Fed May Drop Interest Rates 100 Basis Points

by Darren

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Here’s a bit of a shocker: the Fed may drop interest rates a very hefty 100 basis points, in an effort to stimulate the moribund U.S. economy. At least this is the belief of Citi’s chief economist, Lewis Alexander.

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.

Ben Bernanke
Lawrence Jackson / AP
Federal Reserve Chairman Ben Bernanke.
“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

Alexander feels such a drop would ease credit restrictions and would not spur inflation. According to him, such a move in 2002 helped and didn’t boost inflation.

He also said he felt the U.S. would avoid a recession as energy prices ease.

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