For all the turmoil in the markets over the past month, economists at the top US banks remain reasonably bullish about the future.
The American Bankers Association said its economic advisory committee, chaired by Stuart Hoffman of PNC Financial, believes there will be no “double-dip” recession in the US, which will instead experience a “moderate but solid” recovery with growth of 3 per cent this year and next.
Morgan Stanley expects the Fed to keep rates on hold until 2011 in the wake of the sovereign debt crisis in Europe. Their previous estimate was September of this year.
The investment bank said it expected the target rate on fed funds to climb to 2.5 per cent by the end of next year, and forecast the 10-year Treasury yield to be 1 percentage point lower, at 4.5 per cent, by year end. “The European sovereign credit crisis, its threat of contagion beyond Europe, and its effect on inflation expectations is the key reason for these significant changes,” said the research note.
By Michael Mackenzie, US markets correspondent
The main interest rate for the economy has quietly climbed towards the upper end of the range established by the Federal Reserve during the financial crisis, heralding a potential end to the central bank’s “near-zero” rate policy.
Ever heard of asymmetrical risk?
Well, it may be a key reason why Federal Reserve policymakers are keeping interest rates “exceptionally low” for an “extended period”.
Ben Bernanke, Federal Reserve chairman, heads to Capitol Hill on Thursday for a hearing on the US central bank’s exit strategy.
With the latest FOMC statement out only a week ago, few economists are expecting any significant changes to the monetary policy outlook of “exceptionally low” rates for an “extended period”. But that does not mean there won’t be news coming out of Mr Bernanke’s mouth. One guess of several economists, such as Michael Feroli of JPMorgan, is that the headlines could be made by a discussion of the discount rate – the rate at which commercial banks can borrow from the Fed in a pinch.
References to the discount rate were notably absent from the FOMC statement last week – but that doesn’t mean the committee did not discuss it.
Capital Economics said in a note today that the Fed’s extended period language may be debated in its meeting next week, but the FOMC will not drop it. But, the group says, that doesn’t mean the meeting will be uneventful. There is a possibility that the Fed will continue to increase the discount rate over the fed funds rate. (Its first move toward discount rate normalisation came last month, when it raised the spread by 25bp to 0.75 per cent).
But Capital Economics said a change in the extended period language – that is, the language the Fed uses to signify that it won’t raise the federal funds rate for at least six months – would be premature given inflation and credit trends and also that the Fed will not want to make another significant change as it ends its asset purchasing programme.
Among the points Capital Economics make:
Other than a brief year-end dip, the Fed funds rate has been extremely close to the midpoint of its 0 to 0.25 per cent range after months of on and off flirting with the high end of the range.