Fed chief to Congress: Don't end stimulus spending

Bernanke urges Congress not to slash spending or raise taxes during the economic recovery

WASHINGTON (AP) -- Federal Reserve Chairman Ben Bernanke told Congress Thursday that the fragile economy still needs government stimulus spending to strengthen the recovery and help reduce unemployment.

Testifying before the House Financial Services Committee, Bernanke did urge lawmakers to come up with a credible plan to reduce the government's record-high budget deficits in the long run. But he said they shouldn't move now to slash spending or boost taxes in the near future.

"I believe we should maintain our stimulus in the short term," Bernanke said as he spoke about the economy's challenges for the second straight day on Capitol Hill.

Bernanke again said the Fed is prepared to take new steps to bolster the recovery if needed.

"We are ready, and we will act" if the economy doesn't continue to improve, Bernanke told the House panel.

But he refrained from repeating comments made earlier in the week, that he didn't anticipate the Fed taking new action in the near term. Those comments to the Senate Banking Committee sent stocks tumbling Wednesday. The market on Thursday recovered those losses after another strong batch of earnings revived optimism on Wall Street.

Bernanke is under growing pressure to keep the recovery going because there's little appetite in Congress to provide a major new stimulus package.

The Fed chief made his comments as the panel's highest-ranking Republican, Rep. Spencer Bachus of Alabama, and other Republican members, complained about the effectiveness of President Barack Obama's $862 billion stimulus package. That has increased government spending and cut taxes at a time when most Republicans and some Democrats are worried about the government's exploding red ink.

"The economic recovery is anemic at best," Bachus said, arguing that the stimulus package hasn't delivered.

Bernanke's remarks also come as tax cuts by President George W. Bush are set to expire at the end of this year.

The economy is slowing as consumers cut back spending under the strains of 9.5 percent unemployment, lackluster wage gains, sagging home values and chipped nest eggs.

Businesses are wary of hiring and expanding because they are uncertain about the strength of their sales and the strength of the rebound. Some private economists fear the recovery could fizzle.

If the recovery were to flash serious signs of backsliding, the Fed could revive programs to buy mortgage securities or government debt. It could cut to zero the interest rate paid to banks on money left at the Fed, although there are some technical difficulties raised by such a move, Bernanke said. The Fed also could create a new program to spark more lending to businesses and consumers in a bid to lure them to ratchet up spending and grow the economy.

Rep. David Scott, D-Ga., complained about a lack of "aggressiveness" on the part of the Fed to tackle high unemployment. And, Rep. Gary Peters, D-Mich., wondered why the Fed wasn't taking new steps to stimulate the economy now.

Despite growing threats to the recovery, Bernanke said the Fed continues to believe the economy will grow modestly this year and avoid sliding back into recession. Some disappointing economic data hasn't been bad enough for Fed policymakers to "radically change our outlook," he said.