A credit crunch stemming from turmoil in the subprime mortgage market will trigger further weakness in housing and keep U.S. economic growth "below trend" most of this year, a UCLA Anderson Forecast unit said in a report on Monday.
The sluggish growth will help clear the way for the Federal Reserve to ease monetary policy at the end of the second quarter despite a historically low 4.5 percent unemployment rate, the economic forecasting unit said in its report.
Citing Fed Chairman Ben Bernanke's recent comments about the link between inflation and employment levels appearing "looser" than in past decades, the unit projected three cuts to the Fed Funds rate by the end of the year, taking it to 4.5 percent from 5.25 percent currently.
While I agree completely that the mortgage problems will hold growth below "full potential", I don't see the Fed lowering rates anytime soon.
The Fed has been consistent in its inflation pronouncements. Bernanke has highlighted that recent lower inflation was the result of lower energy prices. Since that statement, oil spiked over the technically important $64 price level. Gas prices are higher this year than the same time last year, and gas and oil inventories are lower than the same time last year.
In addition, we now have agricultural prices to deal with. For the last three months, the food price component of the PPI and CPI have shown strong increases. While a record corn planting helped to lower corn prices recently, I seriously doubt that increased supply will be sufficient to adequately supply increased ethanol demand. In short, I don't see agricultural prices playing into the Fed's hands right now.
