The head of the U.S. central bank says America's economy is slowing and that a short-term economic stimulus package would be beneficial to spur growth and help avoid the risk of a recession. VOA's Michael Bowman reports from Washington, where Federal Reserve Chairman Ben Bernanke testified on Capitol Hill.
A recent string of sobering economic news - including lower growth rates, higher unemployment and runaway energy costs - has made economic stimulus a hot topic in Washington and beyond. Leaders of both political parties, as well as most presidential candidates and even the White House, are now on record urging action to spur the economy and aid those who are suffering in the current economic environment.
Addressing the House Budget Committee, Fed Chairman Bernanke cautiously added his voice to the growing chorus.
"I agree that 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. To be useful, a stimulus package should be implemented quickly and structured so that its effects on aggregate spending are felt as much as possible within the next 12 months."
Bernanke noted troubling trends, including declining housing prices in the United States and a tightening credit market. He predicted the current economic slowdown will continue this year and possibly extend into 2009.
To influence the economy, the Federal Reserve has one major tool: setting interest rates. Already, the Fed has lowered interest rates on several occasions in recent months, and Bernanke indicated further rate cuts could be forthcoming if conditions warrant them.
The looser credit policy seemed to worry the ranking Republican on the committee, Congressman Paul Ryan.
"My concern is that these interest rate cuts could lead to even more inflation down the road. And history has shown that once inflation pressures are in the pipeline and expectations rise, it can prove costly to deal with," Ryan said. "The Fed risks having to put the breaks on economic growth later on, via higher interest rates, in order to wring that inflation out of the system."
But Bernanke indicated he expects inflationary pressures to ease and that overall inflation should moderate over the coming year.
Economic stimulus packages usually come in the form of higher federal spending, lower taxes, or some combination of the two. For years, President Bush has urged Congress to make permanent the tax cuts that were enacted at the start of his administration. Many of those cuts, which President Bush credits for spurring economic growth, are set to expire in coming years.
Democrats have blasted most of the cuts as benefiting the wealthy at the expense of the nation's fiscal health. Democratic Congressman Chet Edwards asked Bernanke whether making the tax cuts permanent would provide the short-term economic stimulus that the Fed Chairman advocates.
"In your opinion, would making permanent tax cuts that are not going to expire for three years - would that have any significant impact on our present economic slowdown?" he asked.
Bernanke indicated he did not think so, but stressed he was not passing judgment on the merits of extending the tax cuts for the long-term health of the economy.
"Our discussion today is about short-term stimulus. And I think from the point of view of getting stimulus for the next few months, I think the evidence suggests that measures that involve putting money in the hands of households and firms that will spent it in the near-term, will be more effective," Bernanke said.
No one is suggesting that a stimulus package can, by itself, cure an ailing U.S. economy. But economists like Hank Smith, Chief Equity Investor at Pennsylvania-based Haverford Investments, says the economic signal Washington sends does matter.
"It is still very important from the standpoint of instilling confidence, for business managers and consumers to know that the Federal Reserve and their Congress know what is going on and stand ready to help," Smith said.
White House Spokesman Tony Fratto says President Bush believes a short-term economic stimulus package is necessary. Thursday, Mr. Bush held a conference call with congressional leaders as well as Treasury Secretary Henry Paulson to discuss the economy and ways to spur growth.