Claiming to belong to the ‘Taper Lite’ camp, Andrew Economos of JPMorgan AMC expects the US Federal Reserve to scale back its bond buying program by USD 5-10 billion.
Speaking to CNBC-TV18 hours before the Fed chairman Ben Bernanke's much-awaited speech on QE tapering, Economos says that Fed will aim to strike a balance between hawk and dove.
“They (Fed) on one hand will sound hawkish to make sure the bond market vigilantes are covered. On the other hand, they are going to be a little bit more dovish to make sure that the equity rally continues because the wealth effect has to take hold in United States to maintain consumer confidence to really get the economy – getting it out of that steady state and into a stronger glide path,” he adds.
Additionally, Economos expects the emerging markets (EMs) to hail Janet Yellen replacing Bernanke as the Fed chairman.
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Below is the edited transcript of Economos’ interview to CNBC-TV18.
Q: Our polls have thrown up that USD 10 billion is the expectation in terms of the reduction in what the Fed will buy starting from next month. I would rather like to know how you expect the markets to react after that announcement if it indeed comes as the polls indicate USD 10 billion, how do you estimate the markets will react? Will it be profit taking in emerging markets or will it be a renewed bout of buying?
A: The good news is that we are done with taper talk at the end of the day today. So, one way or the other we will come to a resolution. I am in the ‘Taper Lite’ camp. So, it will be anywhere from USD 5-10 billion predominantly in treasuries and I think the stock market will take that well. The equity rally continues. I actually think that is very good for the emerging markets (EMs) as we start moving down from the developed markets and set in more EMs. Ultimately, investors want a little bit more confidence in the future. They want a bit more stability and I think with the taper talk behind us, we start to become a little bit more bullish as investors on equities in general given the anomalisation in global economies.
Q: How much emphasis would you pay on the commentary coming in from the Fed Reserve today? How pertinent would it be for a reaction to the stock markets especially emerging economies such as India?
A: Lets be careful here. We know the Fed will try to work both sides of the fence. They on one hand will sound hawkish to make sure the bond market vigilantes are covered. On the other hand, they are going to be a little bit more dovish to make sure that the equity rally continues on because the wealth effect has to take hold in United States to maintain consumer confidence to really get the economy – getting it out of that steady state and into a stronger glide path.
The Fed will be a bit working both sides of this and even handed. The real question for me is who succeeds Bernanke and I think that is going to be Yellen, I think that will be bullish for the stock markets and EMs.