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Good news, bad news: US economy too strong for interest rate cuts

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The US economy was expected to cool a bit along with temperatures this winter, but that slow patch is looking more like business as usual.

The housing slump is still serious. Detroit carmakers are still in trouble. But with oil prices dropping since last summer, overall economic activity keeps chugging along even as inflation looks to be easing.

The momentum has spoiled hopes that the Federal Reserve will cut interest rates anytime soon. The Fed is expected to note signs of strength in the economy, and continued vigilance against inflation, when it releases its latest policy statement Wednesday.

Otherwise, however, this is good news that eases worries about a possible recession – and suggests a year of economic growth that is closer to normal.

"It's a combination of very savvy monetary policy" by the Fed plus lower oil prices and a dip in mortgage rates, says Brian Bethune, an economist at Global Insight, an economic forecasting firm in Waltham, Mass. "You add all that up, it's a pretty good story."

Good enough that some forecasters have been ratcheting up their projections for US growth during 2007 and for the end of last year.

"We are revising our estimate for fourth-quarter growth to 3.3 percent (annual rate) from 2 percent previously," economists at Goldman Sachs, the New York investment firm, wrote after a solid report two weeks ago on sales by America's retailers.

Numbers on gross domestic product (GDP) for the fourth quarter of 2006, which includes holiday spending, are scheduled to be released Wednesday.

Many economists credit the Federal Reserve with having a steady hand on the monetary tiller. But they generally cite energy as been the biggest factor behind the recent economic strengthening.


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