Outlook for Republic has already factored in a more severe slowdown for US
THE Federal Reserve on Wednesday cut its forecast for United States economic growth, but the move left American investors and economists in Singapore unfazed.
The US central bank now expects the world’s biggest economy to expand between 1.3 per cent and 2 per cent this year, down from a previous prediction of 1.8 per cent to 2.5 per cent.
The Fed’s weaker outlook ironically sent Wall Street stocks up as investors read the downgrade to mean that more interest rate cuts were on the way.
In Singapore, economists say a slower US economy is bad news for exporters. They add, however, that forecasts for the local economy, including that of the Singapore Government’s, have already factored in a more severe US slowdown.
‘People are already factoring in the worst for the US,’ said Mr Joseph Tan, a Fortis Bank currency strategist based in Singapore. ‘That worst-case scenario has been factored in and priced in.’
The Trade and Industry Ministry trimmed its Singapore growth forecast on Feb 14 to 4 per cent to 6 per cent. It said even if the US is stuck in a long and deep recession, the local economy should at least achieve the lower end of its forecast range.
Wednesday’s forecast was the Fed’s second downward revision since last November, when it cut its US growth estimate for this year by 0.75 percentage point.
It said the latest revision was due to a number of factors, including a worsening housing market, tightening credit conditions, ongoing turmoil in financial markets and high oil prices.
With growth slowing more severely, the Fed now expects the unemployment rate to increase further to between 5.2 per cent and 5.3 per cent, up from its old forecast of 4.9 per cent.
The Fed’s latest forecast was published with the minutes of the Federal Open Market Committee’s Jan 29 to 30 meeting, at which members trimmed 0.5 percentage point off the key federal funds interest rate to 3 per cent.
The minutes showed that several members noted that ‘the risks of a downturn in the economy were significant’.
‘With no signs of a stabilisation in the housing sector and with financial conditions not yet stabilised, the committee agreed that downside risks to growth would remain even after this action,’ the minutes said, referring to the Fed’s most recent rate cut.
These comments and the weaker outlook have raised expectations that the Fed will lower the target rate for overnight loans among banks again at its next meeting on March 18. The Fed has slashed rates by 2.25 percentage points since September, including an emergency 0.75 percentage point cut on Jan 22.
‘The Fed’s main focus will remain the weakening economy and dysfunctional credit markets,’ Merrill Lynch economist David Rosenberg told Agence France-Presse. ‘We continue to expect the Fed to keep cutting rates and still look for a 50-basis-point reduction in the funds rate on March 18.’
Deutsche Bank economists added that if the US slips into a recession, the benchmark rate is ‘likely to go down to 2 per cent, if not a bit less’.
But what is causing more worries is escalating inflation, which hit a two-year high last month.
The Fed on Wednesday bumped up its projection for core inflation, which excludes volatile food and energy prices. It expects this to hit between 2 and 2.2 per cent, up from a prior forecast of 1.7 to 1.9 per cent.
The combination of rising inflation and slowing growth has led some analysts to recall the infamous 1970s spectre of ‘stagflation’.
The economic phenomenon presents policymakers with a tough dilemma: Easing interest rates will boost growth but spur inflation, while hiking rates will do just the opposite.
Source: The Straits Times 22 Feb 08