Business Daily from THE HINDU group of publications
Tuesday, Aug 08, 2006
Business Daily from THE HINDU group of publications Tuesday, Aug 08, 2006 |
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Markets
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Interview
Mr Michael Spencer, Chief Economist for Asia at Deutsche Bank expects the Fed to hike rates on Tuesday; but he expects this to be the last one. He expects a relatively dovish statement from the US Fed, and also says that the Fed may cut rates by late-2006 or early-2007. According to him, the liquidity story for emerging markets is over, and a pause by the Fed on Tuesday may ignite a strong rally in emerging markets. He also says that we may see US inflation come down by the end of 2006. Excerpts from CNBC-TV18's exclusive interview with Mr Michael Spencer What is your prognosis for tomorrow? We are expecting a rate hike tomorrow. The market has got it as a very unlikely event but we think the Fed will want to send one relatively strong signal that they really mean it when they say they don't want inflation expectations to continue to creep higher. So we are looking for a rate hike tomorrow, but we think that will be the last one. More importantly, what will the Fed say about the future even if it moves tomorrow with another 25 bps, do you think it will conclusively shut the door on future rate hikes? No. What I expect to see is a rate hike with a relatively dovish statement basically saying that the slowdown in growth has already begun, and that should, by the end of the year, start to lead to a moderation of inflation pressures. But with energy prices still remaining relatively high and the labour market still more or less in full employment, the Fed will be alert to the possibility that inflation doesn't start to weaken. But in our view the growth outlook for the second half of the year suggests that the Fed will indeed see inflation coming-off by the end of the year and that this will be the last rate hike. So you are not in the camp which believes that we have seen the first signs of slowdown already and the Fed being data dependent would take that on board and say enough is enough and not raise one more time, GDP growth and the US non-farm payroll data to be specific? Sure, but we certainly have begun to see growth. The question for the Fed is whether the economy will bounce back at all in the third quarter We had a few quarters over the last couple of years where the US economy has grown very slowly and then bounced back very strongly and if one looks through the data last week, other than the payrolls data, there were reasons for optimism. The ISM and the Chicago PMI indices were much stronger than expected, factory orders continue to grow, car sales were at a three-month high. So I think the Fed may be wondering whether the third quarter growth will be higher than two and a half. I think if they don't raise rates tomorrow, the concern would be that the asset markets would rally and that would re-ignite growth. So I think a rate hike tomorrow with a relatively dovish statement, makes sense for them.
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