Fed will lower rates in Q1: Citigroup

Sept 29 | Updated: Sep 30 2006, 05:34am hrs
The Federal Reserve will probably lower its benchmark interest rate in the first quarter of 2007 as slowing economic growth diminishes inflation pressures, according to economists at Citigroup Inc. The biggest US bank by assets previously forecast the Fed would keep its target rate for overnight loans between banks at 5.25% through June.

The bank now predicts a quarter-point reduction by March, with the Fed holding the rate at 5% through September. Mounting signs of a slowdown in the US economy spurred treasuries to their biggest quarterly rally in four years and bolstered investor confidence that the Fed has finished raising rates.

The Fed on August 8 halted a two-year campaign of lifting rates, stating that slower growth was likely to damp inflation. There is softer growth, and with oil prices down and lower inflation, the Fed in a sense can follow the markets lead, Michael Saunders, chief Western European economist at Citigroup in London, said.

A modest ease in rates should cushion the economy. Citigroup also lowered its forecast for benchmark 10-year treasury yields to an average of 4.6% in the first quarter, from 4.9%. US economic growth slowed to a 2.6% pace in the second quarter, 3 percentage points lower than the first three months of the year.