According to Sung Won Sohn, executive vice president and chief economist with Wells Fargo Bank in Minneapolis, the Fed will continue to slowly raise interest rates over the course of the next year until a neutral interest rate is achieved. A neutral interest rate is one that neither hinders nor encourages the economy – that probably falls somewhere between 3 percent to 4 percent.
Besides, he says, “Greenspan doesn’t want to go out being the guy who caused a recession by raising rates to fast.”
Greenspan is scheduled to step down in 2006 as chairman of the Fed as he will have served the maximum numbers of terms allowed. But don’t expect President Bush to replace him too quickly. The law allows the current chairman to stay in the job until a replacement has been nominated by the president, and approved by the Senate. If things are going well, selecting a new chairman may fall near the bottom of the president’s to do list.
Economy looking brighter
“The economy is coming out of a soft patch and definitely getting onto firmer ground,” Sohn told attendees at the National Agricultural Bankers Conference earlier this week. The economic fundamentals are sound.
For example, income and consumption are both going up at a steady pace. And all of this consumer spending is supported by greater consumer wealth. The one caveat though, a lot of that wealth is based on real estate, explained Sohn. If the real estate market ever goes bust you would see national economic implications. “But I don’t expect to see that happen,” he added.
Other bright spots in the economy include capital goods orders are rebounding and inventory investment is rebuilding that means companies are starting to feel more confident about consumer spending. In addition, businesses are building up cash reserves by holding down costs. All of these point to firmer economic growth. And Sohn predicts the U.S. economy should grow by 3.5 percent in 2005.
All of this of course, says Sohn, is closely tied to U.S. foreign policy. Keeping oil prices at reasonable levels and getting out of Iraq with honor are priorities.