Ben Bernanke, the Chairman of the US Federal Reserve, threw his weight yesterday behind an increasingly likely package of tax-and-spending measures being weighed up in the White House and on Capitol Hill to underpin the American economy.

As Mr Bernanke renewed his analysis given last week of worsening US prospects, and repeated his strong signal of aggressive interest rate cuts by the Fed to fend off recession, he argued that a fiscal boost through tax cuts or spending measures could also help to bolster growth.

“Fiscal action could be helpful in principle, as fiscal and monetary stimulus together may provide broader support for the economy than monetary actions alone,” Mr Bernanke told the Joint Economic Committee (JEC) of the US Congress.

The Fed chief’s comments came amid a double dose of bleak economic news, showing the sharpest slump in US home-building for 25 years. A manufacturing downturn in America’s mid-Atlantic region fuelled recession fears and sent shares plunging once more on Wall Street. The Dow Jones industrial average fell more than 300 points, or nearly 2.5 per cent, while the broader-based S&P 500 index lost almost 3 per cent.

Deepening losses across US stock markets will add to pressure for fiscal steps to counter recessionary risks.

President Bush and Republican and Democratic congressional leaders last night held a conference call to discuss potential action after the White House earlier gave what was the first explicit indication that it would support a fiscal plan. In the call, the President made clear that he favours income tax rebates and tax breaks for companies as the preferred measures.

“I think the President does believe that, over the short term, to deal with this softening in the economy some fiscal boost is necessary,” a White House spokesman said.

Lawrence Summers, the US Treasury Secretary under President Clinton, told the JEC this week that tax measures worth $50 billion to $75 billion (£25 billion to £38 billion) should be enacted quickly.

Mr Bernanke, while backing fiscal measures, told the committee that it was “critically important” that any action be carefully designed to take rapid effect and deliver its maximum impact on American companies’ and households’ spending power within the next 12 months.

He said that it would be “quite counterproductive” for the economy if these conditions were not met.

“Stimulus that comes too late will not support economic activity in the near term, and it could be actively destabilising if it comes at a time when growth is already improving,” he said.

Mr Bernanke added that fiscal measures should be “explicitly temporary” – a condition that would ensure the cost had only a limited impact on the large US budget deficit.

He also suggested that the most effective action would come through channelling extra spending power to less well-off Americans. “There is good evidence that cash that goes to low and moderate income people is more likely to be spent in the near-term,” he said.

He repeated his bleak assessment that US prospects had worsened. In a renewed signal that the Fed was poised to cut interest rates at the end of this month, perhaps by a half-point, and to take more action after that, he said: “We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.”

Explore Economics

• Pre-Budget Report 2008

• Budget 2009

• World Economic Forum

• The Times MPC

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive