PR - Euler Hermes Economist Forecasts Continued Rate Cuts

Following the announcement of the Federal Reserve’s interest rate cut, Daniel C. North, Chief Economist for leading trade credit insurer Euler Hermes ACI, issued the following commentary calling for rate cuts to continue into 2008.

“Yesterday, as expected, the Federal Reserve Bank cut the Fed Funds rate by 50 basis points from 5.25% to 4.75%. It was widely anticipated that the Fed would lower the key inter-bank borrowing rate, but expectations were split as to whether the cut would be 25 or 50 basis points. As a result, the stock market rallied in response to the more aggressive 50 basis point cut. However, the rally was most likely a short term relief rally and may not presage a longer term trend.

“While the Fed did open the discount window last month to calm financial markets, the Fed’s action in cutting the Fed Funds rate yesterday was most likely directed towards stimulating a weakening economy. Signs of decay in the economy, such as weak retail sales, have become more abundant recently, and last month the economy lost jobs for the first time in four years. Typically, the employment situation gives little warning about the state of the economy, so by the time the economy starts losing jobs, it is probably already well on its way into a slowdown or even a recession.

“Three key factors are hurting the economy: elevated energy prices, last year’s yield curve inversion, and the deflated housing market bubble that will continue to damage the housing sector, crimp consumer spending, and contribute to tightened lending conditions and wider credit spreads in the financial markets. We expect to see these three conditions continue to drag on the economy, and, as a result, we forecast that the Fed will continue to cut the Fed Funds rate into 2008, most likely stopping in the neighborhood of 3.25%.”

North had been forecasting a fall Fed interest rate cut of 50 basis points since April.