Fed rate action commentary from Swiss Re US senior economist

28 March 2006, New York

After today's 25 basis point Federal Reserve increase in the target fed funds rate to 4.75 percent, Swiss Re's US chief economist Kurt Karl commented, "though the yield curve is flat-to-inverted, economic growth remains solid and a recession is unlikely. In addition to an inverted yield curve, typically the economy slows rapidly before a recession. However, the latest economic indicators imply robust growth. However, high oil prices and modest wage gains will slow consumer spending this year, lowering US growth to close to 3.0%, compared to 3.5% last year.

"The unemployment rate continues to fall and manufacturing capacity utilization continues to rise, so the Fed will need to raise rates at least one more time to 5.0%, most likely at the next FOMC meeting in May. Unlike last year, this year will have a more coordinated global monetary policy. The European Central Bank is expected to raise its policy rate to 3.0%, the Bank of Japan will be tightening and the Chinese authorities are expected to allow the renmimbi to appreciate. These measures, coupled with a slowdown in all-items inflation will represent a significant tightening of monetary policy, raising long term interest rates to slightly over 5.0% in the US," Karl said.

"Even the Bank of England is unlikely to cut rates, despite fairly weak economic activity and Canada will also be raising rates. Growth will be slowing in the US and accelerating overseas and this should also tend to boost long-term interest rates worldwide. In Euroland, real GDP growth is expected to be about 2%, up from 1.4% last year. In the UK, it is projected to rise by 2.1%, compared to 1.8% last year. China will continue to boom, but Japan may experience a slight slowdown from 2.8% growth last year, while Canadian growth rises slightly to above 3%," added Karl. 

About Swiss Re

Swiss Re is one of the world's leading reinsurers and the world's largest life and health reinsurer. The company operates through more than 70 offices in over 30 countries. Swiss Re has been in the reinsurance business since its foundation in Zurich, Switzerland, in 1863. Swiss Re offers a wide variety of products to manage capital and risk. Traditional reinsurance products, including a broad range of property and casualty as well as life and health covers and related services, are complemented by insurance-based corporate finance solutions and supplementary services for comprehensive risk management. Swiss Re currently has the following ratings: (i) from Standard & Poor's: long-term counterparty credit, financial strength and senior unsecured debt ratings of "AA (CreditWatch negative)", and a short-term counterparty credit rating of "A-1+", (ii) from Moody's: insurance financial strength and senior debt ratings of "Aa2" (on review for possible downgrade), and a short-term rating of "P-1" and (iii) from A.M. Best: a financial strength rating of A+ (superior) (under review with negative implications).