Swiss Re’s Chief US Economist Comments on Fed’s Rate Reduction

November 7, 2002

Swiss Re’s chief US economist, Kurt Karl, stated that the Federal Reserve Board’s decision to lower the target federal funds rate to 1.25 percent from 1.75 percent was an attempt to “bolster the economy and confidence.”

Karl believes that “the Fed stands ready to support economic growth, now that the recovery is faltering. This rate cut provides assurance that the Fed will do everything possible to sustain the recovery. Businesses and consumers can look forward to next year with greater confidence.”

He also said that he thought further rate cuts “will follow if economic conditions continue to deteriorate.” He indicated that the move was not unexpected in light of slowing consumer spending, but pointed out that housing sales have been stimulated by the low interest rates, and remain at very high levels. “A consumer who is unafraid of buying a new home is not a consumer who will lead the US economy into recession,” Karl stated.

He also noted that increases in inventory, orders and sales volumes,” imply that production will again be increasing by the end of this quarter,” and that “business investment advanced at a healthy 6.5 percent annual pace in the third quarter.”

He expects a similar move in Europe. “Given the slowdown in the US and the fragile state of the European economy, the European Central Bank is likely to be cutting rates also,” added Karl. “The next cut will most likely come soon and be at least 25 basis points, with further rate reductions to follow if economic conditions dictate. The ECB is much more likely to continue to cut rates than the US Fed — the European economy is much weaker than the US economy. The Bank of Canada, on the other hand, will most likely be on hold — the recovery in Canada is on track and much more robust than in the US.”

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