Fed to cut US economic outlook as downturn debated

 

The US Federal Reserve this week releases its updated economic forecast likely to show tepid growth for most of 2008 but probably not a recession, thanks to rate cuts and a big stimulus effort.
 

The forecast set to be released Wednesday along with minutes of the Fed's January 30-31 monetary policy meeting is part of a new policy set by Chairman Ben Bernanke to provided more frequent economic updates.


Bernanke told a congressional hearing last week that the forecast would be lower than the forecast released late last year of a range of 1.8 to 2.5 per cent growth on average for 2008.

He told the Senate Banking Committee a $168-billion economic stimulus plan, which aims to boost consumer and business spending, would help lift growth later this year.

"At present, my baseline outlook involves a period of sluggish growth, followed by a somewhat stronger pace of growth starting later this year as the effects of monetary and fiscal stimulus begin to be felt," Bernanke said.

In response to a question, Bernanke said the Fed would release its new economic outlook that "will show lower projections of growth, and they'll be reasonably consistent with what we're seeing with private forecasters."

Societe Generale economist Stephen Gallagher said he expects a year-over-year growth rate of 1.2 to 1.6 per cent for gross domestic product (GDP), which "would be consistent with private forecasts and forecasts of the CBO," or Congressional Budget Office.

Gallagher said that even though many private economists are predicting a recession -- generally seen as two consecutive quarters of declining activity -- he does not see the Federal Open Market Committee (FOMC) making such a forecast.

"Even FOMC members at the weak end of expectations in the October 2007 forecasts might be reluctant to now officially forecast a negative GDP reading, even if they make downward revisions," Gallagher said.

Yet the latest Fed forecast -- which was provided to policymakers in January -- may be stale since it did not take into account the impact of a stimulus plan, according to some analysts.

The Congressional Budget Office last week upgraded its outlook to show 1.9 per cent growth in 2008 from 1.7 per cent, while lowering its projection for 2009 to show 2.3 per cent expansion instead of 2.8 per cent.

The shift is expected because some consumer and business spending will be drawn into 2008 due to the impact of the stimulus plan. Another factor is the Fed's aggressive rate cuts, which have brought the base federal funds rate to 3.0 per cent from 5.25 per cent last September.

Economist Ethan Harris at Lehman Brothers said that the stimulus will provide a chopppy impact: "We look for a W-shaped trajectory in GDP growth with the economy threatening recession in early 2008 and early 2009. However, we still think the economy will skirt recession due to timely monetary and fiscal policy."

Other analysts argue that it may be too late to prevent a recession.

"Market hopes are pinned on the fiscal stimulus package giving the economy enough of a lift to avert a recession," said Merrill Lynch economist Sheryl King.

"Unfortunately, in spite of the breathtaking speed at which Congress managed to push the proposals though both chambers and onto the president's desk for signing, the swath of indicators we saw this week tell us that the ship has probably already sailed. By our estimations we are probably at least a couple of months into the downturn." (AFP)
 
 
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