--US bankers peg fed funds rate at 3.75% in second half of 2001
--Bankers project US 2001 Q4 real GDP at 1.8%, 2002 Q4 at 3.3%
--Bankers caution excessive rate cuts could trigger US inflation
--Bankers see tax and interest rate cuts boosting US economy by 2002
--Bankers: Risks of high US energy prices, bankruptcies, layoffs remain
By Shihoko Goto
Washington, June 25 (BridgeNews) - Although the U.S. economy will continue to remain soft until the end of the year, it is likely to avert a downright recession, economists of the American Bankers Association said Monday. In their twice-yearly report, the ABA's Economic Advisory Committee concluded that tax cuts and rebates, coupled with aggressive monetary easing by the Federal Reserve since the beginning of the year should bolster growth by 2002.
"The nation will narrowly escape a recession for the remainder of this year and resume a faster pace of growth next year," concluded the nine-member committee of economists from private banks. As such, the group anticipates real gross domestic product growth at an annual rate of 1.8% by the end of 2001, rising to 3.3% the following year. Still, the economists anticipate the Fed drawing closer to the end of its easing cycle as the overall economy picks up. Reduced borrowing costs as a result of lower interest rates will continue to push up demand, but the group cautioned that "excessive monetary stimulation can trigger inflation."
The committee said it expected up to two quarter-point cuts in the fed funds rate before the end of the year, projecting the rate at 3.75% from the current 4.00% by the third quarter. But the economists project the rate to go back to 4.00% by the second quarter of next year, rising to 4.25% by the end of 2002.
Rapid money growth also was cited as one factor that could increase inflationary pressure, which in turn would lead the Fed to reverse its easing policy.
"No one wants to face rising interest rates next year to combat inflation. This would strike consumer confidence and weaken business reeling from compressed profit margins," committee chairman and Comerica Bank chief economist David Littman said.
While the overall economy is expected to pick up next year, the economic advisory committee pointed out that some downside risks remain, including higher energy prices that could hurt consumer spending, the rise in personal and business bankruptcies, increasing layoffs, and lackluster capital spending especially in the manufacturing sector.