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Swiss Re Economist Expects Yield Curve To Stay Flat

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The Federal Reserve Board could increase the federal funds rate as much as 0.5 percentage points, to 5.75%, Thursday.

Kurt Karl, the U.S. chief economist at Swiss Reinsurance Company, Zurich, gave that assessment today in an economic review.

The economy appears to be strong, and inflation appears to be increasing, and that could cause the Fed to trade in 0.25-percentage point increases for a bigger increase, Karl says.

Accelerating wage gains, rising capacity utilization, a weak dollar and high oil prices all have helped to increase the core U.S. inflation rate to 2.4% in May, from 2.1% in March, Karl says.

The yield on the 10-year Treasury note should remain close to the fed funds rate, and the fact that there is a large amount of cash sloshing around the world should help keep the yield curve flat, Karl predicts.

Life insurers tend to prefer steeper yield curves, because they have an easier time funding obligations to policyholders and fixed annuity holders when long-term interest rates are higher than short-term rates.