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Higher Interest Rates On Horizon

June 26, 2002

Chief Economists See Sluggish Growth, Upturn In Capital Spending, Fed Tightening

Inman News Features

The American Bankers Association Economic Advisory Committee expects the national economy to expand during the second half of this year, but that growth is likely to be uneven and its strength remains uncertain.

The committee expects national economic growth to settle around 3 percent in the second half before rising to nearly 3.5 percent next year. The committee doesn't expect interest rates to rise in the near term, but is anticipating for an increase by the end of this year.

SunTrust Bank Chief Economist Gregory Miller, chairman of the ABA committee, said consumers are "doing their part," but businesses "have not yet grabbed hold" of the recovery.

"We don't have all hands pulling in this tug of war with a sluggish economy," he said.

The committee continues to see business profits as a challenge to overall economic growth. Companies have not been able to raise prices due to intense competition, the committee said.

"U.S. companies have strived to be more efficient, but nonetheless profits still have been squeezed," said Miller. "As a result, firms have been reluctant to expand capital spending or hire additional workers."

The committee expects profits to improve going forward, and that should help support an upturn in business capital spending and a gradual decline in the unemployment rate.

But the committee also expects the Federal Reserve to raise interest rates as soon as September and no later than year-end. Inflation will remain benign at around 2.5 percent through next year, the committee said, and that would allow the Fed to raise rates in a measured fashion.

"Low interest rates have provided a significant stimulus, the impact of which has not been fully realized. As the impact of lower interest rates becomes more obvious in the economic data, the Fed is expected to gradually raise rates," Miller said.

The committee's other members are economists from State Street Bank and Trust Co. in Boston, James & Associates in St. Petersburg, Fla., Banc One Investment Advisors Corp. in Columbus, Ohio, PNC Financial Services Group in Pittsburgh, Pa., Northern Trust Co. in Chicago, Wells Fargo in Salt Lake City, Union Bank of California in San Francisco and Banc of America Capital Management in St. Louis.

Copyright: Inman News Service

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