Wednesday, November 21, 2007

RBC thinks financial market volatility will persist into early 2008

Fed signals steady rates for now; Bank of Canada to stay on sidelines

We are calling for the U.S. economy to grow by 2% in the fourth quarter of this year compared to the 2.7% average rate in the first three quarters on the back of slower consumer spending and business investment as the impact of the late summer tightening in credit conditions damps activity.

Our assessment that financial market volatility will persist into early 2008 as the housing market meltdown continues suggests that investors and lenders will remain cautious and risk averse. Against this backdrop, we have revised our interest rate forecast down and now expect the Federal Reserve to cut the Fed funds rate by 25 basis points in the first quarter of 2008 to ensure that credit markets continue to function and that rates remain low enough to sustain borrowing by households and businesses.

The U.S. housing market slowdown is expected to continue unabated, with residential construction activity contracting at a doubledigit rate. However, this moderating pace of the economy will not, by itself, be enough to prompt the Fed to ease the policy rate again.

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A. Mark Argentino
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