Fed rate action commentary from Swiss Re US senior economist

20 September 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 senior economist, Arun Raha, commented, "The markets had been expecting the Fed to extend the pause in its rate hikes - and it has not disappointed them. Recent indicators point to an easing in inflationary pressures, but not a complete remission. So the Fed will need at least one more 25 basis point interest rate hike before year end, especially with the economy growing at close to trend, and core inflation still above the Fed's comfort zone."

"Inflationary pressures from a weak dollar, rising housing rents, increased wage gains, tightening capacity utilization, and improved pricing power on the part of small businesses remain. The easing of energy prices is unlikely to be sustained through the winter heating season. Our WTI oil price assumption is $70 to $75 bbl at end of 2006 and about $73 to $78 bbl by end-2007. With the economy expected to grow close to trend in the second half, it is unlikely that inflation will be reversed, if past experience is a guide. As a consequence, the Fed will need to raise the fed funds rate further before year-end. With growth fairly robust, the yield on the 10-year Treasury note should also rise along with the fed funds rate," Raha said.

"Globally, we expect a continued gradual reduction in liquidity, as Central Banks continue to tighten. Policy rates are expected to rise in the US, Euroland, and Japan, while China will tighten with a variety of measures, including an appreciating currency. The Bank of England is no longer on the sidelines and might raise rates even further. Only Canada appears to be done with its tightening cycle," added Raha.

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