Dr. Sohn sees soft landing in 2007

I got to know Dr. Sung Won Sohn when he worked at Norwest Bank in Minneapolis. He is a former White House advisor and associate of Alan Greenspan, the former Federal Reserve Board chairman. Sohn worked at Norwest for many years, through its transition to Wells Fargo Bank, but left in January 2005 to become president at CEO of Hanmi Bank in Los Angeles.

I got a chance to visit with Sohn last week, when we were both in Phoenix for an industry meeting. I was intrigued to hear his optimistic comments about the economy. While the media bombards us with stories about the slowing housing market, Sohn isn’t so worried about it.

“We do not have a housing bubble,” he said. “That is a rapid increase in prices followed by a rapid decrease, and that has not happened.”

Sohn said the best way to predict the housing market is to assess the economy. “If people think the economy is going to go well, housing prices increase,” he said. “If they think it is going to do poorly, housing prices decline.” As mortgage rates decline, however, he noted that home sales generally begin to pick up, which encourages sellers to increase prices. “If short term rates fall, the yield curve will flatten. Housing will get a second wind,” Sohn said. “Despite all the bad predictions, housing is not going as bad as people thought.”

Sohn said there isn’t much discussion about increasing the federal funds rate much more, even in light of an increase in the core inflation rate (consumer price index minus energy and food costs). “The question is ‘should we be cutting interest rates or should we wait?’” Sohn summarized. “My personal prediction is the federal funds rate has topped, and will not be going up very much, if at all, in the future. So in the near future we will see the federal funds rate moving sideways.” The federal funds rate is currently 5.25 percent. The Federal Reserve's Federal Open Market Committee, which officially sets the rate, met today and left the rate unchanged.

Sohn sited the Chicago Mercantile Exchange, which is indicating a drop to 5 percent or lower for the fed funds rate by June 2007. “I think the market expectations are reasonable,” Sohn said. The federal funds rate is near the top, if not at the top. In 2007, we will actually see lower interest rates. That is what the market is saying.”

Sohn noted a drop in the price of energy, which is stimulating the economy. The price of natural gas and oil is down. Sohn said that 9 percent of all goods are derived from energy – “from plastics to shoes.” Energy prices, he said, have a huge impact on the economy.

“When the price of gasoline goes down by 10 cents, it is like putting $1 billion in our pockets. It is like a tax cut.” Sohn said. “So when the price of gas drops 70 cents, it is like a $7 billion tax cut. Eventually energy prices find their way into the core inflation rate because of its impact on so many other goods. So as energy comes down, the price of these other products should begin to come down. The result is the inflation outlook improves.

Sohn warned, however, that on-going demand for energy from China and India will keep oil and natural gas prices from falling very much.

Sohn concluded: “Economic growth rates will slow, but not a great deal. Long-term economic growth is about 3 percent. I am very optimistic about the economy.”

You might find Dr. Sohn’s web site to be of interest, at www.drsohn.com.