Fiscal Cliff II is likely to be averted, says Swiss Re Chief Economist Kurt Karl
30 January 2013, New York
After today’s decision by the Federal Reserve to maintain the target fed funds rate at zero to 25 basis points, Swiss Re’s Chief Economist, Kurt Karl, commented that monetary policy will continue to support growth through all of 2013 and into 2014.
Karl said: "The unemployment rate is likely to fall below 6.5% next year, so the Fed may be raising interest rates as soon as mid-2014. However, any rate hikes are likely to be moderate so the policy rate will remain low by historical standards into 2015.
"The budget outcome from the fiscal cliff negotiations was the expected size – $150 billion – but more biased to tax increases than expected. The next round – 'Fiscal Cliff II' – will likely include delayed spending cuts, partially on entitlements, partially on defense spending, as well as some 'revenue enhancement' (reduced subsidies or tax breaks). Thus, with a reasonable housing and consumer spending recovery underway, real GDP growth in 2013 will be near 2.5%, our baseline outlook. Yields on the 10-year Treasury note are likely to rise modestly this year as growth accelerates."
He continued: "The fiscal drag from the tax increases will be offset this quarter by rebuilding post-Sandy, so real GDP growth should still come in at 2%. In the baseline scenario, real GDP growth is expected to be 2.4% in 2013 and 3.2% in 2014. The yield on the 10-year Treasury note is projected to rise to 2.2% by end-2013 and to 2.6% by end-2014."
He further added: "In Europe, volatility from the Euro area debt crisis has abated and spreads in Italy and Spain have tightened to manageable levels. There is still considerable implementation risk, but things are calm for now and perhaps too stable on the growth front – near zero for 2013. All the indicators from China are pointing toward a modest acceleration in growth this year, which will boost commodity markets and global growth. Japan's new monetary policy has yet to be fully implemented, but anticipation of substantial quantitative easing (QE) has weakened the yen by about 10% against the dollar and euro. Growth over 1% this year seems likely, despite the drop in trade from the dispute with China over the Senkaku/Diaoyu islands. Global monetary policy will remain accommodative in 2013, with the Bank of Japan joining in QE jamboree. For now we cannot rule out another ECB rate cut early this year though our baseline is for rates to remain unchanged. The Fed is expected to continue QE through 2013 but may lessen or drop it next year."
Notes to editors
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