Fed rate action commentary from Swiss Re US senior economist

31 January 2006, New York

After today's 25 basis point Federal Reserve increase in the target fed funds rate to 4.50 percent, Swiss Re's US senior economist Arun Raha commented, "this rate hike comes as no surprise — the economy has been growing despite an inverted yield curve, high energy prices, and a squeezed consumer. More rate hikes can be expected at future FOMC meetings - inflation concerns have yet to subside and incoming Chair Ben Bernanke needs to establish his inflation fighting credentials. "

"Inverted yield curves tend to be associated with economic weakness, but there are several indicators of strength in the economy. Unemployment has been falling and capacity utilization rising. So the Fed appears likely to raise the Fed funds rate to 5.0% by May 2006. The yield on the 10-year Treasury note will rise to 5.2% by year end – restoring a normal yield curve in the second half, as growth improves." Raha said. "The economy is on track for at least trend growth this year."
"In Euroland, consumer price inflation will ease, but remain above the 2.0% ceiling. The European Central Bank will, therefore, raise interest rates by another 50 bp to 2.75% this year. The Bank of England, on the other hand, will stay on hold for now as it attempts to balance the risk of inflation against a weakening economy. In Japan, economic activity has picked up and trend growth of 2% is expected in 2006. Inflation too appears likely to return this year. This could lead the Bank of Japan to end its monetary easing in the second half. Canada is expected to continue raising rates, since its economy is doing well and inflation could increase if rates are not raised," added Raha.

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).