WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke on Thursday threw his weight behind proposals for near-term actions to stimulate economic growth to ward off an election-year recession -- but warned such a plan could do more harm than good unless put together quickly.
Bernanke told the House of Representatives Budget Committee that the Fed was not forecasting a recession but repeated the U.S. central bank was ready to act aggressively to prop up growth. He said a fiscal package could be effective if used in concert with interest-rate cuts.
Bernanke’s comments, which lent impetus to efforts in Congress to assemble a package of stimulus steps, also reinforced expectations in financial markets that a half-percentage-point rate reduction will come on January 30.
“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 said.
Other Fed officials, speaking elsewhere, said they were worried enough about the economy to back further cuts in interest rates. The central bank has already lowered benchmark rates by 1 percentage point to 4.25 percent since mid-September.
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A sense of urgency has set in at the White House and among lawmakers on Capitol Hill about how to prop up an economy that some analysts say may have already fallen into a recession.
The White Houses confirmed it was working on a stimulus plan, and President George W. Bush talked with congressional leaders later on Thursday about measures that might be in it.
House Republican leader John Boehner of Ohio said talks were focusing on a package in the $100 billion to $150 billion range.
Bernanke said $50 billion to $150 billion would be a reasonable size and provide “measurable” benefit to the economy. But he specified it was “critically important” that any fiscal measures be designed to spur spending quickly and deliver their maximum impact within the next 12 months.
A delayed stimulus that kicks in when it is no longer needed could cause the economy to overheat and generate inflation, Bernanke warned.
The idea of a quick fiscal stimulus package has taken flight in the past two weeks as rapid-fire reports showed U.S. unemployment hit a two-year high in December, while retail sales fell and manufacturing activity stalled.
Lawmakers are considering a package that could extend tax rebates of about $250 to $600 each to individuals and give businesses a bigger tax break on new investments.
Bernanke repeated a bleak assessment of the economy’s health that he made in a speech last week. “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,” he warned.
“We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks,” the Fed chief said.
Bernanke’s somber take on the economy and a big drop in a gauge of factory activity in the Mid-Atlantic region drove down the value of the dollar and gave a lift to bond prices as traders increased bets on further interest-rate cuts.
U.S. stock prices dropped sharply as the factory gauge and news of a big loss at brokerage Merrill Lynch MER.N deepened economic fears. The Dow Jones industrial average .DJI ended the day down 307 points, or 2.5 percent. The dollar dipped on the factory survey and Bernanke's testimony, while the yields on U.S. government debt fell sharply.
Dallas Federal Reserve Bank President Richard Fisher, a voting member of the bank’s policy-setting Federal Open Market Committee, echoed Bernanke’s vow to act aggressively to help an economy hit hard by a housing market downturn and tighter credit.
Another committee voter, Cleveland Federal Reserve Bank President Sandra Pianalto, said residential housing markets remain “in free fall” and said policy-makers had to be “highly flexible.”
A third regional Fed bank chief, Atlanta’s Dennis Lockhart, said the Fed must be prepared to respond to a souring outlook. “In my view, pragmatism in the face of growing weakness in the general economy may very well require additional moves to lower the federal funds rate,” he said.
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 subprime market may have reached $100 billion so far and would likely climb, but would not top $500 billion.
Additional reporting by Alister Bull, Donna Smith, Joanne Morrison, Emily Kaiser, David Lawder, Lisa Lambert, Patrick Rucker and Richard Cowan; Editing by Jonathan Oatis
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