(April 25 – 10:45 ET) – Interest rates are headed lower, say TD Bank economists. The key question is how low interest rates have to fall before they will spur an economic recovery.

TD says the U.S. Federal Reserve Board is likely to cut rates another 50 basis points at its May 15 Federal Open Market Committee meeting, and it sees quarter point cuts at the June 27 and August 21 meetings. “The central bank easing will take the Fed funds target rate down to a distinctly low 3.50%. This should be sufficient, when combined with federal tax relief, to bolster the United States economy, with a recovery likely to be well underway by the fourth quarter of 2001,” says Craig Alexander, senior economist at TD.

Canadian rates are also poised to fall. “The Fed’s concern about the health of the U.S. economy should be setting off warning bells about the future vitality of the Canadian economy. As a result, we anticipate that the Bank of Canada will match the next 100 basis points of Fed cuts,” notes Alexander. However, no action is expected from the Bank of Canada between its fixed policy announcement dates.

TD says bond markets have not yet priced in the full extent of central bank easing, so both Canadian and U.S. bond yields will decline in the coming weeks. The yield on the benchmark Canadian 10-year government bond likely to trough at close to 5% this summer. Canadian fixed-income markets are expected to outperform their U.S. counterparts over the next several quarters, leading to a narrowing in positive Canada-U.S. interest rate spreads.