Fed rate action commentary from Swiss Re chief US economist
29 October 2008, New York
After today's decision by the Federal Reserve to lower the target fed funds rate 50 basis points to 1.0%, Swiss Re's chief US Economist, Kurt Karl, commented, "The Fed is assessing the latest developments in financial markets and the appropriate next policy action. Inflation has faded as a major concern, while the US economy has clearly moved into recession. In aggressively cutting rates, the Fed is signaling its willingness to do what it takes to stabilize financial markets. The Fed is expected to lower the fed funds rate to 0.5% by year-end and announce this is sufficient to stabilize markets."
"The economy's outlook has deteriorated sharply over the past two months. The credit crisis will have a severe impact on the real economy — in the US and globally. At this time, it is difficult to forecast the timing of greater stability in financial markets, but our current outlook is for the US economy to improve in the second half of 2009. Financial markets appear to be slowly stabilizing and so does the housing market. Of course, given the surprises and shocks over the past 18 months, this is no guarantee of a permanent trend," Karl said.
"Monetary authorities have shifted abruptly from inflation concerns to focusing on the impact of the economic downturn. The recent coordinated cutting of interest rates is just the beginning of rate cuts in Europe. The European Central Bank is now expected to lower their policy rate to 2.25% by end-2009, while the Bank of England will lower its rate to 3.0% by mid-2009. The Bank of Japan will remain on hold, rather than raising rates, through end-2009. In Canada, the policy rate is expected to be 1.5% by the end of the first quarter. Inflation is no longer a concern, given the magnitude of the global recession and recent declines in commodity prices. Recessions are expected in all major economies, though they will be mild in Japan and Canada. Under this situation, the US dollar has been strengthening on a flight to quality – and an implicit assumption of "first in, first out," i.e., that the US economy will be the first to recover. How long this trend continues is quite uncertain, given the rapid reversal of the dollar against most currency, with the exception of the yen. More certain is a decline in government bond yields. Yields on 10-year government bonds can be expected to be significantly lower in 2009 in Europe and US as the impact of negative growth and lower inflation are felt," added Karl.
Swiss Reinsurance Company Ltd
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.
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