J.P. Morgan Chase: Bar Is Rising for Rate Cuts
In their weekly report on the global economy, J.P. Morgan Chase economists say the bar for Federal Reserve and European Central Bank easing is rising, even as the two central banks pump money into money markets to relieve unusual tensions.
The ECB, they say, “is not persuaded that the disruptive repricing of credit risk will have significant negative growth consequences. And it remains concerned about the rise in inflation now under way.” As for the Fed, they conclude, “the path ahead is uncertain.”
The Fed, they note, already has cut its key rate by a full percentage point, “prompted by concerns that the interaction of credit tightening and a housing downturn could produce a recession.” Fed officials now are “processing economic news pointing to a significant downshift into year end, one that looks likely to hold growth below trend for some months to come. However, the latest data do not suggest that the economy is sinking into recession. All of the key monthly indicators are well above recession-like levels and there is no evidence of a significant shift toward caution on the part of households or firms.”
All is not well, though, in the J.P. Morgan Chase crystal ball: “Reduced stress in money markets will not deliver a cure for financial markets, which are absorbing the pain of substantial credit losses and a contraction in the use of structured products. Indeed, corporate credit spreads have drifted wider in recent weeks and US jumbo mortgage rates have moved higher.”
J.P. Morgan Chase economists predicts a one-quarter point cut in the Fed’s key rate by March and then a one-half percentage point rate (ital) increase (end ital) by the end of 2008. It doesn’t anticipate any ECB rate moves in either direction. – David Wessel |
