Fed rate action commentary from Swiss Re Chief US economist
25 October 2006, 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 continuation of the federal funds rate at 5.25% was widely anticipated. The Fed is hoping that this level of interest rates is sufficient to restrain inflation, and it may be right. The housing sector has weakened significantly and auto production is down, as the sector works off inventories. Core consumer price inflation is slowing month-to-month, but not yet on a year-over-year basis, and oil prices have fallen substantially. It is still possible that inflation reasserts itself, causing the Fed to raise rates, but this is increasingly unlikely."
"Inflationary pressures appear to be easing. Oil prices are down from nearly $80 bbl for West Texas Intermediate to under $60 bbl recently. Our WTI oil price assumption has been lowered to $65 to $70 bbl at end of 2006 and $70 to $75 bbl by end-2007, from about $5 bbl higher two months ago. Also, our forecast of second half growth has been lowered to about 1.5%, which historically has been sufficient to reverse an acceleration in core inflation. Though growth will be slow in the second half, prospects for growth toward the end of the quarter will improve substantially after the fourth quarter inventory correction and slowdown in housing is mostly behind us. Hence, yields on the 10-year Treasury note are expected to rise to 4.9%, or so," Karl said. "Next year, the Fed is likely to be able to cut rates as inflation declines and growth should be sufficiently strong to keep yields on the 10-year note near 5.0%, re-establishing a positively sloping yield curve by the middle of 2007.'
"Growth prospects are solid around the world, though growth in 2007 is expected to be less robust than 2006. We expect a continued gradual reduction in liquidity, as the European Central Bank, the Bank of Japan, and China tighten monetary policy. Even the Bank of England is expected to raise rates one more time, to 5.0%. Only the Bank of Canada is likely to remain on hold. As policy rates rise and growth remains firm, long-term interest rates are projected to rise modestly in most countries," added Karl.
About Swiss Re
Swiss Re is the world's leading and most diversified global reinsurer. The company operates through offices in over 30 countries. Founded in Zurich, Switzerland, in 1863, Swiss Re offers financial services products that enable risk-taking essential to enterprise and progress. The company's traditional reinsurance products and related services for property and casualty, as well as the life and health business are complemented by insurance-based corporate finance solutions and supplementary services for comprehensive risk management. Swiss Re is rated "AA-" by Standard, Poor's, "Aa2" by Moody's and "A+" by A.M. Best.
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