Federal Reserve Chairman Ben Bernanke told the House Budget Committee this morning that a mix of interest rate cuts and fiscal policy makes sense to help manage a U.S. economy that will experience slower growth during the first half of 2008.
While the Fed Chairman made overtures prior to this morning's hearings that the Fed was poised to cut interest rates when it meets at the end of the month, this was the first time Bernanke commented for the record on the need for a Congressional stimulus package.
"A fiscal stimulus package could be helpful," said Bernanke, adding that such a stimulus would diversify the government's policy tools. "But any fiscal stimulus must be done quickly, it must be temporary, and for every dollar spent we must get a reasonable response," he explained.
Bernanke said much of the reason for the worsening economy and the increased need for government intervention is the fallout from the subprime mortgage meltdown, which he estimates is already responsible for $100 billion in losses. When asked what caused the current economic situation the country faces, the Fed Chairman said the problems with subprime loans led to increases in delinquencies and then created instability in the banking sector.
"The increase in oil prices and the housing sector's unusual downturn pattern make this a different combination of circumstances," Bernanke said.
"However, the U.S. economy is resilient and for more than a century has shown tremendous resiliency and ability to grow under all kinds of situations," he said. "Every economy goes through ups and downs, right now we're in a slow period, the question is what policy initiatives would be helpful," Bernanke concluded.