The hefty emergency rate slash by the Federal Reserve on January 22 may reiterate the market's view that the US economy may be on the verge of recession, or may already be in recession. This has also led to wide speculation that the Fed may cut their rates considerably again during the first half of this year. Most primary dealers expect that the Fed Funds rate may be trimmed to 2.50 percent by the middle of this year. However, KASIKORN RESEARCH CENTER (KResearch) views that Fed's latest move, coupled with expected easing monetary and fiscal policies, may be a good omen for the US economy – likely to see a recovery during the latter half of this year – particularly if these policy implementations prove to be effective and can restore the public confidence quickly, and if the credit crisis does not worsen more than expected.
However, this US economic crisis that stems from the sub-prime mortgage problem may intensify and broadly affect American consumers, and it is considered that this will be a hard hit on US economic growth. This event is different from previous economic meltdowns in the US that were only confined to some business sectors. In addition, past overspending by American consumers has run counter to their low level of savings. Therefore, the risk will remain that the US economy may face a long and chronic recession such that the Fed will be forced to reduce interest rates exceeding market forecasts. As of now, it will be worthwhile to keep a close watch on development of private sector confidence and key US economic indicators.
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