Weak economic data and financial market turmoil have analysts lowering their expectations for the U.S. economy, along with their forecasts for U.S. interest rates.
In a research note released today, UBS Securities LLC points out that the latest U.S. economic data, including the unexpected decline in February payrolls, adds to the evidence that the economy is in recession.
“So far, the rate of contraction implied by the broad growth data looks fairly modest. We are not forecasting a deep recession, due in large part to only a small drag from inventories this time. Still, even if the recession is ultimately ‘milder than average’, as we project, data in coming months are likely to show additional weakening,” it says. However, UBS adds that ongoing financial market problems raise the risk of greater-than-expected weakness.
“Against that backdrop, Fed officials showed concern by announcing new liquidity boosting measures for short-term funding markets. We expect that concern will also be reflected in another large cut in the funds rate at the March 18 FOMC meeting: we now expect a 75 basis points cut at that meeting (to 2.25%), instead of 50 bps. In addition, we now forecast an eventual lowering of the funds rate to 1.5% (by August) instead of 2%,” it says.Economists at HSBC Bank plc are going even lower than that, suggesting that U.S. rates could go as low as 1%.
“Built on a mountain of debt, the U.S. upswing was bound to come to an end at some point. The collapse in securitisation over recent months has led to a massive shift in financial conditions which suggests we’re in for a bumpy landing,” HSBC says in a new report.
“Despite valiant efforts from the Federal Reserve, the financial system is in great difficulty. The loss of trust in asset backed securities and the hoarding of cash point to downside risks for nominal economic growth,” it notes.
“Ultimately, the current downswing is a return to the unfinished business associated with the last recession in 2001,” HSBC maintains. “Then, consumers carried on spending, helped along by low U.S. rates, rapid house price gains and the effects of securitisation. Now, as the housing market implodes, consumers are suddenly incredibly vulnerable.”
“With the collapse of securitisation, a breakdown of trust within the financial system and a housing market which is now seriously weak, there are good reasons for worrying about the outlook for the U.S. economy,” it concludes. “The debate about technical recession is irrelevant. What’s more important is the likely length of any adjustment. Evidence from other countries suggests that, even with significant interest rate cuts and looser fiscal policy, a liquidity hangover can be long and drawnout.”
It has cut its GDP forecasts to 1.5% in 2008 and just 1.2% in 2009. Unemployment is probably also heading sharply higher, it predicts. Meanwhile, it concludes that the fed funds rate may eventually come down to 1%.
Growing evidence of U.S. recession: UBS Securities
FOMC expected to cut interest rates by 75 bps at March 18 meeting
- By: IE Staff
- March 10, 2008 March 10, 2008
- 15:15