Bernanke backs fiscal stimulus if quick

WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke on Thursday threw his support behind efforts to craft an economic 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 told the U.S. 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. A delayed stimulus could do more harm than good, Bernanke warned.

The Bush administration and lawmakers on Capitol Hill have begun to consider steps to prop up an economy many fear is on the verge of a recession. House Republican leader John Boehner of Ohio said the White House and Congress were talking about a package in the $100 billion to $150 billion range.

In response to questions, Bernanke said a package in the $100-billion range could help. "It would be certainly measurable. It would not be window-dressing," he said.

Lawmakers are looking at an election-year package that could extend tax rebates of about $250 to $600 to individuals and give businesses a bigger tax break on new investments.

While offering a welcoming hand to the idea of pairing a fiscal boost with interest-rate cuts, Bernanke reiterated that the Fed was not forecasting a recession, but did foresee slow growth this year and into 2009.

President George W. Bush was to hold a conference call on stimulus proposals on Thursday afternoon with Democratic and Republican congressional leaders.

"I think the president does believe that over the short term that to deal with this softening in the economy that some boost is necessary," White House spokesman Tony Fratto said, offering the first explicit indication that the administration will propose a plan.

Bernanke said that while fiscal stimulus measures could help give the economy a boost, it was essential not to compromise longer-term budget discipline. He also warned there was a danger in moving too slowly.

"Stimulus that comes too late will not help support economic activity in the near term, and it could be actively destabilizing if it comes at a time when growth is already improving," he said, adding it should also be "explicitly temporary."

OUTLOOK BLEAK

Bernanke repeated a bleak assessment of the economy's health that he delivered last week that was widely seen as a signal that the U.S. central bank would slash 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. In response to questions, he said the economy remained "resilient" for the longer term but was in "a slow period" currently that might require stimulus.

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.

The Fed chief's somber take on the economy and a big drop in a gauge of factory activity in the Mid-Atlantic region helped drive down stock prices and the value of the dollar, while pushing bond prices higher on expectations of lower interest rates.

The idea of a quick fiscal stimulus package has taken flight in the past two weeks with rapid-fire reports showing U.S. unemployment hit a two-year high in December, while retail sales fell and manufacturing activity stalled.

Bernanke noted that financial markets around the world have been under strain since late last summer, largely because of problems in the U.S. subprime mortgage market, where foreclosures have been rising sharply.

He said losses in the U.S. subprime mortgage market may have reached $100 billion so far and would likely climb, but would not top $500 billion. Mounting losses have already led banks to curtail credit.

"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."

(Additional reporting by Alister Bull, Donna Smith, Joanne Morrison, Emily Kaiser, David Lawder, Lisa Lambert, Patrick Rucker and Richard Cowan; Editing by Andrea Ricci)