WALL STREET rallied last night after Federal Reserve chairman Ben Bernanke threw his weight behind a new economic stimulus package and hinted at a cut in interest rates.
The White House signalled that it was open to the idea but expressed concerns that a plan favoured by Democrats in Congress might not work.
Mr Bernanke yesterday told the House of Representatives Budget Committee that the US economy could remain weak for a while and that it was the right time for Congress to consider a new package.
"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.
The endorsement of a second fiscal stimulus marks a shift by the Fed chief, who opposed plans for such a boost in the summer, believing the money would be better spent recapitalising banks.
Earlier this year, most Americans received a tax rebate of between $600 and $1,200 as part of a $168 billion stimulus package.
Democrats are talking about a new package that would cost $150 billion, although many economists believe it would have to be twice that size to have a significant impact. Until yesterday, the Bush administration was unenthusiastic about a second stimulus package because of its impact on the ballooning budget deficit.
Last night, White House spokesman Dana Perino said the administration was "open to the idea" of another stimulus package, though approval would depend on details drafted by Congress.
President George W Bush would weigh input from all of his economic advisers, and Mr Bernanke "obviously" is "a key one".
Mr Bernanke told the House budget committee members the package should include provisions that would help to ease the flow of credit. "If the Congress proceeds with a fiscal package, it should consider including measures to help improve access to credit by consumers, home buyers, businesses and other borrowers," he said.
"Such actions might be particularly effective at promoting economic growth and job creation."
Mr Bernanke said he expected inflation to moderate "down to levels consistent with price stability" and hinted at further interest rate cuts.
"Over time, a number of factors are likely to promote the return of solid gains in economic activity and employment in the context of low and stable inflation. Among those factors are the stimulus provided by monetary policy," he said.
US stocks rose in afternoon trading yesterday. The Dow Jones industrials index rose about 2.5 per cent and the Standard Poor's 500 index jumped 2.7 per cent.
Interbank lending rates fell for a sixth straight day yesterday. The London interbank offered rate, or Libor, for three-month dollar loans fell 0.36 per cent to 4.06 per cent, the biggest daily drop since January. - ( Additional reporting: Financial Times service and Bloomberg)
