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Fed to cut rates from March, says NT economist

Posted by fairval on December 22, 2006


Northern Trust’s Paul Kasriel appears quite bearish on the US economy. He is forecasting less than 2% growth for 4Q06, and less than 2% for first 3 quarters of 2007.
This here is an interesting chart from his recent report. He says —

“Another relatively reliable forecaster of Fed interest-rate cuts is the ratio between the Institute of Supply Management (ISM) manufacturing new orders index and the ISM manufacturing inventories index. As shown in Chart 8 (above), the Fed usually begins cutting the federal funds rate when this ratio falls below 1.0. In November, this ratio did slip below 1.0 for the first time since March 2001, the date of the peak in the last business expansion.

We believe that sub-par economic growth lies ahead, inflationary pressures are subsiding and the Fed most likely will begin a cumulative 100 basis point decrease in the federal funds rate with a 25 basis point cut at its March 21 meeting. The Fed is unlikely to signal that a funds rate cut is imminent at next week’s December 12 meeting, but it will likely issue a somewhat less “hawkish” statement with the announcement that it is holding the funds rate steady at 5.25%. However, at its January 31 meeting, the Fed is likely to hint that it is contemplating a rate cut”.

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