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Economist: Fed actions can stave off recession

Posted October 10, 2007 11:00 pm

Tim Landis

The U.S. economy is headed for a bumpy, but not a crash, landing.

JP Morgan Chase managing director and chief economist Anthony Chan brought that cautiously optimistic forecast to a private-investment group meeting at Chase Bank in Springfield Thursday.

He also said he expects the Federal Reserve will continue to aggressively cut interest rates so long as inflation is not a threat.

"I think we're close to turning a corner, but it's a 'U'-shaped corner, not a 'W'-shaped corner," Chan said in a phone interview prior to his presentation.

Chan, who is based in New York, called last month's decision by the Federal Reserve to cut a key interest rate by half a percentage point a "watershed" that probably will keep the economy from slowing into a recession.

He said he believes Federal Reserve members were a little surprised by how quickly problems with subprime loans spread through the industry, though the worst of the lending problems have been on the coasts.

"I would be very concerned if they're finished making cuts. I think they have another 50 basis points (half a percentage point) that they want to do," said Chan.

He said high gasoline prices, falling home prices and tighter lending standards "are a formula for slower growth," and that recession remains a possibility. But he said there already are signs interest rate cuts have eased the lending crisis, and he expects economic growth to pick up in the spring or summer of 2008.

"I'd say the chances of a recession are 30 to 35 percent. That's not trivial, but that's another way of saying there's a 65 to 70 percent chance there won't be a recession," Chan said.

Global economic growth and ethanol should continue to increase demand for Midwest farm products, both as food and fuel, even as corn, wheat and soybean farmers are enjoying some of the best prices in years, according to Chan.

"It's one of the best situations you can be in (for farmers)," he said, adding that he believes the federal government will continue to increase ethanol mandates for blended fuels.

Chan said the timing of an economic rebound also could have a significant effect on the 2008 presidential elections, but that it is difficult to tell at this point who among the candidates, Republican or Democrat, stands to benefit.

He said the stock market rebound that followed last month's rate cut is a sign of investor confidence a recession has been avoided. But he said that mood, too, depends heavily on Federal Reserve action in the coming weeks.

"Historically, the market is ahead of the economy, and what the market is telling us is they have faith … that the Federal Reserve has the power to make sure that we don't get into a recession," Chan said.

Tim Landis can be reached at (217) 788-1536 or tim.landis@sj-r.com.

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