Bonds News

UBS sees deeper, longer US recession on credit woe

NEW YORK, Oct 3 (Reuters) - UBS sees a deeper and longer U.S. recession than it had earlier predicted, due to further deterioration in the credit market and its drag on housing spending and the broader economy.

A more severe downturn will likely lead the Federal Reserve to trim interest rates by a total of a full percentage point over the next six months, UBS economists said on Friday.

“The major reason for the downward revision is the evolving severity of the U.S. financial crisis, with its likely negative household spending effects,” they wrote in a research report.

They now expect U.S. economic contraction spanning three straight quarters, compared with a forecast of a shallower recession lasting two quarters.

The UBS economic team stuck with its earlier forecast for an annualized drop in gross domestic product of 1 percent in the third quarter.

It downgraded its GDP outlook for the fourth quarter to an annualized decline of 1.5 percent from an earlier forecast of a decline of 0.5 percent.

It now expects GDP in the 2009 first quarter to shrink by 0.5 percent compared with an earlier forecast for growth of 1.5 percent.

Under this recession scenario, the U.S. jobless rate could jump to 7.1 percent in 2009, compared with the 6.1 percent for September reported earlier Friday by the Labor Department.

The last time the unemployment rate stood at 7.1 percent was May 1993, according to Labor Department data.

Meanwhile, UBS economists now expect the Fed to cut its benchmark federal funds target rate by half a percentage point to 1.50 percent at its two-day policy meeting later this month, followed by a quarter point cut at its Dec 16 meeting and another quarter point cut in first quarter of 2009. That would bring the Fed’s benchmark lending rate to 1 percent, from the current 2 percent level. (Reporting by Richard Leong; Editing by Leslie Adler)