Fed rate action commentary from Swiss Re chief US economist

27 April 2011, 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 US Economist, Kurt Karl, commented: “Economic activity and employment growth are expected to accelerate in the second half of this year, paving the way for the Fed to raise interest rates early next year.”

He added: “US growth will likely be slowed this quarter by high oil prices and a lack of key parts from Japan. Both problems are assumed to be resolved by July. Growth is forecast to be about 3% this year and is expected to accelerate in 2012 to 3.5%. Job growth is projected to rise to 250,000 per month by the last quarter of this year. All items inflation will be about 2.5% this year and next if our assumption about oil prices falling to around $100 bbl this summer and remaining there through end-2012 is correct. Core inflation will stay below 1.5% over the next 18 months. Under these conditions, the Fed will be on hold through 2011 and the yield on the 10-year Treasury note will rise to about 3.8% by year-end as the expansion gathers strength in the second half of the year.”

Karl said: “Japan’s growth will be close to zero, at best, this year due to the disruptions from the earthquake and tsunami. Thus, the Bank of Japan will continue to be accommodative, with low interest rates and efforts to weaken the yen. The recent uptick in inflation in Europe is expected to be temporary, because oil prices – the key driver of the change in the inflation outlook – are assumed to fall from recent levels.  The European Central Bank is expected to continue raising rates to 1.75% by end-2011. The Bank of England is still expected to wait until Q3 of this year before its first rate hike. Despite the recent uncertainties, Euro area GDP growth is still expected to be 1.7% this year and rise to 1.9% in 2012. In the UK, growth will be 1.9% and 2.2% this year and next. Yields on 10-year government bonds are expected to continue rising due to the acceleration of growth. Yields will rise to 3.7% in Germany, 4.2% in the UK and 1.6% in Japan by end-2011. Inflation is accelerating in China which is now expected to have inflation above 4% this year, so the People’s Bank of China will continue tightening monetary policy.”

Notes to editors

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