Tuesday, December 4, 2007

Citigroup’s Chief Economist Forecasts Large Rate Cuts

Lewis Alexander, Citigroup’s chief economist, said he expects the Fed Funds rate to drop 1 percentage point by mid-2008. He believes the Fed will not be concerned about the dollar’s stability because the currency’s value doesn’t affect consumer prices. Alexander, who’s worked at the Fed before joining Citi, is also optimistic about oil prices and the housing market, and believes the U.S. will not go into recession.

All of this is highly debatable, given all the evidence to the contrary we’ve seen so far. Recession is probably around the corner, or already beginning in some local markets, and the dollar’s weakness does affect the prices of imported goods. While a weak dollar benefits the GDP and the job market, its advantages do not offset all the trouble it causes. While a 3.5% Fed Funds rate is not impossible, a great many companies and financial structures will need go under before the Fed cuts this deep. They’ve seen what happened the last time they cut interest rates too low, and they’ll probably look for other ways to prop up the economy. Alexander said energy prices are unlikely to rise from now on, but should the Fed cut, as it is expected to, on Dec.11, oil may well skyrocket beyond $100/barrel, despite the recent drop in prices. Perhaps Alexander is being optimistic, or perhaps he knows something most of us don’t. However, we’ve already seen too many top economists denying the obvious to believe in things the just seem illogical.

No comments: