Economists See Moderate Growth, Higher Rates

After two years of rapid economic expansion, the U.S. economy will slow to "a more sustainable pace," the American Bankers Association's economic advisory committee predicts."The economy has entered the Goldilocks Zone -- not too hot and not too cold," said Richard DeKaser, chairman of the committee and chief economist at National City Corp., Cleveland. The committee predicts that the economy will grow at an annual rate of 3.5% in real terms for the remainder of this year and slightly more than 3% in 2006. The committee predicts that the underlying inflation rate will stabilize around 2% through next year but expressed concern that a tight labor market, rising employment costs, and persistently high oil prices could push inflation higher than expected. The bank economists predict that the Fed will continue to raise the federal funds rate to between 4% and 4.25% by next spring, and they expect the conventional mortgage rate to reach 6.5% by the end of next year. Mr. DeKaser said the "conundrum" of persistently low long-term interest rates amid rising short-term rates is "anomalous and unlikely to persist."