First Fed rate hike will be in 2015 at the earliest, says Swiss Re Chief Economist, Kurt Karl

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, said that with economic growth this year still uncertain, the Fed will want to reassure the markets that they are not expecting to raise rates until next year.

"Until growth prospects for 2014 are clarified by incoming data, the Fed's guidance will be that there will be no rate hikes until 2015 at the earliest," says Kurt Karl

Recent worries about US growth prospects have actually lowered the yield on the 10-year Treasury note, but this seems very likely to reverse this year.

He continues: "Our latest forecast for the 10-year yield is 3.5% by end-2014 because real GDP growth is expected to be over 3.5% in the next three quarters, as housing starts to increase, business investment accelerates, consumers keep spending and the fiscal drag eases."

Karl adds: "Fed tapering will be completed this year, freeing the Fed to decide on the appropriate timing of the first Fed funds rate hike. Given our outlook for economic growth, the Fed is likely to begin raising the Fed funds rate in early 2015, lifting it to 1.75% by end-2015. Growth is expected to continue to be robust next year as well, so the yield on the 10-year Treasury note will end the year close to 4.2%."

Growth is also improving in the euro area, though France continues to lag behind. The peripheral countries are also expanding with the Manufacturing Purchasing Managers Indices (PMIs) of Italy, Spain and Ireland above the 50-threshold in December. The recovery in the euro area is expected to continue this year, albeit at a modest pace of around 1%. While fiscal policy should become less of a drag, ongoing deleveraging of the private sector and tight credit conditions are likely to prevent more robust growth.

Yields on the 10-year German bunds will only rise to 2.3% by end-2014 and to 2.8% by end-2015. The UK looks particularly strong, so we have lifted our 2014 growth forecast for the UK economy from 2.2% to 2.8%. Yields in the UK will rise along with US interest rates.

Karl adds: "The Chinese economic outlook remains positive and steady. Nevertheless, credit risk is gaining increasing market attention. Domestic bond yields and interbank rates are trending higher, reflecting tighter liquidity and the impact of interest rate liberalization. Local government debts rose to CNY17.9 trillion in June 2013 (up 67% from 2010) and 2014/15 will be the repayment peak. Rising bond yields would make refinancing challenging.

Swiss Re

The Swiss Re Group is a leading wholesale provider of reinsurance, insurance and other insurance-based forms of risk transfer. Dealing direct and working through brokers, its global client base consists of insurance companies, mid-to-large-sized corporations and public sector clients. From standard products to tailor-made coverage across all lines of business, Swiss Re deploys its capital strength, expertise and innovation power to enable the risk-taking upon which enterprise and progress in society depend. Founded in Zurich, Switzerland, in 1863, Swiss Re serves clients through a network of over 60 offices globally and is rated "AA-" by Standard & Poor's, "Aa3" by Moody's and "A+" by A.M. Best. Registered shares in the Swiss Re Group holding company, Swiss Re Ltd, are listed on the SIX Swiss Exchange and trade under the symbol SREN. For more information about Swiss Re Group, please visit: www.swissre.com or follow us on Twitter @SwissRe.

For logos and photography of Swiss Re executives, directors or offices go to www.swissre.com/media

For media 'b-roll' please send an e-mail to [email protected]

Cautionary note on forward-looking statements

Certain statements and illustrations contained herein are forward-looking. These statements (including as to plans objectives, targets and trends) and illustrations provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to a historical fact or current fact.

Forward-looking statements typically are identified by words or phrases such as “anticipate“, “assume“, “believe“, “continue“, “estimate“, “expect“, “foresee“, “intend“, “may increase“ and “may fluctuate“ and similar expressions or by future or conditional verbs such as “will“, “should“, “would“ and “could“. These forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause Swiss Re’s actual results of operations, financial condition, solvency ratios, liquidity position or prospects to be materially different from any future results of operations, financial condition, solvency ratios, liquidity position or prospects expressed or implied by such statements or cause Swiss Re to not achieve its published targets. Such factors include, among others:

• further instability affecting the global financial system and developments related thereto, including as a result of concerns over, or adverse developments relating to, sovereign debt of euro area countries;
• further deterioration in global economic conditions;
• Swiss Re’s ability to maintain sufficient liquidity and access to capital markets, including sufficient liquidity to cover potential recapture of reinsurance agreements, early calls of debt or debt-like arrangements and collateral calls due to actual or perceived deterioration of Swiss Re’s financial strength or otherwise;
• the effect of market conditions, including the global equity and credit markets, and the level and volatility of equity prices, interest rates, credit spreads, currency values and other market indices, on Swiss Re’s investment assets;
• changes in Swiss Re’s investment result as a result of changes in its investment policy or the changed composition of its investment assets, and the impact of the timing of any such changes relative to changes in market conditions;
• uncertainties in valuing credit default swaps and other credit-related instruments;
• possible inability to realise amounts on sales of securities on Swiss Re’s balance sheet equivalent to their mark-to-market values recorded for accounting purposes;
• the outcome of tax audits, the ability to realise tax loss carryforwards and the ability to realise deferred tax assets (including by reason of the mix of earnings in a jurisdiction or deemed change of control), which could negatively impact future earnings;
• the possibility that Swiss Re’s hedging arrangements may not be effective;
• the lowering or loss of one of the financial strength or other ratings of one or more Swiss Re companies, and developments adversely affecting Swiss Re’s ability to achieve improved ratings;
• the cyclicality of the reinsurance industry;
• uncertainties in estimating reserves;
• uncertainties in estimating future claims for purposes of financial reporting, particularly with respect to large natural catastrophes, as significant uncertainties may be involved in estimating losses from such events and preliminary estimates may be subject to change as new information becomes available;
• the frequency, severity and development of insured claim events;
• acts of terrorism and acts of war;
• mortality, morbidity and longevity experience;
• policy renewal and lapse rates;
• extraordinary events affecting Swiss Re’s clients and other counterparties, such as bankruptcies, liquidations and other credit-related events;
• current, pending and future legislation and regulation affecting Swiss Re or its ceding companies, and the interpretation of legislation or regulations;
• legal actions or regulatory investigations or actions, including those in respect of industry requirements or business conduct rules of general applicability;
• changes in accounting standards;
• significant investments, acquisitions or dispositions, and any delays, unexpected costs or other issues experienced in connection with any such transactions;
• changing levels of competition; and
• operational factors, including the efficacy of risk management and other internal procedures in managing the foregoing risks.

These factors are not exhaustive. Swiss Re operates in a continually changing environment and new risks emerge continually. Readers are cautioned not to place undue reliance on forward-looking statements. Swiss Re undertakes no obligation to publicly revise or update any forward-looking statements, whether as a result of new information, future events or otherwise.

This communication is not intended to be a recommendation to buy, sell or hold securities and does not constitute an offer for the sale of, or the solicitation of an offer to buy, securities in any jurisdiction, including the United States. Any such offer will only be made by means of a prospectus or offering memorandum, and in compliance with applicable securities laws.