The Bond Market Association is predicting that economy will be taking a softer tone in 2001, the Association's Economic Advisory Committee said last week at its eighth annual forecast meeting.

William Dudley, director of U.S. economic research at Goldman, Sachs & Co. and member of the Committee, said that the group gives the Federal Reserve high grades for monetary policy. While Fed Chairman Alan Greenspan recently lifted his bias on tightening, Dudley does not believe monetary policy will be changed in 2001.

The Committee expects the Federal Funds rate to remain at 6.50% throughout 2001.

However, the 10-year Treasury yields are expected to creep up to 5.9% from around 5.6%, the level they are currently hovering around, with the Treasury yield curve remaining inverted throughout the coming year.

Thirty-year fixed-rate mortgage rates are expected to hold steady at 7.7%, with a slight dip to 7.5% around the end of the second quarter. New home sales are also expected to remain at a stable level, at around 900,000 units, while existing home sales are expected to decline, to 4.7 million units from the current five million units.

The committee also expects credit conditions to worsen, causing higher default rates and some adverse earnings consequences for some sectors in the banking industry, though the Committee is "worried about credit conditions weakening more than the Fed would like," Dudley said. However, conditions should not worsen wide enough or sharp enough to cause a credit crunch.

It was also the view of the committee that the dollar has peaked and should become more on parity with the Euro by the end of 2001, and that the tone the U.S. economy is taking is good for emerging markets.

"This is a pretty nice forecast if you're sitting in an emerging markets economy," Dudley said.

While there is a slowdown occurring, the Committee said that chances of a recession are low, about 25% to 50% over the next 18 months.

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