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Expectations for Fed Rate Cut Are Mixed After GDP Report

Friday, 27 Apr 2007 | 1:38 PM ET

Michael Darda, chief economist at MKM Partners, told CNBC’s “Morning Call” that he doesn’t expect the Federal Reserve to cut interest rates anytime soon despite weakness in the latest economic report.

First-quarter gross domestic product rose an estimated 1.3%, less than the expected annual rate of 1.8%, the government reported Friday.

“If you just take a look at this (economic) report, certainly it was weak,” Darda said. “But consumption, which is 70% of the U.S. economy, grew at almost a 4% rate in real terms. Inflation on a quarterly basis, was the highest rate in 16 years. So, to assume the Federal Reserve is going to cut rates based on this data, I think is wrong. If you look at sensitive financial indicators, they’re pointing to an upturn in growth later in the year. So, I think rate cut fantasies are just that.”

Economic Stability
Discussing how the latest snapshot of the economy will impact interest rates, with Joseph LaVorgna, Deutsche Bank chief U.S. economist; Michael Darda, MKM Partners chief economist and CNBC's Mark Haines

He said consumer spending will remain strong as long as the job market remains tight.

But Joseph LaVorgna, chief U.S. economist at Deutsche Bank, said he expects the Fed to cut interest rates to spur economic growth.

“We’ve heard for so long how the economy is going to reaccelerate,” LaVorgna said. “It’s been four quarters now where growth has been weak. Final demand to domestic purchasers has averaged under 2% for four quarters in a row. Our view for sometime has been that the Federal Reserve will cut – that certainly hasn’t panned out as of yet – but there’s no question over time, if you look at real GDP, when it slows, the unemployment inevitably rises.”

That, he said, will trigger a rate cut.

“When the (unemployment) rate goes up, the Fed abandons its harsh inflation rhetoric and cut rates,” LaVorgna said.