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Friday, September 29, 2006

Citigroup: The Next Move in US Rates Will Be Down

Citigroup have just revised their forcecast: the next move in US interest rates will be down. This is a far cry from just a month ago when the debate was focused on whether there would be a pause or a rate rise. It also fits in with my own personal 'call' made earlier this week.

The Federal Reserve will probably lower its benchmark interest rate in the first quarter of 2007 as slowing economic growth diminishes inflation pressures, according to economists at Citigroup Inc.

The biggest U.S. bank by assets previously forecast the Fed would keep its target rate for overnight loans between banks at 5.25 percent through June. The bank now predicts a quarter- reduction by March, with the Fed holding the rate at 5 percent through September.

Mounting signs of a slowdown in the U.S. economy spurred Treasuries to rally this quarter and bolstered investor confidence that the Fed has finished raising rates. The Fed on Aug. 8 halted a two-year campaign of lifting rates, stating that slower growth was likely to damp inflation. Two-year note yields are heading for the biggest quarterly drop since 2002.

``The U.S. economy currently is in the most intense phase of its downdraft, due to plunging housing construction,'' Citigroup Global Markets analysts, including Todd Elmer in New York, wrote in a report to clients yesterday. ``The cooling in demand should reduce inflation risks sufficiently to open a window for a token easing early next year.''

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