Fed chief, Bush back a stimulus
President Bush and Federal Reserve Chairman Ben S. Bernanke pledged help for the economy Thursday, but their words gave no comfort to Wall Street, which suffered one of its biggest declines of the last year.
The Dow Jones industrial average plunged more than 300 points, deepening the market’s recent sell-off amid fears that government aid might be too late to avert a recession.
As sinking stock prices added urgency to negotiations between the White House and Congress, Bush signaled that he would set aside some of his most cherished long-term economic goals to approve a short-term rescue package.
The White House said the president would announce today his ideas for stimulus measures. Officials indicated that the president was focused on short-term actions -- implying that he would bend to demands from congressional Democrats that he not insist on making permanent the tax cuts passed in his first term.
“We’re dealing with short-term concerns with the economy,” White House spokesman Tony Fratto said. “The head winds that we’re dealing with right now are things that we see over the next coming quarters. So we do want to try to pass something quickly.”
Bernanke, testifying Thursday before the House Budget Committee, repeated that the Fed was ready to cut interest rates further. He also said that a fiscal-stimulus package in the $100-billion range would give a significant boost to the flagging economy, provided that the money was funneled to people who would spend it quickly.
“Getting money to people quickly is good, and getting money to low- and moderate-income people is good, in the sense of getting bang for buck,” the Fed chief said.
Bernanke’s statement amounted to a vote of confidence for many of the ideas now being discussed by congressional leaders of both parties, including individual tax rebates of at least $500, expanding food stamps, extending jobless benefits and other measures that could buoy consumer spending.
Financial markets, however, failed to draw encouragement from what they heard Thursday from Washington. Investors instead focused on another barrage of reports suggesting that the sinking housing market was far from bottoming and that the ill effects of that sector’s crash were spreading to other parts of the economy.
Groundbreaking on new U.S. homes in December fell 38% from the previous year to an annualized level of about 1 million units, the lowest since 1991, the government said.
Also, brokerage titan Merrill Lynch & Co. said it lost a record $9.8 billion in the fourth quarter after writing down the value of mortgage-related securities slammed by rising loan defaults.
But the most distressing report, analysts said, came from the Fed’s Philadelphia bank, which said factory activity in that region appeared to be down dramatically this month.
Because the mid-Atlantic area has a diversified manufacturing base, the data could be a harbinger of serious trouble for the U.S. manufacturing sector as a whole -- and indicate an actual contraction in the economy, not just a slowdown in growth, economists said.
Compared with most other economic reports in recent weeks, “The Philly Fed data was the first number that was truly recessionary,” said T.J. Marta, a bond market strategist at brokerage RBC Capital Markets in New York.
What’s more, manufacturing had been a bright spot in the economy in 2007, thanks to strong foreign demand for many U.S. goods.
The stock market, already down sharply in recent weeks, began to plummet early in the session as investors bailed out of shares across the board, fearful that a crumbling economy could devastate corporate earnings.
The blue-chip Dow index finished with a loss of 306.95 points, or 2.5%, to 12,159.21, its biggest one-day drop since Nov. 7. The Dow now is down 14.2% from its record high reached in October -- the sharpest pullback in five years.
Bernanke, on Capitol Hill, said that the economy had slowed but that the Fed wasn’t forecasting a recession this year. A recession usually is defined as a contraction lasting at least six months.
He also reiterated that the Fed was ready to make “substantive” additional cuts in interest rates to buttress the economy. The central bank has trimmed its benchmark rate by 1 percentage point since September, to the current 4.25%, and Wall Street has been expecting a half-point cut at the Fed’s next meeting Jan. 29-30.
With markets in panic mode, however, some economists said the central bank should immediately announce what would amount to an emergency rate cut.
“Why hold back if you’re going to do something anyway?” said John Silvia, chief economist at Wachovia Corp. in Charlotte, N.C.
Although analysts acknowledged that it was dangerous for the Fed to be pushed into action by markets’ mood swings, they said there were times when it had little choice.
“What we’re in danger of is that sentiment gets so weak it becomes self-fulfilling,” said Stephen Gallagher, chief U.S. economist at banking giant Societe Generale in New York.
Businesses “see the market like this and it causes them to delay hiring and spending decisions,” further eroding the outlook for the economy, he said.
Some analysts said nervous investors might have been hoping that Bernanke would sound more forceful in his commitment to bolster the economy.
As a public speaker, “He is not a commanding presence,” said John Rutledge, an economist and head of Rutledge Capital in Cos Cob, Conn.
But the bigger issue may be that Wall Street is losing faith that anything Washington can do would stop the economy’s slide, some investors said.
“The market is sending a clear and unambiguous message that something very bad is unfolding,” said Brian Barish, president of Denver-based Cambiar Investors, which manages about $8 billion in assets.
Even if investors doubt how much good it would do, Congress and the White House appear likely to agree soon on some package of economic-stimulus measures.
The breakthrough came after Bush backed off from demands that Congress remove the sunset provision on some of his tax cuts. They are set to begin expiring in 2010.
Bush took part in a conference call Thursday with congressional leaders of both parties, and neither administration nor congressional officials would provide details of the proposals they discussed.
But in a statement afterward, Senate Majority Leader Harry Reid (D-Nev.) expressed irritation that the president scheduled his announcement for today after congressional leaders explicitly asked him not to.
“I am disappointed that he is rejecting a request from leaders of both parties and both chambers to work with us directly to develop a bipartisan package rather than unilaterally detailing his own approach without congressional input,” Reid said in a statement afterward. “The president’s strategy threatens to unnecessarily politicize the inevitable bipartisan negotiations we will need to quickly enact legislation.”
Bernanke gave his blessing to stimulus measures that would give an immediate boost to consumer spending, as opposed to broad-based -- and long-lasting -- tax cuts that could cause the federal budget deficit to swell.
“Any program should be explicitly temporary, both to avoid unwanted stimulus beyond the near-term horizon and, importantly, to preclude an increase in the federal government’s structural budget deficit,” the Fed chief said.
--
tom.petruno@latimes.com
Reynolds reported from Washington. Petruno reported from Los Angeles.
