Saturday, October 11, 2008

RBC suggests that Chances of additional Fed rate cuts rise as recession talk increases

Chances of additional Fed rate cuts rise as recession talk increases

With conditions in the U.S. economy degenerating and the credit crisis intensifying, we see little scope for a meaningful improvement in near-term growth prospects. The Fed has been focusing on both providing liquidity to the financial markets and ensuring the passage of the rescue package, but the growing downside risks to the global economy prompted the Fed to join other banks in cutting the policy rate before its scheduled meeting later this month.

Our forecast assumes that the passage of the US$700 package and the co-ordinated rate cut will eventually assuage market nervousness and set the stage for a firmer tone in equity and debt markets. However, this process will take time to affect the real-side economy and is unlikely to prevent the economy from tipping further into recession. To address the deteriorating economic outlook, we expect the Fed to cut the Fed funds rate by an additional 50 basis points to a cyclical low of 1% by year-end.

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