US economic forecasts

As the apparent incoming head of the Federal Reserve Board, Dr. Ben Bernanke has a tough act to follow. Chairman Greenspan has been perhaps the most successful Fed chairman in history, with inflation remaining calm and with only two mild recessions in 18 years. On the positive side, the incoming chairman inherits an economy that is stable, with low inflation and solid growth. But the problems and imbalances he must deal with are big.

First on the central bank's agenda is always inflation, and the sharp rise in energy prices and construction cost increases caused by the rebuilding of New Orleans has brought that to the fore again. In his academic work and at the Fed, Dr. Bernanke was known as an advocate of inflation targeting. We expect him to move gradually toward that policy as Chairman.

Second has to be the dependence of the U.S. financial market on foreign capital to finance our deficits. The lack of household saving (now negative for a record four months) and rising federal deficit in the wake of Katrina makes us dependent on this massive inflow of private and official money. What happens if foreigners stop shipping us all their spare cash?

The third item on the agenda is the heavy borrowing of the household sector and the related housing boom, which has enabled that borrowing. Household debt is at a record 124% of household after-tax income. The new bankruptcy law and Katrina have created a flurry of bankruptcies, as debtors filed before the new law became effective October 16. Charge-offs will peak in the fourth quarter as a result.