Fed will consider QE3 in early 2012, predicts Swiss Re Chief Economist, Kurt Karl

13 December 2011, 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: “Weak economic activity, moderating inflation and fiscal tightening will keep the Fed on hold through mid-2013, perhaps longer.”

Karl added: “The Fed is confronted with an economy that is growing at an anemic pace at best, falling inflation and volatile markets. The ongoing fiscal impasse in Washington DC and the sovereign debt crisis in Europe are exacerbating the uncertainty and the economy's problems. Thus, the Fed is unlikely to tighten for the foreseeable future and may initiate a further round of quantitative easing next year. Though activity is weak and fiscal stimulus has turned to constraint, the economy is unlikely to sink into recession. Consumers are replacing their ageing vehicles with new cars, household formation is stimulating construction of multi-family units and the weak dollar is sustaining exports and boosting business investment. Nevertheless, growth will be low in the first half of next year as the fiscal tightening increases. As a consequence, yields on the 10-year Treasury note will remain low, only rising to 2.6% as growth picks up toward end-2012."

He continued: “In Europe, some important steps to contain the crisis have been taken recently. The set-up of technocratic governments in Greece and Italy, the progress in finalizing the European Financial Stability Facility, the credible commitments to fiscal consolidation and structural reforms as well as the planned improvements to governance in the Euro area have provided a boost to confidence. These measures should allow the European Central Bank to take a more prominent role in financing troubled sovereign debt. Nevertheless, the Euro area is unlikely to avoid a recession, which likely started this quarter. In the UK, fiscal policies are stifling growth, but maintaining confidence in the pound and the country's AAA rating. A recession is possible, but not currently in our outlook. The Bank of England will hold at 0.5% and will continue with its quantitative easing program. Japan’s economy is recovering from the tsumani, so will support the global economy next year with real GDP growth of 2.3%. China's expansion is expected to continue at a slightly subdued pace of 8.8%. With inflation abating, China has turned toward a more accommodative monetary policy and has plenty of room for fiscal stimulus, should the government deem that necessary to sustain growth near 9%.”

Notes to editors

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