Fed rate action commentary from Swiss Re Chief US economist

09 May 2007, New York

After today's decision by the Federal Reserve to hold the target fed funds rate at 5.25%, Swiss Re's Senior US economist, Arun Raha, commented, "This was expected. Growth has weakened, but inflation has not fallen enough, so the Federal Reserve Board will hold interest rates constant at 5.25% for some more time. Slowing economic activity is helping ease inflationary pressures, but the decline in inflation has not been sufficient for the Fed to cut rates. By mid-year, core CPI inflation is expected to fall close to 2.0%, allowing the Fed to ease in August."

"With housing continuing to decline, business investment fairly flat, and softening consumer spending, real GDP growth in the current quarter will almost certainly be sub-par. Slowing growth and the inverted yield curve are keeping the risk of recession near 35%. Housing is expected to stabilize in the second half of 2007, which will improve real GDP growth," Raha said.
"Growth outside of the United States is solid, and because of the relatively weak US dollar is helping reduce the risk of US recession, by keeping external demand strong. Some tightening is expected overseas, however, which will slow growth modestly. Our current forecast assumes the European Central Bank and the Bank of England will raise rates at least one more time to 4.0% and 5.5%, respectively. The Bank of Japan will raise its policy rate to 0.75%, perhaps higher, by end-2007, while China will tighten monetary policy modestly with a renminbi appreciation of around 4% and other financial measures. The Bank of Canada is likely to follow the example of the Fed and cut rates modestly late in the year. Long-term government bond interest rates in the Euro area, as in the US, are projected to increase modestly in response to ECB tightening, remain in a trading range near current levels in the United Kingdom, and rise in Japan as the Bank of Japan raises rates," added Raha.

Notes to editors 

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