Analyst foresees 2 more rate cuts/Fed is expected to spur growth (Gazette - Montreal)
Sunday May 13, 2.001.
The Federal Reserve will have to cut interest rates twice more before midyear to keep the nation's economy out of a recession, a leading economist said Wednesday. Sung Won Sohn, executive vice president and chief economist for Wells Fargo Banks, expects the Fed to cut rates by 0.5 percent Tuesday and by a similar amount in late June.
"Both consumers and the financial markets expect a cut on Tuesday; if the Fed fails to deliver, the stock market will have a broad sell-off and consumers' confidence will suffer," Sohn said in an interview after a presentation to bank customers in Denver.
Sohn is scheduled to make a similar presentation today to bank customers and business leaders in Colorado Springs.
The rate cuts are needed to help combat several economic problems that have slowed growth late last year and into this year, Sohn said. Those problems include overcapacity among high-technology manufacturers, consumers and businesses awash in debt, higher energy prices and a declining stock market.
"This slowdown is not just the result of the interest rate hikes imposed by the Fed last year. There are both cyclical and structural problems that contributed to it," Sohn said. "But I don't believe we will end up in a recession because manufacturers are already building inventories, which will accelerate economic growth."
Sohn predicted U.S. growth would slow from 2 percent during the first quarter to 1.5 percent in the current quarter. Growth will hasten to 3 percent during the second half of the year as a result of rate cuts, a likely federal tax cut and a recovering stock market.
Long-term interest rates likely will rise in coming months in another sign of a recovering economy as the threat of a recession diminishes, Sohn said.
Sohn also tracks the Colorado Springs economy for Wells Fargo and said it faces continuing threats because of its dependence on high- technology manufacturers stuck with overcapacity, traditional manufacturers and tourism hurt by a slowing economy, and an inevitable slowdown in the red-hot construction industry.
However, those threats are somewhat offset from the economic stability the area gains from military spending, financial services employment and a high quality of life that keeps population growing even during economic slowdowns, Sohn said.
On balance, Sohn predicted that job growth - the best measure of economic growth - in Colorado Springs will slow to 2 percent this year from 3 percent last year while the state's job growth will slow to 3 percent this year from nearly 4 percent last year.
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