NU Online News Service, Aug. 21, 3:16 p.m. – Institutional investors are still expecting the Federal Reserve Board to make at least two more 0.25-percentage-point cuts in interest rates.
But, because bonds have already rallied in the past month, bond yields are likely to remain about the same, according to a commentary from Kurt Karl, the chief U.S. economist at Swiss Reinsurance Company, Zurich.
The Fed today cut the little-used but closely watched federal funds lending rate 0.25 percentage point, to 3.5%.
The Fed also cut another closely watched rate, the rate on Fed loans to commercial banks, 0.25 percentage points, to 3%.
The Fed rates are now at their lowest level since early 1994.
Karl writes in his commentary that investors viewed the latest cut as all but inevitable.
“The economy is on a knife-edged cliff,” Karl says. “If consumer confidence collapses, the economy will fall into recession. If confidence is sustained, we’ll avoid the abyss and have — at most — one quarter of falling economic activity. The Fed cannot afford to stand idly by while the economy goes into recession.”
Investors are hoping the rate cuts, tax cuts, lower energy prices and weaker dollar will turn the U.S. economy around this fall, but they are expecting the Fed to make at least two more cuts, because “a recovery is far from assured,” Karl says.