SINGAPORE - U.S. President-elect Barack Obama is seeking as much as $310 billion in tax cuts as part of a stimulus plan to counter what policymakers warned could be a prolonged period of economic stagnation and deflation.
Obama's plan is the latest in a series of measures aimed at tackling a financial crisis that began with U.S. mortgage defaults in 2007 and has now plunged major economies into recession, reshaped the banking landscape and taken entire countries to the brink of bankruptcy.
Over the weekend, Janet Yellen, president of the San Francisco Federal Reserve Bank, highlighted risks of deflation - a damaging spiral of falling prices and demand.
Investors have, however, begun to make tentative bets that the worst of the turmoil triggered in September by the collapse of investment bank Lehman Brothers is over.
Kicking off the first full week of 2009, they pushed up stocks, the dollar and commodities while selling safe-haven plays such as government bonds and the Japanese yen.
Appetite for risk
Helping increase the appetite for riskier assets, senior Democratic aides said Obama planned to discuss his tax cut and stimulus package plans with Democratic and Republican leaders of the Senate and House of Representatives.
The tax relief proposals are designed to attract support from fiscal conservatives in Congress, who prefer cutting taxes to increasing federal spending. Under Obama's proposal, about 40 percent of an economic package worth as much as $775 billion would be in the form of tax breaks for businesses and the middle class, one aide said.
The U.S. economy is in need of drastic measures. U.S. jobs data at the end of the week are expected to show half a million jobs were lost in December alone, pushing the unemployment rate to 7 percent.
"The ... firestorm we face today poses a serious risk of an extended period of stagnation - a very grim outcome," Yellen, a voting member of the Federal Open Market Committee in 2009, said. "I'm strongly supportive of a substantial fiscal stimulus package," she said at the annual meeting of the American Economics Association on Sunday.
"If ever, in my professional career, there was a time for active, discretionary fiscal stimulus, it is now."
Even with the Fed's efforts to restore credit flows, an extended period of economic weakness was likely, she added.
Yellen also said the Fed would likely expand its raft of unconventional monetary policy measures now that its benchmark rate has hit rock-bottom. The Fed's target rate is between 0.25 percent and zero.