Bernanke: Juice the economy 'quickly'

Fed Chairman Ben Bernanke tells Congress he supports economic stimulus efforts.

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NEW YORK (CNNMoney.com) -- Federal Reserve Chairman Ben Bernanke told Congress Thursday that legislators should enact a fiscal stimulus package in order to help beleaguered consumers as recession fears grow.

The comments by Bernanke, who testified before the House Budget Committee, came as a cascade of more bad news about the housing, financial and manufacturing sectors stoked calls for decisive action.

"To be useful, a fiscal stimulus package should be implemented quickly and structured so that its effects on aggregate spending are felt as much as possible within the next twelve months or so," Bernanke said.

Some economists have suggested that the economy is heading into a recession or may already be in one. Stocks have plummeted this year, and big banks Citigroup (C, Fortune 500) and Merrill Lynch (MER, Fortune 500) reported huge quarterly losses this week resulting from bad mortgage investments.

Bernanke said that current losses from the subprime mortgage mess were probably about $100 billion but cautioned that this figure could wind up being higher.

Former Treasury Secretary Larry Summers told lawmakers on Tuesday that Congress should consider a stimulus package of up to $150 billion. He proposed an immediate injection of $50 billion to $75 billion through a combination of tax cuts and increased spending on unemployment benefits and other programs. He also advocated that another $50 billion to $75 billion be set aside in case economic conditions weaken further.

During Thursday's hearing, Bernanke said he thought a fiscal stimulus package of up to $150 billion, would be "reasonable."

A spokesman for President Bush said Thursday that the White House also supports a short-term stimulus package.

Bernanke cautioned though that any stimulus "should be explicitly temporary" in order "to avoid unwanted stimulus beyond the near-term horizon and, importantly, to preclude an increase in the federal government's structural budget deficit."

The Fed chairman said that extending some of the tax cuts engineered by Bush in 2001 and 2003, which are set to expire in 2010, could have a positive impact on the stock market today. He singled out the cut on dividend taxes as particularly key to stimulating the economy.

Bernanke stopped short of suggesting that the Bush tax cuts should be made permanent. He said he's most in favor of the "law of arithmetic" - regardless of what Congress spends on fiscal stimulus, it should make sure that it had the resources to support the package.

Rep. John Spratt, D-S.C., the chairman of the House Budget Committee, said during opening remarks that he and other members of Congress would heed Bernanke's warning about the budget deficit.

But Spratt maintained that something must be done to help consumers now. He said the economy is in a "slump" - if not an outright recession - and cited concerns about "meager" jobs growth in December.

Bernanke said "it would be a mistake to read too much into one month's data" but conceded that "developments in the labor market will bear close attention."

Nonetheless, Bernanke said a stimulus package, in addition to further actions by the Fed, could help jumpstart the economy again.

"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.

The Fed has already cut its key federal funds rate three times since September and is widely expected to slash this rate, which impacts how much consumers pay on credit card debt, home equity lines of credit and auto loans, by another half of a percentage point on Jan. 30. The central bank has also loaned a combined $70 billion to banks since December through a series of three auctions.

But Rep. Paul Ryan, R-Wisc., said in an opening statement that he is concerned that further interest rate cuts could "lead to further inflation down the road" and this could be costly to the long-term health of the economy.

To that end, Bernanke said the Fed continued to remain on inflation watch.

"Some important developments have occurred on the inflation front. Most notably, the same increase in oil prices that may be a negative influence on growth is also lifting overall consumer prices," Bernanke said, adding though that "overall and core inflation should moderate this year" as food prices and energy prices ease.

Those comments echoed remarks Bernanke made last week about inflation during a speech in Washington.

Bernanke, during the question and answer session, reiterated that he did not believe the economy would enter a recession, but he did say he expected the economy to grow at a "slow pace" this year and possibly into the beginning of 2009.

But he added that the contraction in the housing market should finally begin to "wane" later this year.

Bernanke's appearance on Capitol Hill failed to impress Wall Street, however.

Bonds rallied Thursday, pushing the yield on the benchmark 10-year U.S. Treasury close to its lowest level in nearly four years. Bond prices and yields move in opposite directions and low yields are typically an indication of a sluggish economy.

And stocks fell once again after the Philadelphia Fed released a report that pointed to more weakness in the manufacturing sector, adding to recession fears. The government also reported Thursday that new home construction plunged last year.

"Bernanke didn't really say anything new today except for his emphasis on getting Congress to enact fiscal stimulus sooner rather than later. That's about the only new aspect of it," said Hank Smith, chief equity investment officer with Haverford Investments, a money management firm with $6.5 billion in assets.

Many investors are hoping that the Fed would cut rates before its Jan. 30 meeting, Smith noted. "The market is correct in reacting this way." he said. "They want less talk and more action."