Meanwhile, the continued rise in oil prices is another of three factors that will contribute to what North calls "a sharp economic slowdown" and what many fear could lead to a recession. "A spike in oil prices for the past three years has had an impact which has perhaps been overlooked," North explained. "Since the mid 1970s, spikes in oil prices have always been followed by sharp slowdowns in the economy." He said that the combination of elevated energy prices, a decimated housing market, and the inversion of the Treasury yield curve in 2006 and 2007, are particularly troubling for the nation's economy.
"You have three major events occurring during the same part of the business cycle, and that is creating a significant drag on the economy," said North. To help ease recessionary fears and strengthen the weakening economy, the Federal Reserve "is definitely going to cut interest rates, probably through the year and into 2008," North forecasts. While the financial markets appear to have priced in a 50 bps cut in the Fed Funds rate, "the markets could be disappointed if it's only 25 bps, and you could see a pullback. And it could be 25 bps, because when the Fed opened the Discount Window last month, it calmed the financial markets, took the pressure off the Fed to cut the Fed Funds rate so rapidly, and is now allowing the Fed to focus on the real economy, not the turmoil in the financial markets."
