NEW YORK-- Swiss Re's chief economist said today that strong economic growth, coupled with a slight uptick in inflation, will force the Federal Reserve to raise the federal funds rate to close to 2 percent by the end of 2004.
Additionally, at the company's Mid-year Economic and Insurance Industry Teleconference, it was stated that a rising interest rate environment usually dampens investment results, straining insurance companies' capital base. This will tend to prolong the hard-market conditions through the end of 2005.
"We expect the next year to be good for corporate profits, good for job growth, but a challenging year for investors," said Kurt Karl, Swiss Re's chief economist in North America. "We also expect consumers to remain an engine of growth, but rising interest rates and a spike in commodity prices could dampen consumer spending power."
Regarding the property and casualty insurance business, Thomas Holzheu, Swiss Re's senior economist for that business sector said, "We've seen a significant improvement in underwriting, and believe the hard market will last through 2005.
"Additionally, we foresee moderate growth for the industry as a whole," he added. "With market conditions improving, we expect the rating agencies to follow the market by issuing more upgrades and fewer downgrades by the end of this year or beginning of next year."
Among some other observations made by the economists:
On June 30, the Federal Open Market Committee is highly likely to raise interest rates by 25 basis points, followed by 25 basis points for the next 11 FOMC meetings;
A large spike in market interest rates, up to 6% for the 10-year Treasury note, is possible over next 12 months as the Fed raises rates;
2005 could see quite high interest rates, particularly with large deficits;
Higher rates will improve investment results of insurance companies after 2005, but dampen GDP growth;
Credit conditions should continue to improve, and a sharp rise in core inflation is unlikely.
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