Citi Economist Forecasts Fed to Cut Fed Funds Rate by 100 bps by June

While there are a whole group of analysts wondering if the Fed is going to cut rates this month, there is another group that believes that the Fed will end up making fairly large cuts over the next 12 months. Text in bold is my emphasis. As you will see from my comments (not in italics), there are parts of the article I do not agree with. From Market Watch:

By the way, bps (pronounced bips) stands for basis points and is financial speak for percentage. 25 bps equals 0.25%, so 50 bps is one-half percent, and 100 bps is 1%. Therefore, 1 bip equals 0.01%.

The Federal Reserve will cut interest rates by 100 basis points before June to help the housing market, Citigroup's chief economist, Lewis Alexander, said on Monday.

Alexander, who worked at the Fed before joining Citi, also said Asian economies would probably suffer only a modest slowdown as a result of the U.S. housing turmoil as the spillover effect from housing was much smaller than from sectors such as information technology.

"When the tech bubble burst, there was a substantial amount of capital and employment that had to be worked off," he said at a talk for Citi clients in Singapore.

Citi, he said, expected the Fed to cut its Fed funds rate by 25 basis points when it meets later this month and by 50 basis points in the first quarter of 2008. The final 25 basis-point cut would probably take place in the second quarter.

Alexander said the Fed would not be too concerned that the drop in the dollar would be inflationary. Studies carried out over the years had shown that the dollar's value had little impact on consumer prices in the United States, he said. (Does this guy shop for groceries or buy gas?)

"The vulnerability of inflation to a weaker dollar is not a major risk."

The dollar's fall from its peak in 2002 had had only a minor impact on inflation in the United States, he said, noting U.S. retailers were facing intense pressure to lower prices rather than raise them.

He also said a weakening dollar had not resulted in a general aversion to U.S. assets, noting Treasuries had rallied in recent months and equity markets had stayed relatively firm. (This is due to a flight to quality resulting from a credit crunch and nothing to do with a drop in the value of the dollar.)

Citi does not expect the United States to fall into recession as energy prices are unlikely to rise from current levels as the global economy slows. The anticipated Fed rate cuts will also help calm the housing and credit markets, he said. (Energy prices do not need to increase to get a recession, staying where they are is not helping the consumer.)

According to a Citi report on November 21, the dollar was expected to decline to 1.57 to the euro in the first quarter of 2008 before recovering to end the year around 1.47. The euro bought around $1.4660 on Monday.