By Richard Rubin, CQ Staff

Lawmakers pressed ahead Tuesday with plans to kickstart the ailing U.S. economy, as the Federal Reserve Board stepped in with a big interest rate cut aimed at spurring growth and stabilizing a battered stock market.

House Speaker Nancy Pelosi , D-Calif., Senate Majority Leader Harry Reid , D-Nev., and other leaders from both parties met with President Bush at the White House for about an hour to discuss an economic stimulus package. They agreed only on the basics: They will seek to clear a $150 billion package by the time Congress breaks for the Presidents Day recess Feb. 16, Reid said.

“We need to put something on the president’s desk by then,” Reid said.“It’s not easy, but we’re going to have to get it done as quickly as possible.”

Pelosi and House Minority Leader John A. Boehner , R-Ohio, will work with Treasury Secretary Henry M. Paulson Jr. to develop a legislative proposal that can first pass the House and then be sent to the Senate, the leaders said.

Boehner and others said they did not discuss with Bush any details of the legislation, such as who would be eligible for the tax rebates that are likely to be the core of the stimulus package.

Boehner said he and Pelosi “will have these conversations later on today and tomorrow,” once they have more precise cost data.

“I think the Speaker and I have been very open in our conversations with each other. I understand where her concerns are, she understands where my concerns are,” Boehner said. “The question is ... with more accurate cost numbers, can we come to an agreement?”

The day began with the Fed lowering a key interest rate by three-quarters of a percentage point, to 3.5 percent. But Senate Finance Committee Chairman Max Baucus , D-Mont., said Congress must keep working on a fiscal stimulus plan.

“Will monetary stimulus be enough?” Baucus asked at a hearing. “There are reasons to believe that it might not.”

Although it was not scheduled to consider another interest rate cut until the Jan. 29-30 Federal Open Market Committee meeting, the Fed acted after world financial markets took a dive Monday, spooked by a U.S. economic slowdown that appears to be spreading.

The Dow Jones industrial average dropped almost 500 points at Tuesday’s opening (U.S. markets were closed Monday for a federal holiday) but recovered later, closing down 128 points at 11,971.

“Whether it’s herd mentality or restructuring of the markets, world markets are reacting to the situation in America,’’ Pelosi said after congressional leaders met at midday with Paulson, Bush’s chief negotiator on a stimulus package.

Bush on Jan. 18 called for a package equal to about 1 percent of the $14-trillion-plus gross domestic product. The White House might be open to an even bigger package, press secretary Dana Perino suggested.

Senate Minority Leader Mitch McConnell , R-Ky., said he hoped a “spirit of cooperation” could be applied to “act quickly and act on a bipartisan basis. Senate Republicans are prepared to do that.”

Rebate Eligibility at Issue

First, congressional leaders will have to strike a deal with Paulson on the details of a stimulus package, one that commands enough broad bipartisan support to speed through both chambers in just a few weeks.

The president has called for tax rebates for individuals who pay income taxes, but Democrats want the checks to go to a broader group of people who pay payroll taxes but may not earn enough to owe income taxes.

The rebates, which are likely to be the biggest single part of the package, could reach as much as $800 per person and be delivered in the spring and summer.

Baucus floated a different rebate idea: $400 for individuals, $800 for married couples and a $400 bonus for each child. Under his suggestion, all taxpayers, not just those who pay income taxes, would get the money.

Sen. Judd Gregg , R-N.H., objected to Democratic efforts to give tax rebates to individuals or households too poor to owe income taxes, saying the checks likely would be used to purchase cheap imported goods.

“Are you going to be energizing the Chinese economy or the American economy?” Gregg asked.

Meanwhile, Republicans and business groups are pressing for investment tax incentives to encourage business spending. And Democrats are eager to add other spending, such as extended unemployment insurance, aid to state governments and higher food stamp payments.

That spending option could be even more attractive, because the money could be in families’ pockets within two months, as opposed to the tax rebates, which would take longer for the IRS to process.

“It sounds like that’s one of the quickest turnarounds we could make in terms of getting money to people,” said Sen. Debbie Stabenow , D-Mich.

The regular tax filing season and IRS problems with computer infrastructure could make rebates difficult to distribute quickly, said Congressional Budget Office director Peter Orszag.

“It would be desirable if it could happen faster,” he said. “It is remarkable that the world’s leading economic power can’t get checks out faster than that.”

There was no shortage of ideas about what to include in a stimulus package.

Sen. Ron Wyden , D-Ore., for example, suggested a boost in funds for road resurfacing, a type of infrastructure spending that can be done quickly, perhaps even faster than the tax rebates. He also asked whether Congress could craft proposals that had both short-term and long-term benefits.

Sen. Edward M. Kennedy , D-Mass., chairman of the Health, Education, Labor and Pensions Committee, introduced legislation to temporarily extend unemployment compensation benefits.

“Congress should act now to strengthen this vital safety net, and I urge my colleagues to join me in extending unemployment benefits so we can help American families weather the current economic storm and get our economy back on track,” Kennedy said.

One possible complication to the passage of a stimulus package was raised by Sen. Christopher J. Dodd , D-Conn., chairman of the Banking, Housing and Urban Development Committee, who said he would like housing and credit-related proposals to be considered.

“The economic downturn that we are facing, coupled with the sharp downturn in the global markets, is in large part due to the ongoing fallout from the problems in our housing market, specifically within the subprime market,” Dodd said in a statement. “The stimulus package that Congress will shortly consider needs to include a component that will address the problems in the housing and credit markets.

Meanwhile, Sen. Pat Roberts , R-Kan., warned of the long-term consequences of a temporary increase in food stamps.

“There is no such a thing as temporary,” he said. “Once you do it, you do it.”

Sen. Charles E. Grassley of Iowa, the ranking Republican on the Finance Committee, was skeptical of calls for higher spending, saying taxpayers and businesses — not lawmakers — should decide how to spend any additional money.

Grassley, whose support is generally critical for tax measures in the closely divided Senate, also sharply questioned the attention given to tax rebates for individuals. People who support that approach, he said, “give the impression that we can grow our economy by getting people to go shopping and it doesn’t matter what they buy.”

Like Gregg, he took issue with the Democratic view that rebates should be targeted to middle- and low-income Americans because they would be most likely to spend it quickly.

“It ignores the role of savings,” Grassley said. “Money that is saved does not disappear. It flows back into the economy in the form of investment.”

It was unclear what effect the latest round of turmoil on Wall Street and in global financial markets will ultimately have on the stimulus policy debate.

Orszag warned senators against overreacting to the fluctuating market data.

“It’s important to keep our eyes on the real economy and not respond too dramatically to short-term movements in financial markets,” he said.

Catherine Richert, Kate Hunter and Edward Epstein contributed to this story.

First posted Jan. 22, 2008 10:44 a.m.