Bernanke Encourages Additional Stimulus Package as Consumer Weakness Mounts

In an unusual endorsement of Congressional fiscal policy Federal Reserve Chairman Bernanke strongly endorses a second stimulus package. Is it possible that the current economic slowdown has spooked Chairman Bernanke? Yesterday's statements are in sharp contrast to Bernanke's assurances, during his confirmation hearings, that he would avoid giving Congress recommendations of fiscal and tax policy.

On the heels of the largest drop in retail sales since August 2005, largely driven by a 3.8 percent drop in auto sales--Bernanke deviates from his own Fedspeak rules. Sources close to Bernanke, cited in a recent Bloomberg article, attribute this departure to depression fears.

Bernanke made is recommendation on a backdrop of recession, "with the economy likely to be weak for several quarters, and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate."

Most have been hesitant to mention the word recession. However, even the White House is growing comfortable with the reality. Edward Lazear, Chairman of the Council of Economic Advisors, told CNN "we are seeing what anyone would characterize as a recession in some parts of the country." Lazear supported his statement with the indicator that some areas of the Country are experiencing much higher rates of unemployment than the national average of 6.1 percent.

Likewise, Federal Reserve Governors like Richmond President Jeffrey Lacker and San Francisco President Janet Yellen are more directly signaling their recession opinion. The swelling shift from inflation concerns to recessionary pressure strengthens indications that the Fed will provide an additional rate cut at the October 28-29 FOMC meeting, adding to the 0.50 percent emergency cuts last week.

The Democrats, led by House Speaker Nancy Pelosi (D-CA) and Senate Majority Leader Harry Reid (D-NV) are already dusting off a prior stimulus proposal to extend unemployment benefits, increase funding for States roads, bridges, and infrastructure projects.

Strongly opposed to this stimulus package previously, even the White House is hinting at a change of position. White House Press Secretary responded to Chairman Bernanke's statement with, President Bush is "open to the idea" of another stimulus package.

However, Republican leadership headed by House Minority Leader Jim Boehner (R-OH) characterized the Democrat's stimulus plan as, "hundreds of billions in new government spending masquerading as economic stimulus."