The Federal Reserve's aggressive policy of interest rate cuts to stave off a recession in the US runs the risk of creating a new 'bubble', a leading market commentator has warned.

The Federal Reserve's aggressive policy of interest rate cuts to stave off a recession in the US runs the risk of creating a new 'bubble', a leading market commentator has warned.

'Most economists will no doubt tell us in six months time that we are already in a recession today', Joe Valente, head of research at DTZ, told PropertyEU TV at MIPIM in Cannes.

'The message from investors in the US and DTZ's offices there is that psychologically, the US is already in recession. Valente noted it is more difficult to get debt at a reasonable cost, resulting in a real problem in terms of market liquidity. The net result of this I fear is that the Fed will continue to reduce interest rates and that brings good news and bad news.

'The good news is that rates are falling and that means property becomes self-financing again. The bad news is that it will inflate a new bubble and that is the real danger because in two years’ time there is a danger we could all get our fingers burned if we are not very careful.'

The situation in Europe is more diverse, he said. 'Within the European market you have a patchwork of different prospects. You have some markets fairly close to fair value. Certainly compared to bonds and equities, property looks well priced generally and I would put the UK in that category,' he said.

Valente said yields should continue to move outwards in the second quarter of 2008 and capital values of property in Germany and France would likely fall further in the first half of the year.