Major headwinds

Still, the U.S. economy is facing several, large headwinds: problems that will make the job of jump-starting a tepid-at-best U.S. economy difficult, economist Steve Affinito told BloggingStocks on Thursday.

"We have some serious-order problems here. A housing correction that could be the worst in more than 20 years, high oil prices, high prices for other commodities, sluggish job growth or even job declines, credit market concerns, and a consumer that's showing signs of cutting back spending," Affinito said. "That's a lot of headwind acting to slow the economy, so it's incumbent on Congress and President Bush to pass a fiscal stimulus package."

Affinito said he'd "love to see Congress pass a $500 tax rebate, or at least a $300 tax rebate and some other measure "to give consumers and business leaders confidence that help is on the way."

"It could take the form of more spending on public goods, such as education, infrastructure, energy, job training or the environment," Affinito said. "There are so many projects that the spending could be allocated to - - in particular I like mass transit and highway/road infrastructure, due to the tremendous needs the U.S. has in these areas, the good jobs it would create, and its economic spin-off effects. But that is really a political question. The important thing is that we get either a tax rebate or some fiscal spending to prime the pump."

Economist David Wang also favored a fiscal stimulus package. "My sense it that the $300-$500 tax rebate would work best, as it would provide a quicker economic boost." Wang said. "But you could combine, for example, a $250 or $300 tax rebate with a spending package, which would provide an initial boost and help longer-term."

Risk of higher inflation?

But would fiscal stimulus, on top of monetary policy stimulus, run the risk of causing inflation to cycle higher? U.S. producer price inflation is already above the Fed's stated "2% comfort zone."

Analyst C. Leonard Bauer, formerly of Prudential, said there is an inflation risk with a fiscal stimulus package, but he still favors Congress approving one.

"Inflation is the bane of every bondholder, and as a bondholder myself, I can speak not only as an analyst but from personal experience. No bond holder likes inflation, but there's only one thing worse than a bond that loses some of its value due to inflation - - a bond with no value because the issuer goes bankrupt," Bauer said. "Given the damage a serious recession would cause, the balance of risks favors a fiscal stimulus package.

London-based economist Mark Chandler is slightly more conservative regarding the issue of fiscal stimulus.

Chandler said Wall Street and public officials "seem to be a little too eager to provide more stimulus." In his interpretation the Fed "has already injected considerable monetary stimulus" and has addressed the credit market liquidity issue via the term auction facility and via its coordinated actions with other major central banks, including the Bank of England and the European Central Bank. Congress should hold off regarding a stimulus package for now, he said.

"It may be just my perspective being in Europe and not in America but unemployment hasn't jumped that much. Everyone seems to be acting as if unemployment had jumped to 7%," Chandler said. "So far the housing recession has not driven the U.S. economy into the ground, and U.S. exports are holding up well, so a fiscal package at this time seems a little premature. We don't want inflation ramping to the sky again."

Fed rate cut predictions

Affinito said he now expects the Fed to cut benchmark interest rates by 100 basis points, total, over three meetings. Bauer "is not in the business of forecasting Fed rate cuts," and Chandler expects the Fed to cut rates by 50-75 basis points over the next three meetings.

To counteract the effects of the housing's sector's correction and other drags on the U.S. economy, including high energy prices, the Fed has cut benchmark interest rates three times, starting in September 2007. The Fed Funds rate, the rate banks charge each other, now stands at 4.25%, and the discount rate, the rate the Fed charges banks for short-term loans, is at 4.50%. The Fed also set up a special term auction facility to help banks maintain short-term liquidity.