Fed rate action commentary from Swiss Re Chief US economist

30 January 2008, New York

After today's decision by the Federal Reserve to lower the target fed funds rate 50 basis points to 3.0%, Swiss Re's Chief US economist, Kurt Karl, commented, "The economy is in or near a recession, so only time will tell if this move is sufficient to avert further economic deterioration. Since Fed monetary easing takes about a year to have its full impact on the economy, this will help cushion the growth slowdown but only by late this year and early next year. The credit crunch is now expected to be mostly over by mid-2008 due to this rate cut and other Fed actions. Currently, the risk of recession is about 55% over the next 12 months due to the weak growth, market turbulence and elevated oil prices. Inflation is expected to decline this year as unemployment rises and capacity utilization declines."

"The latest data imply at least a 50/50 chance of recession - it may have even started late last year. If this slowdown does prove to be a recession, it is expected to be short and shallow. The dollar is weak, boosting exports, the Fed is cutting rates and government spending is likely to be given a boost later this year from a temporary stimulus package. Employment growth continues to soften and the manufacturing sector is contracting. In aggregate, the leading indicators support a forecast of 1.0% to 1.5% growth this year, a very mild recession. The Federal Reserve Board will continue cutting rates - 50 or 25 basis points at each of the next few Federal Open Market Committee (FOMC) meetings, lowering the federal funds rate to 2.0%. The uptick in inflation in November poses a problem for the Fed, so these cuts will likely remain at 50 or 25 bp per meeting. Real GDP growth will be less than 1.5% this year and the yield on the 10-year Treasury note will end the year at 3.0% to 3.5%," Karl said.

"Euroland, the UK and Japan are also experiencing a growth slowdown, but these economies are not likely to have recessions. Growth in Euroland and Japan should remain close to 1.5%, while the UK will slow to around 2% growth in 2008. Elevated oil prices, lower exports to the US - due to its soft economy and weak currency - coupled with some credit market turmoil (particularly in Europe) are moderating demand and reducing growth. Meanwhile, oil prices have kept up inflation pressures, delaying rate cuts from the ECB and the BoE. The BoE is expected to cut rates by another 50 bp, while the ECB is expected to cut rates by 25 bp. In Japan, rate hikes will continue to be delayed, but not postponed indefinitely - a couple of 25 bp hikes are expected late this year. China's boom is projected to continue through the end of the year at least, sustaining high commodity prices. Inflation is rising rapidly in China, increasing the risk of a hard-landing (a major slowdown in growth). The US dollar is expected to remain fairly stable relative to the euro, pound and Canadian dollar, but will continue to depreciate against Asian currencies," added Karl.

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