US recession, Fed Funds Cut to 2.25%

NEW YORK, Jan 22 (Reuters) - UBS now sees the United States in a recession in the first half of 2008, as the persistent housing slump and financial market woes have spread into the broader economy, the investment bank said on Tuesday.

UBS also revised its forecast on how far the Federal Reserve would slash the key federal funds target rate to 2.25 percent later this year in a bid to revive growth.

U.S. gross domestic product is expected to contract 1.0 percent in the first quarter and 1.5 percent in the second quarter before growth in the second half of the year, UBS said in a research note on Tuesday.

Meanwhile, UBS said the Fed would lower the fed funds target to 2.25 percent before the end of the third quarter, compared with its earlier forecast of 3.25 percent.

The bank said in a research note that it does not expect the U.S. central bank to opt for an intermeeting rate cut "without a crash in the equities market."

(Does the recent inter-meeting rate cut and crash in progress count, or should we be looking for another one later on? J.)

Economic Recession Unlikely

Economic Recession Unlikely: Congressional Budget Office
Wed Jan 23, 2008 9:24am EST

WASHINGTON (Reuters) - The current U.S. economic slowdown will not turn into a recession and the economy will likely rebound next year as housing and financial market turmoil fades, the Congressional Budget Office forecast on Wednesday.

"Although recent data suggest that the probability of a recession in 2008 has increased, CBO does not expect the slowdown in economic growth to be large enough to register as a recession," the nonpartisan congressional budget analyst said in a new forecast.

"CBO expects the economy to rebound after 2008, as the negative effects of the turmoil in the housing and financial markets fade," the budget and economic report to Congress said.

Saving Private Greed

Fed Emergency Rate Cut of 75 Basis Points
First emergency rate cut since the 9/11 terror attacks.

WASHINGTON (Reuters) - The Federal Reserve on Tuesday slashed a key interest rate by a hefty three-quarters of a percentage point, the biggest cut in more than 23 years, after a two-day global stocks rout sparked by fears of a U.S. recession.

The move, a rare one made between the U.S. central bank's regularly scheduled meetings, took the federal funds rate governing overnight lending between banks down to 3.5 percent, its lowest level since September 2005. The Fed also lowered the discount rate it charges on direct loans to banks to 4 percent.

"The Fed is very, very, very worried," said John Tierney, an analyst at Deutsche Bank in New York.

The Fed's bold bid failed to instill confidence in shaken financial markets as U.S. stocks, playing catch-up with sell-offs around the world, fell sharply at the open. The Dow Jones industrial average (.DJI) was down about 1.1 percent in late morning.

Prices for U.S. government bonds slipped, while the dollar fell sharply against the euro.

"The committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth," the Fed said, referring to its policy-setting Federal Open Market Committee.

"While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households," it said.