Fed rate action commentary from Swiss Re US senior economist

18 March 2008, New York

After today's decision by the Federal Reserve to lower the target fed funds rate 75 basis points to 2.25%, Swiss Re's US senior economist, Arun Raha, commented, "The Fed's action is yet another forceful move in its attempts to alleviate the liquidity crunch and to shore up a rapidly weakening economy. It clearly does not believe that the action it took last week to expand its securities lending program, or its emergency measures over the weekend to increase market liquidity are enough. The economy is in or close to a recession, but increasing oil prices have kept inflationary pressures from abating, complicating the Fed's task. However, inflation is expected to ease as economic activity slows, albeit with a lag, so the Fed is likely to cut further if the economy continues to weaken."

"A recession, if it does happen, will be short and shallow. There is substantial monetary stimulus in the pipeline, and a temporary fiscal stimulus package is on the cards for later this year. Inventories are thin, and a weak dollar is boosting exports. The labor market continues to soften, the manufacturing sector is contracting, services are treading water, and housing remains in a slump. Growth this year is likely to be 0.5% to 1.0%, a mild recession. The yield on the 10-year Treasury note will be at 3.0% to 3.5% by year-end," Raha 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 credit market turmoil are moderating demand and reducing growth. Meanwhile, oil prices have kept up inflationary pressures, delaying rate cuts from the ECB. The BoE is expected to cut rates by another 50 bp, while the ECB is expected to cut rates by 25 bp before year end. In Japan, rate hikes will continue to be delayed, but not postponed indefinitely – at least one 25 bp hike is expected late this year. China's boom is projected to continue through the end of the year, sustaining high commodity prices. Inflation has spiked in China, increasing the risk of a hard-landing (a major slowdown in growth). The US dollar is expected to remain relatively stable against the pound and Canadian dollar, stabilize against the euro by mid-year, but will continue to depreciate against Asian currencies," 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.