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FINANCIAL CRISIS

Bernanke backs plan to stimulate US economy

Text by: AFP
4 min

Ben Bernanke, the chairman of the US Federal Reserve, endorsed plans of a second stimulus of the US economy on Monday, with more money for healthcare and infrastructure, but still warned of a "protracted slowdown".

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The chairman of the Federal Reserve, Ben Bernanke, on Monday endorsed the idea of a second US economic stimulus plan this year, after warning of a possible "protracted slowdown."

"With the economy likely to be weak for several quarters and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate," he said in comments to the House of Representatives budget committee.

The speaker of the House, Democrat Nancy Pelosi, has suggested that Congress may convene after November 4 presidential elections to pass a projected 150-billion-dollar spending package.

The plan would increase federal spending on infrastructure, food stamps and unemployment insurance, and a focus on health care aid in the form of programs like Medicaid.

Pelosi welcomed Bernanke's comments and called on President George W. Bush and Republicans in the upper chamber Senate "to enact a targeted, timely, and fiscally responsible economic recovery and job creation package."

President Bush signed into law a 168-billion-dollar stimulus package in February, but Senate Republicans rejected an attempt by the House to pass a second package last month.

The White House said it was keeping an "open mind" regarding a second package but was wary of proposals from the Democrats.

"I think we just need to wait and see. We're open to ideas and we'll take a look at what comes our way," spokeswoman Dana Perino said aboard the presidential airplane, Air Force One.

Bernanke said in testimony about the US economy that consumption was falling, confidence was low and the housing market still depressed.

"The slowing in spending and activity spans most major sectors," he said.

Asked about a recession, he declined to use the word but said "the pace of economic activity is likely to be below that of its longer-term potential for several quarters."

Some analysts said this was a coded admission that the economy would contract for two consecutive quarters -- the most widely used definition of a recession among economists.

"We are in a very serious slowdown in the economy which has very serious consequences for the public," Bernanke replied when pushed to say whether a recession was underway.

"Whether it's called a recession or not is of no consequence," he said.

He gave no firm hint of further interest rate cuts to help the economy, but said inflationary pressures were falling due to declining prices of commodities and imports.

"If not reversed, these developments, together with the likelihood that economic activity will fall short of potential for a time, should bring inflation down to levels consistent with price stability," he said.

On October 8, the Fed slashed its interest rates by 0.50 percentage points in a coordinated move with other major central banks around the world.

The key federal funds rate is currently pegged at 1.5 percent. The Federal Open Market Committee holds its next rate-setting meeting on October 28-29.

"Bernanke provided a rather grim update on the economic outlook, using a technical euphemism for recession," commented an analyst at consultancy Global Insight, Brian Bethune.

He added that "the Fed chairman is giving Congress a green light to go ahead with an additional fiscal stimulus package."

Bernanke said that economic recovery would depend greatly "on the pace at which financial and credit markets return to more normal functioning" and said Congress should consider ways to encourage lending in any package.

"If Congress proceeds with a fiscal package it should consider including measures to help improve access to credit by consumers, homebuyers, businesses and other borrowers," he said.

The Fed has spent weeks in crisis-management mode, using a series of weapons to combat the most severe financial crisis since the Great Depression of the 1930s.

Bernanke said any new plan should take into account the long-term effect on government accounts.

The latest data from the Treasury showed the US budget deficit tripled in the 2007-2008 fiscal year ended September 30 to 455 billion dollars, or 3.2 percent of gross domestic product.

Stock markets sprinted higher on Monday, with strong gains in Asia, Europe and on Wall Street as investors cheered government pledges to tackle the economic crisis.

The leading index on Wall Street, the Dow industrials, gained 4.59 percent.
 

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