Washington, DC, June 19--A small cut in interest rates from the Federal Reserve next week should be the last with the U.S. economy soon pulling out of its doldrums, a top bankers' group forecast on Wednesday.
The American Bankers Association's economic advisory committee said the U.S. economy should grow at a 3.5 percent annual rate in the third quarter, well above the 1.6 percent pace the panel expects to see for the April-June period.
The group said the more-rapid pace would likely hold through next year and help edge the jobless rate down a bit from a near nine-year high of 6.1 percent hit last month.
"Major pro-growth economic catalysts have fallen into place: accommodative monetary policy, expansive fiscal policy and a weakening dollar. These are the trifecta of economic stimuli," said Stuart Hoffman, chief economist at PNC Financial Services Group and chairman of the panel.
A majority of the committee, which met with members of the Fed's Board of Governors on Tuesday, expects the central bank to reduce the benchmark federal funds rate by a quarter of a percentage point to 1 percent when it meets on June 24-25.
While all 11 panel members looked for a rate cut next week, seven thought there was some risk the economy could be getting too much of a boost and said a rate cut was not needed.
Overall, the panel expects the Fed to hold rates steady after next week until it starts to nudge them up in the second quarter of 2004. It forecast a funds rate north of 2 percent by the end of next year.
Hoffman said the group looked for a "more balanced" recovery as the economy gained steam.
"We think that business investment will actually finally join in with consumer spending and housing to help lift the economy," he said.
About half of the panel had seen some increase in business loan demand at their banks, but it was too soon to say a full- fledged recovery was underway.
"In some cases, while it's growing, it might not be rapid growing," Hoffman said of commercial loan demand.
Overall, the panel said the economy faced downside risks.
"There are some downside risks to the economy, to economic growth and jobs, such as reduced but still significant geopolitical risk, a fragile business confidence and of course a global economy ... that is weak," Hoffman said.
"But there were a number of committee members who felt equally as strongly that upside surprises to the economy in terms of jobs and output may be just as likely."
He said all panel members agreed the risk of deflation--a decline in the overall level of consumer prices that can hobble an economy--was "fairly remote or minimal."
Expectations the Fed would lower rates next week has grown since the central bank warned last month the economy faced a small deflation risk.
Hoffman said the panel's forecast for the 10-year Treasury bond might imply the market had gone too far in pricing in expectations of aggressive Fed easing.
"I think our consensus forecast was sort of a steady state, or more likely the underlying trend of the 10-year rate might be a bit higher than it is right now. Not as high as 4 percent, but maybe something closer to 3 and a half percent," he said.
The panel said consumer prices would likely pick up from an annual growth rate of 1 percent in the second quarter to a 2.1 percent gain in the final three months of the year.
It forecast a slight further rise in the unemployment rate in the third quarter, but saw it declining by the fourth quarter. The panel expected the jobless rate to average 5.7 percent next year, four-tenths of a percentage point below the level it hit last month.
