Economists say rising recession risk requires Fed rate cut

Posted Dec 11th 2007 10:35AM by Joseph Lazzaro
Filed under: Forecasts, Other Issues, Economic Data, Federal Reserve

Economists surveyed by The Wall Street Journal say the risk of a U.S. recession is rising, and the U.S. Federal Reserve should cut key short-term interest rates to address it.

In the survey, 50 of 52 economists expect the Fed to cut its Federal Funds rate -- the rate charged on overnight loans between banks -- The Journal reported Monday. Only two see the Fed holding the rate steady at 4.5%, and none expects a rate increase. Some 61% say a quarter-percentage-point cut is the right move, while 27% say the Fed should cut rates by one-half point.

Also, the economists on average now put the chances of a recession at 38%, the highest in more than three years, up from 33.5% in the November 2007 survey, The Journal reported. They also reduced gross domestic product estimates across-the-board: Q4 growth is seen at a slim 0.9% annual rate, down from a prediction of 1.6% in the previous survey, with six economists expecting either a negative or flat reading. Three economists project an economic contraction in Q1 2008, with the average growth forecast at 1.5%, down from 1.9% in November 2007.

Conflicting Q4 evidence

Economist David H. Wang, who was not part of the survey, told BloggingStocks on Monday that the economists polled may have been slightly meager regarding their Q4 GDP estimate.

"I see Q4 GDP in the 2%-2.5% range, but there are people who disagree. Are we in slow-growth mode or something worse? Given the conflicting evidence we've witnessed in Q4, it's easy to see why reasonable people can disagree on this," Wang said.

Wang added that with corporate earnings already in year-over-year declines, the next pivotal data point for economists -- and for the U.S. economy -- is the Q1 2008 GDP statistic.

"If the Q1 GDP stat comes in at 1% or lower, that all but guarantees a U.S. recession in Q2 2008," Wang said. "But it's too soon to tell if that Q1 stat is going to come in that low."

Economic Analysis: The Wall Street Journal survey certainly confirms increasing unease among economists regarding a potential U.S. economic stall. Still, we'll side with economist Wang and await the important Q4 GDP data before issuing a prediction regarding the U.S. economy's prospects for 2008.

Tags: economic growth, economy, featured, GDP, interest rates, monetary policy, recession, U.S. economy, U.S. Federal Reserve, U.s.Economy