Fed rate action commentary from Swiss Re Chief US economist

08 August 2007, New York

After today's decision by the Federal Reserve to hold the target fed funds rate at 5.25%, Swiss Re's Chief US economist, Kurt Karl, commented, "The Federal Reserve Board remains comfortable with the federal funds rate unchanged at 5.25%, indicating confidence the economy will weather the current market turmoil. If core inflation falls sufficiently or growth weakens substantially, the Fed would lower interest rates, but currently neither is likely."

"At the last Federal Open Market Committee meeting the equity and bond markets were bullish on the economy, but they have now turned bearish. The economic data remain mixed, so markets are now more accurately reflecting the risk to the economic outlook. The housing sector is still in trouble, but appears to be stabilizing. Business investment is weak, but consumers seem willing to spend and exports are supporting growth. On balance, the indicators still point to an improvement in growth in the second half of this year, so the risk of recession is declining, from 35% earlier in the year to 20% today. Markets are jittery, but this is primarily a reflection of the gradual tightening of monetary policy that we have seen over the last year," Karl said.

"Global growth is very solid — only the US is having serious economic problems. Euroland growth remains robust. The ECB is expected to hike at least one more time, probably next month. Growth in the UK is strong, so there is a risk the BoE will have one more hike to 6.0%. Japan is growing at slightly above trend, but will slow down next year. The BoJ will raise its policy rate at least to 0.75% by end-2007 and 1.25% by end-2008. The yen will strengthen. China continues to boom, so is now expected to allow the renminbi to appreciate more rapidly by about 6% per year. Inflation and a possible hard-landing is a rising concern in China. With these modest tightenings around the world, long-term US Treasury rates will be pushed higher, to 5% by end-2007. The huge US current account deficit implies the U.S. dollar will continue to weaken a bit more against the euro (to $1.40 by end-2007 and 2008) and quite a bit more against the yen (to 107 yen per dollar by end-2008)," added Karl.

Notes to editors

Swiss Re

Swiss Re is the world's leading and most diversified global reinsurer The company operates through offices in over 25 countries. Founded in Zurich, Switzerland, in 1863, Swiss Re offers financial services products that enable the 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.