President George W. Bush and Federal Reserve chairman Ben Bernanke on Thursday threw their weight behind calls for a fiscal stimulus of up to $150bn as stocks fell to their lowest levels since October 2006.
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White House officials said the president will sketch out the "principles" of a fiscal plan in a speech today. The centerpiece of the package will be tax rebates for individuals though Mr Bush is also expected to propose investment incentives for companies.
However, the prospect of a fiscal boost failed to reassure the stock market, which plunged on Thursday as housing starts dived, concerns about bond insuers intensified and the Philadelphia Fed survey of manufacturing conditions fell to recession levels. The S&P 500 fell 2.9 per cent to 1,333.25
Mr Bernanke, meanwhile, warned that business investment was "likely to slow in the coming months" as companies adjusted their spending plans in the light of the downturn.
He said nothing to challenge expectations that the US central bank would cut interest rates by at least 50 basis points at its policy meeting on January 30.
White House spokesman Tony Fratto told reporters "the president does believe that...some boost is necessary."
John Boehner, the top Republican in the House of Representatives, said Mr Bush was considering a package of between $100bn and $150bn.
The prospect of a bipartisan deal brightened as the White House agreed not to link its stimulus proposal to demands that the Bush tax cuts be made permanent.
Nancy Pelosi, the Democratic speaker of the House, indicated that Democrats could support investment incentives as part of a package.
Mr Bernanke told Congress that a well-designed and swiftly implemented stimulus "could be helpful". He said: "Fiscal and monetary stimulus together may provide broader support for the economy than monetary policy actions alone."
The Fed chairman said a stimulus plan of $50bn-$150bn would be "reasonable" adding that the right stimulus plan would have a "measureable" effect on growth.
However, Mr Bernanke warned that a stimulus plan that kicked in too late or worsened the structural budget deficit could be "quite counterproductive."
He told Congress that making the Bush tax cuts permanent would not be the most effective way to deliver a stimulus and suggested the tax cuts should instead be considered seperately on their long term merits.
Treasury Secretary Hank Paulson - who sees Mr Bernanke regularly - has reportedly been pushing a similar line within the administration.
Mr Bernanke endorsed the view - associated with prominent Democrats - that targeting relief at low to middle-income people would deliver the most "bang for the buck".
But he said that spending on green technologies - another idea popular with Democrats - would not be effective as a stimulus.
Mr Bernanke said "we are not currently forecasting recession". But he hinted that Fed officials would cut their growth forecasts on January 30.
"We believe we will see below-trend growth certainly in 2008 and probably the first half of 2009 as well," he said.
The Fed chief said high oil prices were a "real bane" for the economy, because they added to the risks to both growth and inflation.
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