NEW YORK - THE majority of big banks that do business directly with the Federal Reserve say the recession will end this quarter, and they see only a low risk that the economy will take another turn for the worse.
Seventeen out of the 18 dealers in the Fed's exclusive network of primary dealers that responded to a Reuters poll said the economy will see its first quarter of growth since 2007 in the third quarter of 2009.
The dealers on average see a 26 per cent likelihood of a so-called 'double-dip' recession, in which an economy plunges back into recession after a brief recovery. Views ranged from a 10 per cent likelihood (Morgan Stanley, Goldman Sachs and RBS) to a 60 per cent likelihood (Mizuho and Cantor Fitzgerald).
On Wednesday, the Fed, the US central bank, said the economy was levelling out after a ravaging recession that started in December 2007. But risks remain and the Fed reiterated its pledge to keep interest rates very low for an extended period.
In its battle against the worst financial crisis since the Great Depression, the Fed has cut interest rates to near zero and put in place a number of emergency lending programs.
Primary dealers don't expect the Fed to raise rates until 2010 at the earliest. Four banks expect the Fed to raise rates in the first half of 2010, seven say the second half of 2010.
The Fed also said it will have phased out its US$300 billion (S$433 billion) Treasury purchase program by the end of October. The Fed has bought about 84 per cent of the US$300 billion so far, and reviews on the effectiveness of the program have been mixed.
The 10-year note's yield was 3.71 per cent late on Wednesday, up from a five-decade low just above 2 per cent at the end of 2008.
A year from now, in the third quarter of 2010, dealers see the benchmark 10-year Treasury note's yield at around 4 per cent, according to the average forecast of the 17 primary dealers who answered that question.
This forecast suggests little concern that huge government debt issuance to pay for financial rescues, on course for US$2 trillion this year alone, will ignite a major upsurge of inflation and send Treasury yields spiking higher.
The Fed on Wednesday reiterated that it expects inflation to remain subdued for some time. - Reuters
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