Fed rate action commentary from Swiss Re chief US economist
12 Aug 2003
Following today's announcement that the Federal Reserve Board would hold the target federal funds rate at 1.0 percent, Swiss Re chief economist Kurt Karl said, "As expected, the Federal Reserve Board left its key policy rate unchanged today. Since the economy appears to be gaining strength and deflation is not a serious threat, more Federal Open Market Committee meetings without any policy action are anticipated.
"The run-up in interest rates over the last six weeks has been extraordinary - about 140 basis points - but the Fed is expected to be on hold until the middle of next year," said Karl. "Though rates are up sharply, they are still low by historical standards and will not derail the recovery. With inflation declining, the fed funds rate at 1.0 percent until the middle of next year, and growth proving to be weaker than the markets are currently expecting, the yield on the 10-year Treasury note will range mostly between 4.1 to 4.6 percent through the end of the year. Next year, as growth firms and the deficits continue to increase, yields on the T-note are expected to rise to between 5 percent and 5.5 percent by year-end.
"Though expectations of growth in Europe are improving, there are few actual positive signs of recovery. Both the Italian and German economies may have contracted in the second quarter, providing ample reason for increased monetary stimulus," added Karl. "The European Central Bank is expected to cut rates by 50 basis points within six months, despite its recent proclamations to the contrary. Economic prospects in the United Kingdom have dimmed recently and another 25 basis point cut is expected by the Bank of England. In Canada, a spill-over of weakness from the US, a second outbreak of Severe Acute Respiratory Syndrome, and a 'mad cow' outbreak caused the Bank of Canada to abruptly reverse course and cut rates in mid-July. The BOC is now expected to be on hold, like the US Fed, until the middle of next year."
Notes to editors
Swiss Re
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