While Alan Greenspan is on track in stating that a mild economic recovery is under way, the Federal Reserve chairman soon will have to raise interest rates, two economists said Wednesday.
Economist Brian Wesbury said the Fed will begin boosting short-term rates in June, and they will hit 3 percent by the end of the year from their current 40-year low of 1.75 percent.
They will eventually hit about 4 percent, said Wesbury, of Griffin, Kubik, Stephens & Thompson, an investment firm.
Economist Gail Fosler said the timing of the increases will be slower, with rates holding steady until October.
Because the global economy is suffering from excess industrial capacity, Fosler, of the Conference Board, said she doesn’t see short-term rates rising above 2.5 percent for as long as four years.
Wesbury, who along with Fosler spoke at a downtown forum sponsored by his firm, said the Fed is cautious about holding rates at their current levels.
“The central bank believes it waited too long to raise rates in 1998,” Wesbury said. “So when Fed members see any hint of upcoming inflation, they will be quick to pull the trigger. The economic recovery will be much stronger than Greenspan believes.”
Wesbury said central bankers also realize they made a mistake in ratcheting up rates too rapidly in 2000.
The result, he said, was “a deflationary environment that wrecked the steel industry and agriculture. It also contributed to record levels of defaults and bankruptcies, including that of Enron Corp.”
Fosler said companies have been cutting costs since late 2000, so productivity has zoomed and profits are poised to improve.
“Some elements of the economy will be virtually able to mint money,” she said. However, because of the current low interest rates and because stocks are highly valued, equities are likely to advance by no more than an additional 10 percent, she said.
Fosler said the economy is likely to grow this year at about a 2.6 percent rate, “but that is only about half the rate of recovery for the first year after previous recessions.”
Greenspan, in his semi-annual testimony before members of Congress, sounded more optimistic than he did earlier this year about the onset of economic recovery. However, he made clear that he doesn’t expect rip-roaring growth rates ahead.
His comments came against a backdrop of mixed economic reports released Wednesday. While orders for manufactured goods posted an unexpectedly large jump in January, sales of new homes plunged in the biggest decline in eight years.
Orders for durable goods rose 2.6 percent last month, led by aircraft orders, the Commerce Department said. The gain followed a revised advance of 0.9 percent in December.
But in a stunning shift, sales of new homes plunged 14.8 percent in January. New homes were sold at a seasonally adjusted annual rate of 823,000 last month, down from a revised 966,000 pace in December, the Commerce Department said.
Earlier this week, a report on existing homes sales showed a jump of 16.2 percent, to a record annual rate of 6.04 million units.
