Tuesday 14 July 2020

US economy 'set to slow'

Washington, August 9, 2007

The US economy will lose steam in the second half of this year, but inflation should remain just high enough to make the Federal Reserve reticent about cutting interest rates, according to a Reuters poll.

At the same time, concern over tightening credit has heightened speculation that eventually the Fed will have to push rates lower to prevent the expansion from sliding off track.

But that view, shared more widely among big Wall Street bond dealers, is not the majority. Most economists foresee a pick-up in growth with little change in core inflation moving into next year, leaving rates on hold until the end of 2008.

'Growth is likely to be mixed, but relatively soft in the near term, improving in the fourth quarter and in 2008,' said Scott Brown, chief economist at Raymond James & Associates in St. Petersburg, Fla.

Economists look for growth to taper off to a more subdued rate of 2.5 percent in the fourth quarter of this year following a 3.4 percent increase in the second. That should leave growth of gross domestic product (GDP) at 2.2 percent for 2007, the same result as July's poll, then accelerating to 2.8 percent in 2008, slightly lower than the 2.9 percent polled last month.

'The housing market correction will last longer than most had anticipated. The direct impact should fade, but spillover effects will become more meaningful,' Brown added.

However, weaker growth will do little to alleviate core inflation, which excludes food and energy costs and is a favourite of policy-makers.

The measure should dip to 2.1 percent in the third quarter but then pick up incrementally, failing to break below the range that would make Fed officials comfortable bringing rates down.

A separate poll of US primary bond dealers conducted after its decision this week to hold rates at 5.25 percent and maintain its bias to raise them found that five of the 21 banks surveyed foresaw a rate cut as early as October.

The Reuters survey also suggested tighter credit conditions are making analysts more cautious about US growth prospects.

Problems that started in high-risk US mortgages have recently infiltrated other sectors of finance, making it harder for firms to raise capital and stoking fears of broader contagion.

Despite its drag on growth, the retrenchment in lending may offer little relief from inflation, making Fed officials reluctant to reduce borrowing costs even if the economy looks a bit sluggish.

The Fed's rate-setting committee indicated as much on Tuesday, leaving overnight rates on hold at 5.25 percent but also flagging inflation as its number one concern.

'Our view on inflation is hardly altered and core inflation could remain stubbornly high, keeping the Fed in a holding pattern on interest rates throughout 2008,' said Scott Anderson, senior economist at Wells Fargo.

The Fed's anti-inflation mantra had led many economists to believe the central bank will leave monetary policy unchanged through the end of next year.

Nonetheless, a reduction in the availability of credit has clearly gotten investors' attention.

More than a quarter of the 112 economists in the poll, the bulk of which was conducted before the Fed's rate decision this week, predicted rates would come down in the last three months of the year. - Reuters

Tags: US economy | infaltion |


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