One of Wall Street's most influential strategists said on Monday the U.S. Federal Reserve is unlikely to ratchet back efforts to stimulate the economy soon, and that it was too early to worry about inflation choking off what would likely be a fitful recovery.
Abby Joseph Cohen, senior investment strategist at Goldman Sachs Group Inc
Inflation fears are spectacularly premature in light of rising unemployment and excess supply, Cohen said at the Reuters Investment Outlook Summit in New York.
We just don't see that inflation is going to rear its ugly head any time soon, she added. That doesn't mean we won't see some rebound in some prices, including in some commodities.
Cohen predicted a dramatic surge in U.S. corporate profits in the third quarter and especially the fourth quarter from depressed year-earlier levels.
She expects a slow economic recovery, with annualized growth in gross domestic product of just 1 percent from July to December, in part because consumers are saving more and providing less of a spunk to activity.
Cohen is known for correctly forecasting the bullish run for U.S. stocks during the 1990s.
With the Fed having pushed benchmark interest rates to near zero, policymakers have tried other means to stimulate economic activity. The Fed is aggressively buying mortgage securities and other debt to add liquidity, while the Treasury Department has injected hundreds of billions of dollars to prop up banks and insurers.
I don't see anything happening in the short run to reduce the stimuli, Cohen said. These were intended to be transitional. (Until policymakers) see that markets are moving normally, and the economy is behaving normally, they're going to be reluctant to reverse what they have done.
Cohen added, though: We have to be very careful in terms of defining what 'normal' is.
PRAISE FOR OBAMA
While the U.S. budget deficit could reach $1.9 trillion in 2009, or 13.2 percent of gross domestic product, Cohen said the percentage could drop to a more manageable 6 percent in a couple of years, like levels in the Reagan administration.
Cohen praised early efforts by the Obama administration to stimulate the economy, including a focus on energy efficiency, and trying to bolster the U.S. middle class, which has fallen behind over the last decade.
They have been faced by a series of extraordinary problems, and in general I think they have gone about it in a very good way, she said.
Cohen also praised Ben Bernanke, whose term as Fed chairman ends next January.
History is likely to show that he was an extraordinarily effective Fed chairman, she said. Financial markets have stabilized, and the economy appears to be moving toward a stable position. She declined to speculate on whether Bernanke will be reappointed chairman when his term ends.
(Reporting by Jonathan Stempel and Herbert Lash; editing by Jeffrey Benkoe)