Fed Prepared to Lower Interest Rates

Federal Reserve Chairman Ben Bernanke gives a strong signal that Fed policymakers are ready to cut interest rates again amid mounting risks to the U.S. economy. High oil prices, rising unemployment and a decline in manufacturing are pressuring the Bush administration to keep the economy from lapsing into a recession.

Options for Jumpstarting the Economy

President Bush and congressional lawmakers are weighing how to give the economy a nudge in light of recent disappointing jobs numbers and a slumping housing market — not to mention markets roiled by the subprime mortgage crisis.

Policymakers have been tight-lipped about the options on the table, but it's likely that Republicans will favor a mix of business tax cuts and tax breaks for individuals, while Democrats will push for tax breaks and non-tax breaks that are more highly targeted to lower- and middle-income Americans.

Among the proposals the administration may look at:

Unemployment insurance benefits: In the past, policymakers have turned to temporarily extending unemployment benefits — generally limited to 26 weeks — when the economy has weakened because it becomes harder to find a job. According to Mark Zandi, chief economist at Moody's Economy.com, the change has the highest "bang for the buck" when it comes to giving the economy a boost relative to its cost.

Increase in food stamps: Advocates of the proposal, including Brookings Institution economists, say giving food stamp recipients 20 percent more aid for six months could be administered easily and quickly, and would be targeted at families most vulnerable to a recession.

Individual tax cuts: The Bush administration is reportedly looking at giving a $600 rebate to families with incomes less than $100,000, much like it did as part of an economic stimulus package after the Sept. 11, 2001, terrorist attacks. Some say that the lowest-income households should receive a benefit even if they have no income-tax liability. Reports also cite a proposal to temporarily reduce the bottom tax rate to 1 percent from 10 percent.

Business tax breaks: Policymakers may allow companies to deduct half the purchase price of capital equipment — such as property or machinery — from their taxes. The U.S. Chamber of Commerce recently suggested lowering the corporate tax rate. Rep. Eric Cantor (R-VA) recently proposed cutting the corporate income tax rate from 35 percent to 25 percent.

Housing help: Some have suggested increasing federal housing subsidies for this year, so that state housing authorities can buy property to rent to lower- and moderate-income families. Another reported proposal is a refundable tax credit for first-time home buyers.

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