Fed chief backs plan for €150bn kick-start to US economy

President George Bush and Federal Reserve chairman Ben Bernanke yesterday threw their weight behind calls for a fiscal stimulus of up to $150 billion to boost the US economy and minimise the risk of a prolonged recession.

However, the prospect of such a move failed to avert a sharp drop in US equities as investors took fright at poor housing start figures and a very weak Philadelphia Fed survey of manufacturing conditions. The S&P 500 was down 1.8 per cent at 1,349 in midday trading - its lowest level since October 2006.

Mr Bernanke warned business investment was "likely to slow in the coming months" as companies adjusted their spending plans in the light of the economic downturn and credit squeeze.

He said nothing to challenge expectations that the US central bank will cut interest rates by at least 50 basis points at its policy meeting on January 30th.

Mr Bernanke told the House budget committee that the baseline outlook for economic growth had "worsened" and downside risks had become "more pronounced" in recent weeks.

White House spokesman Tony Fratto said: "The president does believe that, over the short term, that to deal with this softening in the economy . . . some boost is necessary."

Mr Bernanke told congress that a well-designed and swiftly implemented fiscal stimulus "could be helpful". He said: "Fiscal and monetary stimulus together may provide broader support for the economy than monetary policy actions alone."

He said it made sense to deploy more than one tool to fight the downturn, since each worked on the economy in different ways. The Fed chairman said a stimulus plan of $50 billion to $150 billion would be "reasonable".

Turning to corporate taxes, Mr Bernanke said incentives for investment in software and equipment would be more effective than a cut in the corporate tax rate. He suggested that the rate is more a question for the longer term.

Mr Bernanke declined to comment directly when asked by Republican legislators whether he favours making permanent the 2001 and 2003 tax cuts scheduled to expire in 2010.

At the same time, he said that making dividend-tax cuts permanent could have a short-term impact on financial markets.