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December 07, 2006
More forecasts of rate cuts in 2007
This time, it comes from Ed Leamer, who is worth listening to: (Reuters)
SAN FRANCISCO (Reuters) - The U.S. economy will expand at a weak pace next year, setting the stage for lower interest rates, according to a UCLA Anderson Forecast report released on Thursday.
The forecasting unit's latest report projected quarterly real gross domestic product growth no higher than 2.7 percent next year, reflecting the weak housing market.
...
As a result, the Federal Reserve will cut interest rates to stimulate business, said Edward Leamer, director of the UCLA Anderson Forecast.
"We think the Fed will shift from an inflation concern to a sluggishness concern so that we'll get some rate cuts," Leamer said, adding that he sees the Federal Funds rate falling to 4.5 percent by the fourth quarter of next year.
...
Manufacturing has already shed so many jobs it is in no position to produce the kind of massive layoffs that paired with a housing downturn would trigger recession, Leamer added.
"We've trimmed it to the bone," Leamer said, referring to factory work. "It's already lean and mean."
Additionally, the economy will avoid recession because credit is abundant and consumers will continue spending at a moderate pace, Leamer said.
Interesting. Their prediction of moderate growth (2.7%) is certainly less than average, but equally certainly not indicative of a recession. It is quite similar to the GDP growth in 1995 (a "soft landing" year). And while there were two rate cuts in 1995 (and one more in early 1996), those cuts were to bring the funds rate down to 5.25%. Ironically, that's where we are now. So, while I'm not ready to predict three rate cuts in 2007 to bring the funds rate down to 4.5%, I would say that the UCLA forecast is in the ballpark.
Given all that has transpired in recent days, I would regard a rate cut in the first six months of 2007 to be more likely than a rate increase in that same time frame. That said, I continue to hold to the view that a rate cut at this time would slow the return of core inflation to its comfort zone. The fact that productivity is not growing as fast as it was in the first half of the year and that Mr. Bernanke has suggested that potential output growth may be slowing only serve to reinforce that view. Unlike 1995 and 1996 when productivity was rising rather than falling, the Fed will not have the luxury of cutting rates while inflation trends down.
The part of me that wants to give a prediction that is right is turning to the view that there will be at least one rate cut in 2007.
The Cassandra in me is having a tough time with that.
UPDATE: Calculated Risk quotes the LA Times version of the story, which includes Leamer quotes such as:
"If you are a builder or a broker, it will feel like a deep depression," he said. "But the rest of us will hardly notice."
and...
His conclusion: "The models say 'recession'; the mind says 'no way.' I'm going with the mind."
UPDATE 2: Leamer isn't alone. At least some people's models agree with his mind.
NEW YORK (Reuters) - The economy will likely pick up in 2007 after output growth slows rapidly in late 2006, according to a survey conducted by the Philadelphia Federal Reserve Bank released on Thursday.
Economic growth for 2008, released for the first time in the survey, was forecast at 3.0 percent.
Economists lowered their forecasts for U.S. growth in the first half of 2007 to 2.8 percent from 3.0 percent when the previous survey was taken six months ago. They forecast growth at 3.1 percent for the second half of 2007.
Posted by William Polley at December 7, 2006 09:56 AM
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