Major US investment banks prepare for recession
10 January 2008
Two of the largest US investment banks stated this week that the US economy will enter recession this year, or that in fact a recession may have already arrived.
Merrill Lynch emphasised that last Friday’s weak unemployment data and poor retail sales figures had set the wheels in motion for the first month of a US recession; for 16 years. Merrill’s comments indicate the deteriorating mood on Wall Street, as the sub-prime mortgage debacle and credit crisis show little signs of easing. Technically speaking, it is the National Bureau Economic Research (NBER) that will officially decide on whether the US has entered recession. However, Merrill Lynch argue that the 4 key barometers that the NBER work from have already provided sufficient justification for their analysis.
Goldman Sachs has become the second Wall Street bank to declare the US economy is heading for a recession this year. The banks Chief US Economist said that the slowdown would force the US Federal Reserve to reduce interest rates to 2.5% from the current level of 4.25% in 2008.
After an initial 0.5% interest rate cut in September and two subsequent 0.25% cuts since, the market will be fully focused on the Fed’s interest rate decision on the 30th January. The severe risks of further economic slowdown are likely to outweigh any inflationary pressures going forward and any further weak retail data will only encourage the Fed to cut rates more aggressively.