Three More Years of Goldilocks?

There was some revealing information in the three-year forecast published by the Federal Reserve this week. It looks like Ben Bernanke & Co. are dissing high oil and gold prices and the sagging dollar as influences on future inflation. Instead they basically see 2 percent inflation — both headline and core — in 2008, 2009, and 2010. The Fed also sees Goldilocks-type economic growth — not too hot, not too cold — for the next three years.

For 2008, an election year, the Fed is looking at 2.1 percent growth, their lowest estimate. This rises to 2.5 percent in 2009 and 2010. A slower 2008 does make some sense given the lingering sub-prime hangover and the housing recession. But one wonders if the Fed might be thinking about higher tax rates under a Democrat like Hillary Clinton, which would produce sub-standard growth for the longer term.

Nevertheless, with the Fed forecasting 2.1 percent growth next year, it certainly looks like they’ll follow Treasury bond market interest rates down toward a 3.5 percent federal funds rate. (Of course, today’s rate stands at 4.5 percent.) On CNBC this week, former Fed governor Wayne Angell told me to expect this, and former Dallas Fed president Bob McTeer agrees. My own view remains the same: The Fed will skip a rate cut at their December 11 meeting in order to help stabilize the greenback in the foreign exchange markets. But they eventually will move their target rate down several times this winter....

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