that the Fed is ready to take ``substantive additional action'' to insure against risks of a recession.

Bernanke's acknowledgment that the economy is weak enough to need a fiscal stimulus may reinforce forecasts for the Fed to lower interest rates at least half a point this month. It may also give impetus to the Bush administration and Congress to reach an agreement more quickly, analysts said.

The Fed chief said that a fiscal package could also ``prove quite counterproductive'' if the stimulus arrived at the ``wrong time or compromised fiscal discipline in the longer term.''

Bernanke reiterated that the outlook for growth in 2008 ``has worsened'' and ``the downside risks to growth have become more pronounced.'' In a question and answer period initiated by Budget Committee Chairman Rep. John Spratt, a South Carolina Democrat, Bernanke said the Fed is ``not forecasting a recession'' for this year.

Central bankers and administration officials are trying to prevent the economy from sinking into the first recession since 2001. Retail sales fell last month, unemployment rose, and housing markets are mired in the worst slump in 16 years.

Bernanke noted that banks are trying to protect asset quality and funding, and tightening credit conditions for the rest of the economy as a result.

Bank Lending

``Banks have also evidently become more restrictive in their lending to firms and households,'' he said. ``More expensive and less-available credit seems likely to impose a measure of restraint on economic growth.''

Homebuilders broke ground on the fewest homes since 1991 last month, the Commerce Department reported today. Building permits, a sign of future construction, declined by the most in 12 years, suggesting the housing slump will deepen.

Residential construction subtracted about 1 percent from growth in the third quarter, and ``likely curtailed growth even more in the fourth quarter,'' Bernanke said. Sluggish housing markets ``may continue to be a drag on growth for a good part of this year.''

Food, Energy Costs

Bernanke said that inflation, both including and excluding food and energy costs, ``should moderate this year and next, so long as the public's confidence in the Federal Reserve's commitment to price stability is unshaken.'' He cited inflation expectations that appear ``well anchored'' and futures suggesting food and energy price increases will slow.

Bernanke in past congressional appearances has typically avoided recommending any particular tax measure. His predecessor, Alan Greenspan, involved himself in shaping tax policy, recommending cuts over spending increases in 2001, a strategy which his colleagues disliked out of concern it would compromise the central bank's independence.

The Fed chairman's speech ``is an endorsement of temporary measures, if enacted quickly, but he's covering himself to ensure he is not blamed for anything in a few years, the way Greenspan is now blamed for endorsing the Bush tax cuts,'' said Ian Morris, chief U.S. economist at HSBC Securities USA Inc.

Timing Critical

Aside from quick implementation, a stimulus package should also be ``structured so that its effects on aggregate spending are felt as much as possible in the next 12 months,'' Bernanke said today. If stimulus comes at a time when growth is improving, it could be ``destabilizing,'' he said.

U.S. Treasury and White House officials are considering tax proposals that would provide consumers with more cash and give businesses an incentive to invest more in their capital stock, according to analysts speaking with administration officials.

Economists at JPMorgan Chase & Co. estimate that the economy grew at 1 percent in the final quarter of last year, slowing from a 4.9 percent pace the previous three months. Merrill Lynch & Co., Morgan Stanley, Goldman Sachs Group Inc. and Nomura Securities International Inc. are all predicting a recession in 2008.

New Strategy

Bernanke and Governor Frederic Mishkin signaled a new strategy last week, when they said in speeches that they favor greater ``insurance'' against the prospect of an economic downturn. That's a break from basing policy on central bank forecasts, which anticipate a continued expansion.

The Jan. 10 remarks by Bernanke, 54, and Mishkin the next day led traders to increase bets the central bank will cut its main interest rate to 3.75 percent from 4.25 percent currently at the conclusion of Federal Open Market Committee's two-day meeting on Jan. 30.

The Fed has reduced the benchmark rate by 1 percentage point since September. In December, Fed officials said in their statement that the outlook for inflation and growth was uncertain, a view that disappointed investors and caused a 2.5 percent decline in the Standard & Poor's 500 stock index.

Policy makers' shift may have been driven by the Labor Department's Jan. 4 report showing the jobless rate jumped to 5 percent in December, economists said. The figures also showed the first decline in private-sector employment since 2003. Bernanke called the jobs data ``disappointing.''

Bernanke and other policy makers continue to cite concerns about inflation pressures. The consumer price index, minus food and energy, rose at a 2.4 percent rate for the year ending December, the fastest pace since March, the Bureau of Labor Statistics said Wednesday.