Fed rate action commentary from Swiss Re Chief US economist
31 January 2007, New York
After today's decision by the Federal Reserve to hold the target fed funds rate at 5.25%, Swiss Re's US chief economist, Kurt Karl, commented, "The economy is probably in a soft-landing, but it is too early to declare victory, so the Federal Reserve Board held interest rates constant at 5.25% today. Economic activity has definitely slowed over the past year and inflation appears to be abating, but it is not low enough, nor is the economy weak enough for the Fed to cut rates. By mid-year, core CPI inflation could be as low as 2.0%, which would allow the Fed to ease if the economy is still fragile. Volatile energy prices, slowing growth and the inverted yield curve have increased the risk of recession, so a cut is likely."
"Economic growth has been modest since the first quarter of 2006. The housing weakness appears to be lessening, however, so growth will accelerate as 2007 progresses. Real GDP growth is projected to be below trend growth of 3.0% in the first half of 2007 and above 3% in the second half. Despite the pick-up in growth, core consumer price inflation is forecast to decline to 2.0% year-over-year by the middle of this year, due to the general economic softness. By mid-year, the Fed is expected to cut rates modestly to support the weak, but improving growth. Long-term interest rates will be 4.9%, perhaps higher, by end-2007 supported by accelerating US growth. All-items inflation is forecast to be 1.7% this year, down from 3.2% last year, due to modest oil price pressures," Karl said.
"Growth continues to be solid, though slowing, in the rest of the world. Our current forecast assumes the European Central Bank raises rates one more time to 3.75%, while the Bank of England holds rates constant for the rest of 2007, though another hike cannot be ruled out. The Bank of Japan will raise its policy rate, probably to 0.75% by end-2007, while China will tighten monetary policy modestly by allowing the renminbi to appreciation by 3 to 4%. The Bank of Canada is likely to follow the example of the Fed and cut rates modestly. Long-term interest rates in the Euro area are projected to increase modestly in response to ECB tightening, remain in a trading range near current levels in the UK, and rise in Japan as the BoJ raises rates," added Karl.
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