As Recession Fears Mount, So Do Calls for Rate Cut

Predicting a recession is about as reliable as forecasting where a hurricane will hit.

But that hasn't stopped CEOs, government leaders and economists from bringing up the "R" word in recent days. And nearly all of them have a simple solution: the Federal Reserve should cut interest rates--and soon.

J. Scott Applewhite / AP Fed Chairman Ben Bernanke.

"Your 17 rate increases have worked--mission accomplished," AutoNation CEO Michael Jackson advised the Fed during a CNBC interview on Wednesday. "From my 40 years in the business, I look at the American consumer. They've pulled back, and every time they pull back you bring recession back into play."

The growing chorus for a rate cut stems from worries that the subprime meltdown and resulting credit crunch will cause consumers to stop spending. And if consumer spending--which makes up 70% of the economy--declines, a recession can't be far behind.

The problem is, most economists think a recession is unlikely for now. So is a rate cut really needed?

Resilient So Far

So far, the U.S. economy, with a $13 trillion output of goods and services, is not only the world's largest, but the most reslient. On Thursday, the government is expected to report that the economy grew 4.1% in the second quarter--hardly a sign that the sky is falling.

And earlier this month, the consensus forecast of 50 top economists for the Blue Chip Economic Indicators called for economic growth to slow but still expand at a 2% rate through the end of 2008.

Still, there are plenty of doubters. For one thing, the second-quarter number is well before the current credit crunch triggered all the recession worries. And economists are not known for predicting future events with any precision.

"The consensus of economists has never forecast a recession, " says Paul Kasriel, chief economist of Northern Trust. "The consensus always ends up being surprised."

The debate about whether the U.S. is headed for a recession has put increased pressure on Fed Chairman Ben Bernanke, who so far has appeared reluctant to cut rates to bail out financial markets.

"The Fed is behind the curve and everybody on Wall Street knows it," CNBC's Larry Kudlow said this week. "The handwriting is on the wall, and the Fed missed it."

Speech on Friday

The markets are eagerly awaiting a speech by Bernanke this Friday at the annual monetary conference at Jackson Hole, Wyoming. Generally, the annual retreat allows global policymakers to hold talks in a relaxed atmosphere. But Bernanke's comments, which will be released Friday morning, will likely have a big impact on the markets.

"He hasn't spoken on the economy in about a month and a half, and it's clearly incumbent upon him to make some kind of statement," James O'Sullivan, an economist for UBS, told Reuters.

But not everyone is convinced the Fed chairman will use the address to go beyond the published topic of the relationship between housing and monetary policy.

"We expect Bernanke to try avoiding any signals on current monetary policy," Lehman Brothers said in a commentary, barring renewed market disruptions which might force him to do so.

Still, some marketwatchers hope Bernanke will end up cutting rates just because everyone wants him to--whether or not there's a recession. The markets rallied sharply on Wednesday after the Fed chairman sent a letter to Sen. Charles Schumer saying that the Fed "is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets."

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