WASHINGTON – Federal Reserve Chairman Ben Bernanke Thursday said he supported President Bush?s plans for a fiscal stimulus package, saying it would complement the Fed’s efforts to provide monetary-policy insurance against an economic downturn.

The remarks came shortly after the White House announced an economic stimulus package is needed to help the sagging economy, The Wall Street Journal reported.

In prepared testimony to the House Budget Committee, Bernanke also repeated the pledge he made last week to enact “substantive” rate cuts if needed to counter the threat to the economy posed by fragile financial markets and weakening employment.

Those remarks were widely interpreted to mean that the Fed would reduce its short-term interest-rate target, probably by a half-percentage point from its current 4.25 percent, at the central bank’s next meeting on Jan. 29-30. It has already lowered the federal-funds rate by one percentage point since September.

Wall Street brushed off Bernanke?s remarks mid day dropping the Dow Jones Industrial Average by 80 points, or 0.6 percent, at 12387.06. The blue-chip average dropped into the red after his remarks.

Bernanke, whose remarks on the economy and monetary policy largely mirrored last week’s speech, also repeated that the Fed is “prepared to act in a decisive and timely manner and, in particular, to counter any adverse dynamics that might threaten economic or financial stability.” He also reiterated that downside growth risks have become more pronounced.

Housing, he said, will probably subtract more than one percentage point from gross domestic product growth in the fourth quarter and “may continue to be a drag on growth for a good part of this year as well.”

But he stressed that the Fed is still keeping a close eye on inflation and inflation expectations. Core inflation, which excludes food and energy prices, “has stepped up recently,” Bernanke said, due to the pass-through effects of energy costs, the weakening dollar and higher prices for financial and medical services. But overall and core inflation should moderate this year and next, he said.

The government Wednesday reported that consumer prices rose at a 17-year high pace on a December-over-December basis last year, and annual core inflation crept higher at the end of the year to 2.4 percent, putting it above the Fed’s 1.5-to-2 percent comfort zone.

Any rise in inflation expectations or threat to the Fed’s inflation-fighting reputation could “reduce the central bank’s policy flexibility to counter shortfalls in growth in the future,” Bernanke said, reiterating last week’s remarks.

Thursday’s remarks included an extensive discussion of fiscal stimulus, a topic Bernanke has avoided publicly until now.

“I agree that fiscal action could be helpful in principle, as fiscal and monetary stimulus together may provide broader support for the economy than monetary policy actions alone,” he told lawmakers.

Congressional leaders from both parties have met in recent days to craft an economic stimulus package, though specific plans vary. The expected tab is expected to be in the $100 billion range.

Fiscal stimulus is acceptable, Bernanke said, as long as it is “implemented quickly and structured so that its effects on aggregate spending are felt as much as possible within the next 12 months or so.”

Bernanke declined to endorse any specific plan, but he said an effective stimulus package would “address the problems from a number of different angles.” He did note that the 2001 tax rebates helped keep the previous recession mild. Bernanke also said that stimulus shouldn’t be offset by higher taxes in the short term, saying that would be counterproductive. Thus, it would lead to a short-term widening of the budget deficit.

But he stressed that any stimulus be “explicitly temporary,” given that the U.S. faces “daunting long-run budget challenges associated with an aging population, rising health-care costs, and other factors.”

Bernanke has in the past repeatedly warned lawmakers of the budgetary effect of rising entitlement spending as the roughly 78 million-strong Baby Boom generation retires and collects Social Security and Medicare benefits.

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