Van Leenders says the risk of a recession has increased significantly. He estimates that risk to be 40 per cent at present and says it will be considerably higher if the Fed does not to act promptly.
Van Leenders believes the Fed will cut rates from the current level of 5.25 per cent to 4 per cent by year-end and then leave rates unchanged for some time.
He says: “There is a lot of talk about moral hazard, with many suggesting that the Fed should not rescue those who have taken irresponsible risks in financial markets. We have little sympathy for this argument. The balance of risks is uneven for the Fed. By not easing or not easing aggressively enough, it risks a significant downturn in which many people may lose their jobs and homes. If it eases too aggressively, it may encourage moral hazard.
“We would therefore suggest that the Fed deals with excessive leverage when the more immediate economic problems have been overcome in the course of 2008.”