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Fed Officials Say Economy Can Use Short-Term Fiscal Help

Three Fed officials Friday spoke up in favor of a fiscal jolt for the sluggish U.S. economy just days after the Bush Administration proposed a huge $674 billion tax-cut plan, but one said a balanced budget must be a long-term goal.

After a series of 12 interest rate cuts over the past two years has been unable to restore the economy to vigorous health, attention this week has shifted to President Bush's plan, which focuses almost entirely on tax cuts.

Federal Reserve Board Governor Edward Gramlich said some fiscal stimulus to boost a slow economy was helpful.

"If there is softness in the economy, you want to see some well-timed fiscal stimulus -- that is not a bad thing. But in the long run, you would hope you'd get back to something like balanced budgets," Gramlich said after a Directors' Roundtable panel.

At a separate event in Burlington, Vermont, Boston Fed President Cathy Minehan voiced her support for fiscal stimulus that lifts the economy in the near term.

"Fiscal stimulus that brings some support to the economy in the short run is good thing," Minehan said after a speech at the Vermont Economic Outlook Conference.

However, some economists have criticized Bush's 10-year plan for not delivering enough stimulus this year, when the economy is soft. Most of the stimulus will come in future years. If the proposals make it through Congress by mid-year, taxpayers could receive some tax cuts in the second half of the year.

Around half of the package's cost will eliminate taxes on dividends, which will only give taxpayers relief in 2004 after they file their 2003 tax returns.

"A posture of fiscal stimulus is what we need now. It can be helpful in providing the necessary inputs for the economy to keep growing," said Minehan in response to a question.

Democrats have denounced Bush's plan as a windfall for the rich that won't offer enough of an immediate kick to economic growth and will swell the federal deficit.

Gramlich stressed that U.S. fiscal policy, which may be headed to a record budget deficit this year, should strive to keep the federal books balanced over time.

"For me, for fiscal policy, an appropriate anchor would be over some horizon that we ought to strive for budget balance," he said. Gramlich did not discuss current economic conditions or the outlook for interest rates.

Many analysts say if the latest tax cut proposals are passed by Congress, the budget deficit this year will top $300 billion, passing the prior record of $290 billion in 1992.

And there is a concern that could push up long-term market interest rates.

Gramlich said most economists feel that in the long run, "explosive" deficit spending would push up rates, but in the short run, "very few people would be that hard-line about it."

Another Fed official, the head of research at the Chicago Fed, Curt Hunter, said the prospect of a growing deficit is not especially troublesome.

"Deficits are OK in a time when you need them, when the economy is struggling," he told the Mid-America Club in Chicago. "You need demand-driven stimulus, and of course, some of the (Bush) proposals are aimed at that."

For its own part, the Federal Reserve is widely expected to wait out the economy's soft patch without providing another cut in interest rates, according to a Reuters poll conducted on Friday. The Fed last cut borrowing costs in November.

Although none of the 20 top government bond dealers surveyed expect a rate cut at the Fed's next meeting on Jan 28-29, four say the Fed will be tipped into moving at its March meeting by the release of more dour economic news.