NEW YORK, Jan 11: Federal Reserve Board Governor Edward Gramlich said on Friday that some fiscal stimulus to boost a slow economy was helpful, but the long-term goal of fiscal policy should be balanced budgets.

“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.

Gramlich said he did not want to get into a political debate over President George W. Bush’s latest $674 billion tax cut plan released earlier this week, and it was hard to tell whether the package would have an effect on long-term interest rates or other markets.

He noted that historically such proposals took a long time to get through Congress and could get changed along the way. But Gramlich stressed that US 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.

Gramlich said although fiscal policy could respond to economic events in the short-run by raising or lowering the budget deficit, this should be done consistently with a goal to balance the budget over the long term.

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.”

The Federal Open Market Committee next meets on Jan. 28-29, and the majority of analysts believe it will keep the federal funds rate steady at 1.25 per cent.

Asked about concerns in financial markets that inflation, already low, could turn negative, Gramlich said the Fed was “certainly worried” about deflation, but it had the tools to fight it.

His remarks were similar to those of other Fed officials, who have said the Fed is aware of the risks of broadly falling prices, but even if benchmark interest rates fall to zero the central bank still has other options to stimulate the economy. Gramlich said that monetary policy, like fiscal policy, needs a long-term anchor.

He cited as an example many foreign central banks, which have chosen a flexible inflation-targeting regime to guide policy. But he stopped short of joining some of his colleagues who have advocated formal inflation targets for the central bank.

“I am not sure if it’s needed in the United States because it does tie our hands a little bit,” Gramlich told reporters after the panel.

Although the Fed doesn’t have a formal inflation target, Gramlich said “I would argue we certainly behave like it,” noting the Fed’s preferred inflation measure, the core personal consumption expenditure price index, has averaged 1.7pc over the past five years.—Reuters