Fed endorse 'big stimulus' to battle recession

Federal Reserve officials, after taking the historic step of cutting the benchmark interest rate to as low as zero, are calling for greater government spending to help revive the US economy.

San Francisco Fed President Janet Yellen said on Sunday at an economics conference in San Francisco that “it’s worth pulling out all the stops” with an economic recovery package. Charles Evans, president of the Chicago Fed, told the same gathering he believes a “big stimulus is appropriate.”

The remarks underscore the view of many economists that unprecedented fiscal measures are needed to combat the yearlong recession, and come ahead of meetings this week between President-elect Barack Obama and congressional leaders.

They also reflect the failure of Fed efforts so far, including record rate cuts, emergency lending programmes and backstops for debt markets, to halt the crisis.

Yellen, Evans and other officials at the conference didn’t specify their recommendations for the size of the stimulus. Obama is asking that tax cuts make up 40 per cent of a package that may be worth as much as $775 billion, a Democratic aide said on Sunday. Yellen said she favors a “diversified package of policies” that includes government spending.

“Fiscal stimulus has got to be an important part of the package” implemented by the federal government, Frederic Mishkin, a former Fed governor, said on Sunday at the conference in San Francisco. The “$500 billion-plus question” is, “can they get it right?” he said.

The “financial shock” that caused the current crisis is “worse than the one that happened during the Great Depression,” he said. Mishkin left the central bank in August and returned to his post as a professor of economics at Columbia University.

The stimulus that emerges from talks between Obama’s aides and Congress will be much larger than the $150 billion proposal from lawmakers in October, when Chairman Ben S Bernanke endorsed the concept of such a programme. He noted then that the impact of the $168 billion stimulus a year ago had waned.

Obama, who has picked New York Fed President Timothy Geithner as his Treasury secretary, is honing a combination of tax cuts and spending on roads, bridges and other infrastructure to create or save 3 million jobs. Economists and a group of Democratic governors led by New Jersey’s Jon Corzine have called for a $1 trillion programme. Obama takes office January 20.