Fed rate action commentary from Swiss Re Chief US economist

28 June 2007, New York

After today's decision by the Federal Reserve to hold the target fed funds rate at 5.25%, Swiss Re's Chief US economist, Kurt Karl, commented, "As expected, the Federal Reserve Board again held interest rates constant at 5.25%. Though growth has been weak for the past four quarters, inflation remains a concern so the Fed is holding firm. Core inflation will continue to fall, so the Fed could cut rates later this year, but that is increasingly unlikely. Growth may prove to be too strong to warrant a cut."

"Equity and bond markets are signaling that the economy will improve in the second half of this year, even though the economic data are still mixed. Housing continues to decline, though at a more modest pace, and business investment is weak. Consumer and government spending, coupled with an improvement in net exports, are sustaining growth. Nevertheless, the improvements modestly outweigh the weaknesses and the risk of recession is receding, down to 30% and falling, from 35% a month ago. Though we are not totally out of the woods, it is increasingly likely that the Fed has successfully engineered a soft landing, with moderate growth and lower inflation," Karl said.

"Global growth is strong, with only the United States showing signs of weakness. European and Japanese growth is stabilizing at a trend pace of 2% or better. China is booming, with no significant slowdown expected until perhaps after the 2008 Olympics. Inflation is projected to remain stable near 2% in Europe, but rise in Japan and China. The Bank of Japan is expected to raise its policy rate to 0.75% by year end. China will tighten monetary policy through a modest 4% appreciation in its currency and other financial market restraints. The Bank of England, after its recent hike, is projected to be on hold, but further tightening cannot be ruled out. The European Central Bank will have at least one more rate hike, perhaps two. These modest tightenings will support the recent global increase in long-term interest rates. The U.S. dollar is expected to continue weakening against the euro and begin weakening against the yen," added Karl.

Notes to editors 

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