Fed May Cut Interest Rates A Full Point: Citi Economist

The Federal Reserve will cut interest rates by a full percentage point before June to help the housing market, Citigroup's chief economist, Lewis Alexander, said on Monday.

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
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.

"The vulnerability of inflation to a weaker dollar is not amajor risk."

The dollar's fall from its peak in 2002 had had only a minor impact on inflation in the United States, he said, noting U.S. retailers were facing intense pressure to lower prices rather than raise them.

He also said a weakening dollar had not resulted in a general aversion to U.S. assets, noting Treasuries had rallied in recent months and equity markets had stayed relatively firm.

Citi does not expect the United States to fall into recession as energy prices are unlikely to rise from current levels as the global economy slows. The anticipated Fed rate cuts will also help calm the housing and credit markets, he said.

According to a Citi report on November 21, the dollar was expected to decline to 1.57 to the euro in the first quarter of 2008 before recovering to end the year around 1.47. The euro
(EUR-) bought around $1.4660 on Monday.