Long-term rates should rise by year-end, predicts Swiss Re Chief Economist, Kurt Karl

20 June 2012, New York

After today’s decision by the Federal Reserve to maintain the target fed funds rate at zero to 25 basis points, Swiss Re’s Chief Economist, Kurt Karl, commented: “The US economy has been weak recently, but is likely to strengthen in the second half of the year."

Karl added: "While downside risks to the global economic outlook have increased lately, along with the uncertainty surrounding the future of the Euro area, recent indicators continue to suggest that moderate growth of the US economy will be sustained. Consumer spending remains resilient, vehicle sales are strong, construction spending is growing, and more signs point to further improvement in housing activity. Housing starts and sales are up and prices appear to have bottomed-out. Real GDP growth is expected to rise from about 2% this year to 2.5 – 3% next year. As a consequence, yields on the 10-year Treasury note are forecast to rise to 2.2% by end-2012 and to 2.8% by end-2013."

He continued: "Concerns have increased recently about an exit of Greece from the Euro and about the Spanish banking sector. Strong policy action will be needed over the next couple of months to avoid a further deterioration of the situation. The European Stability Mechanism will need to be strengthened so it can play the role of lender of last resort. A growth plan, which is now more likely with François Hollande as French President, would also be helpful. Overall, the risk of a disruptive event in the Euro area has increased to about 30%, while the risk of an oil price shock has receded. Japan is expected to grow by 1.8% this year and 1.6% next year, partially on the strength of reconstruction spending. Monetary policy has generally become accommodative in emerging markets, with China, India and Brazil all lowering their policy rates. Growth in China will be about 8.2% this year and 8.5% next year, driven primarily by domestic consumption and investments."

Notes to editors

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