Feb. 24 (Bloomberg) -- Higher oil prices, the threat of a European recession and an uncertain tax policy that may derail the economic recovery have convinced the Federal Reserve to keep interest rates low, according to Gluskin Sheff & Associates Inc.’s David Rosenberg.
“They recognize that, although we have positive growth, the risks are squarely to the downside,” Rosenberg, chief economist at Gluskin in Toronto, said today in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt.
The central bank, seeking to fuel growth and avert deflation, pushed interest rates near zero in December 2008 and has held them steady since then. Policy makers in January pledged to keep the rate low at least through late 2014.
“I’m not sure I would make the recession call right now the base case,” Rosenberg said. “But I think the odds are a lot higher than most Wall Street economists have in their forecasts or, frankly, how the capital markets are priced right now.”
The price of oil rose above $109 for the first time in nine months today and is in the midst of its longest streak of advances in more than two years. Rosenberg said that for each additional penny at the gas pump, $1.5 billion is strained out of household cash flow.
“By May we’re going to be talking about gasoline prices breaking a new high, between $4 and $5,” he said.
Recession in Europe
U.S. exports are threatened by the impact from recession in the euro zone, the nation’s top trade partner, he said.
“That’s going to come with a lag,” he said, “just as the U.S. recession hit Europe with a lag three years ago.”
Uncertainty in the tax rate in this election year, in which personal and corporate rates are a major campaign issue, is going to affect the savings rate going into the second half of the year, he said.
“You get companies that are going to hoard more cash and households that are going to be building up their savings rate for that rainy day,” he said. “That’s going to have a material impact on the economy in the second half of the year.”
As policy makers move forward, Rosenberg said, Canada should be used as the model. He said Canada in the early 1990s hit a “debt wall” and had to go through radical fiscal austerity.
The majority government at the time dismantled the social infrastructure, he said, brushing aside issues such as social security and guaranteed-income supplements. Taxes were raised and retirement ages were lifted as policy makers made all the “tough decisions.”
“Sometimes checks and balances works,” Rosenberg said. “But when you’re in a period where you need strong leadership and have no room for compromise, you need decisive action.”
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