US interest rates are expected to rise in 2003 but any indication of a serious economic decline coul...
US interest rates are expected to rise in 2003 but any indication of a serious economic decline could see the Fed lower them even further.
At 1.25%, Federal Reserve chairman Alan Greenspan has interest rates at their lowest since the Federal Reserve began using the Fed Funds rate as its primary instrument of monetary policy.
Axa Investment strategist Nigel Richardson says his central view is for monetary policy to remain unchanged over the next three months but he does expect interest rates to rise over the course of the year, to around 2% or 2.5%.
He says: 'As the US economy is returning to growth, I would expect interest rates to rise. There is the arrival of a reverse trend in falling rates but we need to have the war out of the way. Consumer confidence is down but juxtaposed to this sentiment is the fact that business confidence is running at normal levels, indicating a sustained level of growth.'
Michael Karagianis, head of global strategy for Aberdeen, says he believes US rates will remain unchanged but adds there could be a small increase towards the end of the year. He notes if the war factor is taken out of the equation, the economy is on an even keel.
He says: 'Unless there is some huge shock to the system there should be sufficient monetary easing, however, if there is a major shock, all bets are off. Confidence is the key element in all of this and rising oil prices and the potential of war are two examples of threats which can impact negatively on confidence.'
Tom Walker, director of the Martin Currie North American Oeic, believes Greenspan could cut rates further if the economy stalls.
He says: 'I would predict GDP growth of 2.5% to 3% in 2003 so I do not think Green- span will cut interest rates but if unemployment increases and retail consumer confidence falls, then he might. Also the war could go badly and confidence would be damaged and confidence is what Greenspan is all about.'
Richardson agrees the chief risks are falling consumer confidence and the uncertainty surrounding a war with Iraq. He adds the effect of higher oil prices also has the potential to be very damaging to consumer confidence if they are sustained and the quicker prices go back down the better.
Karagianis says that corporate bond spreads have displayed a lot of volatility and the strain has been instrumental in the Fed's decision to ease monetary policy.
He notes: 'If corporations cannot borrow then there will be further bankruptcy. In the past three months the pressure has let up. But there is the possibility of war and falling equities encouraging a flight to bonds. Credit spreads would then widen. Investors are nervous at the moment but I am not predicting a bankruptcy cru-nch.'
Richardson says any sign of a clear trend of significant economic deterioration is likely to encourage the Fed to cut interest rates again. He adds: 'We believe the war will be resolved in three months, that it will not be a prolonged affair and afterwards there will be a consumer rebound. This year is basically one very big bet on US monetary policy.'
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