Further Fed Tightening Forced, May Not Be Warranted

Euler Hermes ACI Chief Economist Dan North – whose primary responsibility is to use macroeconomic and quantitative analyses to manage the company’s risk portfolio – recently authored an economic commentary piece titled “Tough Times at the Fed” concerning the Federal Reserve meeting June 28-29.

(PRWEB) June 14, 2006 -- Scrutiny of the U.S. Federal Reserve concerning its actions – and the words of Chairman Ben Bernanke – will persist as the Fed looks to continue its economic tightening at the end of the month, according to economic analysis from global trade credit insurer Euler Hermes ACI.

Chief Economist Dan North – whose primary responsibility is to use macroeconomic and quantitative analyses to manage Euler Hermes ACI’s risk portfolio – recently authored an economic commentary piece titled “Tough Times at the Fed” concerning the Federal Reserve meeting June 28-29. The following is an excerpt from North’s commentary:

“The Federal Reserve has become the focus of intense scrutiny in the past few weeks, over both its actions and its words. It is often thought that the Fed controls monetary policy simply by setting the Federal Funds rate, but the Fed has another powerful tool. It can use ‘jawboning’ – or making public speeches and comments to influence consumers, financial markets, and the economy as a whole. While the recent use of the Fed Funds rate may have been fine, the use of the jawboning tool has been disastrous.

(Recent) remarks were no doubt intended to make it perfectly clear that the Fed will tighten at the June 28th and 29th meeting, and they were meant to bolster both the Fed’s and Bernanke’s credibility as inflation fighters. So the Fed now has to raise rates, no matter what happens between now and then. It has painted itself into a corner. There is even the possibility that the Fed may choose to emphasize the message by raising the Fed Funds rate by 50 bps instead of the usual 25 bps.

The action to raise rates will be a symbolic one made to signal credibility, but the economic fundamentals might actually dictate that the Fed should stop raising rates now. Readings on inflation are mixed. The Consumer and Producer Price Indexes, and inflationary expectations data do show some upward pressure, most likely the result of persistently high energy prices working through the economy. But this data should be balanced against Unit Labor Costs rising only 0.3% in the past year, the Employment Cost Index growing at only 2.8% in the past year which is the lowest rate in nine years, hourly wages growing only $0.01 last month which is the lowest in seven months, the price of gold which has fallen 15% in three weeks, and the price of crude oil which has fallen 5.7% in the past four weeks.

And while inflation data is mixed, there is surely evidence that the economy is slowing down. May’s Employment Report and Credit Manager’s Index were emphatic about a slowdown, and signs of a softening consumer and housing market continue to emerge. It is critical to note that actions taken by the Federal Reserve can take a year or more to work through the economy. With June’s rate hike, the U.S. economy will have to proceed through another full year with the brakes on, and the economy is already slowing.

The Federal Reserve surely has a difficult and tricky job to do. Balancing inflation and growth now is hard enough, but balancing inflation and growth in the future is the real job. Furthermore, the tools for managing this challenge, jawboning and interest rate changes, are certainly double-edged swords. Jawboning has just cut the Fed the wrong way, first hurting credibility, and now forcing it into action which might not be warranted by the fundamentals.”

The full text of North’s article can be accessed in the “News & Publications” section of the Euler Hermes ACI website: http://www.eulerhermes.com/usa/en/news_publications/index.html.

Dan North has written and presented macroeconomic forecasts on behalf of the Credit Research Foundation and provides regular commentary on the National Association of Credit Management’s monthly Credit Manager’s Index. He recently appeared on the CNBC “Morning Call” program in a discussion about macroeconomics and inflation.

Euler Hermes ACI is North America’s oldest and largest provider of trade credit insurance and risk mitigation solutions, featuring a variety of products and services designed to benefit companies small and large who sell goods on open account terms. For more information about Euler Hermes ACI products and services, visit www.eulerhermes.com/usa.

Euler Hermes is the worldwide leader in credit insurance and one of the leaders in bonding and guarantees. With 5,400 employees in 43 countries, Euler Hermes offers a complete range of services for the management of customer receivables. The group posted a 2 billion euro turnover in 2005. The North American subsidiary (Euler Hermes ACI) is headquartered in Owings Mills, MD. For more information visit www.eulerhermes.com/usa.

Euler Hermes, a subsidiary of AGF and a member of Allianz, is listed on Euronext Paris. Standard & Poor’s rates the group and its principal credit insurance subsidiaries AA-.

Press Contact:
Rick Ostopowicz
Euler Hermes ACI Public Relations and Communications Specialist
Phone: (410) 753-0652

These assessments are, as always, subject to the disclaimer provided below.

Cautionary Note Regarding Forward-Looking Statements:
Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management's current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz Group's core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences.

The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz AG’s filings with the U.S. Securities and Exchange Commission. The Group assumes no obligation to update any forward-looking information contained herein.

# # #