Fed rate action commentary from Swiss Re US senior economist

30 April 2008, New York

After today's decision by the Federal Reserve to lower the target fed funds rate 25 basis points to 2.00%, Swiss Re's US senior economist, Arun Raha, commented, "The Fed is buying extra insurance against a deeper recession. The economy is in or close to a recession, and although credit market conditions have improved, market jitters continue. However, the Fed will be reluctant to cut any further, because inflation remains elevated, and they do not want inflationary expectations to increase. There is substantial monetary easing in the pipeline, and this summer there will be a further boost from the fiscal stimulus package, cushioning the downturn. A recession, if is does happen, will be moderate."

"The labor market continues to soften, the manufacturing and services sectors are treading water, housing remains in a slump, and now non-residential construction is also slowing. But, inventories are thin, and a weak dollar is boosting exports. Growth this year is likely to be 0.5% to 1.0%, a moderate recession. Inflation should ease, albeit with a lag, as has been the case in previous recessions. The yield on the 10-year Treasury note will be near 3.5% by year-end," Raha said.

"In Euroland, inflation is expected to be 3.0% – above the European Central Bank's 2.0% target. In the U.K., inflation is forecast to be steady at 2.3%, the same as the last two years. In Japan, inflation is projected to be 0.6%, up from 0.1% last year. Inflation is still a global problem, but this should improve as global growth slows. Euroland, the U.K. and Japan are experiencing a growth slowdown, but are unlikely to have recessions. The BoE cut rates by 25 basis points in April, and we expect another 25 basis point cut later this year. The ECB has held the line on rates so far, but is likely to overcome its reluctance to cut as the economy weakens and there is continued financial market uncertainty. We expect a 25 basis point cut later this year. In Japan, the central bank will keep rates unchanged at least until the end of 2008 but could switch to cutting rates in mid-year if economic performance deteriorates sharply. China continues to boom and inflation remains a risk, but not until after the Olympics. In the near-term, the US dollar is expected to remain relatively stable against the pound, the Canadian dollar, the euro, and the yen, but continue to depreciate against the Chinese yuan." added Raha.

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Swiss Re

Swiss Re is a leading and highly diversified global reinsurer. The company operates through offices in more than 25 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.