Fed likely to lower rates in first quarter of '07: Citi
The Federal Reserve will probably lower its benchmark interest rate in the first quarter of ’07 as slowing economic growth diminishes inflation pressures, according to economists at Citigroup.
By Agencies |
NEW YORK: The Federal Reserve will probably lower its benchmark interest rate in the first quarter of ’07 as slowing economic growth diminishes inflation pressures, according to economists at Citigroup.
The biggest US bank by assets previously forecast the Fed would keep its target rate for overnight loans between banks at 5.25% through June. The bank now predicts a quarter-point reduction by March, with the Fed holding the rate at 5% through September.
Mounting signs of a slowdown in the US economy spurred Treasuries to rally this quarter and bolstered investor confidence that the Fed has finished raising rates. The Fed on August 8 halted a two-year campaign of lifting rates, stating that slower growth was likely to damp inflation. Two-year note yields are heading for the biggest quarterly drop since ’02.
“There’s softer growth, and with oil prices down and lower inflation, the Fed in a sense can follow the market’s lead,” Michael Saunders, chief Western European economist at Citigroup in London, said in an interview. “A modest ease in rates should cushion the economy.”
Citigroup also lowered its forecast for benchmark 10-year Treasury yields to an average of 4.6% in the first quarter, from 4.9%.
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Two-year yields, more sensitive to changes in Fed policy than longer-dated debt, are down 50 basis points since the end of June. The 4 5/8% note due in September ’08 yields 4.66%. A basis point is 0.01 percentage point. Two-year note yields are 59 basis points below the Fed’s target, against an average over the past 10 years of 38 basis points above the central bank’s main rate.
The notes have little scope to rally because yields are already discounting the risk of “some rate cuts”, Mark Schofield, a director of fixed-income strategy at Citigroup in London said in a separate interview today.
US economic growth slowed to a 2.6% pace in the second quarter, 3 percentage points lower than the first three months of the year, the commerce department said. Residential construction fell for the third straight quarter.
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Prices of existing homes fell for the first time in 11 years as sales dropped to the lowest since early ’04, the National Association of Realtors said this week. “Moderation in economic growth appears to be continuing, partly reflecting a cooling of the housing market,” Fed policy makers said in a statement after their last meeting on September 20.
“The US economy currently is in the most intense phase of its downdraft, due to plunging housing construction,” Citigroup Global Markets analysts, including Todd Elmer in New York, wrote in a report to clients yesterday.
“The cooling in demand should reduce inflation risks sufficiently to open a window for a token easing early next year.”
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