Swiss Re’s Chief Economist, Kurt Karl, has predicted that the decision by the Federal Reserve to maintain the target fed funds rate at zero to 25 basis points would help calm some of the turmoil in the global financial markets.
He noted that “weak economic activity, moderating inflation and fiscal tightening will keep the Fed on hold through mid-2013, perhaps longer.”
Karl added: “Since last summer, the US economic prospects have proved to be resilient to the euro debt crisis. Growth continues, though still at a fairly moderate pace. Headline consumer price inflation has eased from 3.9 percent year-over-year in September to 3.0 percent in December. Fiscal stimulus will be weaker this year than in 2011, so growth is unlikely to accelerate substantially this year.
“Nevertheless, vehicle sales and residential construction, particularly of multi-family homes, will support growth this year. The euro debt crisis, coupled with Operation Twist, has bolstered demand for long-term Treasuries. In addition, the new set of forecasts from the FOMC members should help calm markets and provide guidance on expected future Fed policies. As a consequence, we have lowered our forecast of yields on the 10-year Treasury note to 2 percent – 2.5 percent by end-2012.”
As far as Europe is concerned, Karl stated: “In Europe, further steps continue to be taken to contain the crisis and stabilize the situation. This has been, encouragingly, sufficient to lower yields on Italian and Spanish government bonds from recent peaks.
“However, the problems are far from solved and it will take more time to implement needed structural and fiscal reforms. Despite some improvements, the Euro Area is most likely currently in recession. In the UK, fiscal policies continue to restrain growth and a mild recession now looks likely.
“On the other hand, Japan’s economy is recovering from the tsunami, so will support the global economy this year with real GDP growth of 2.2 percent. China’s recent shift to expansionary monetary policy may have already begun to pay off, with Q4 growth a bit stronger than expected. Growth this year is expected to be 8.5 percent, lower than last year, but still robust.”
Source: Swiss Re
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