Many markets have overreacted to the prospect of the US Federal Reserve tapering its bond buying programme, says David Kelly, JPMorgan Funds. He feels economies, equities and currencies emerging markets will be ultimately determined by what is going on in emerging markets.
Though he expects Fed to announce reduction in bond buying by at least USD 10 billion. It will remove bond buying gradually over the next nine months, which in turn will push up long-term interest rates, he adds.
Below is the verbatim transcript of David Kelly's interview on CNBC-TV18
Q: We have seen decent rally in emerging market currencies and equities in the past couple of weeks. How long can the Larry Summers’ steroid work?
A: I think it is important that there is some more certainty about the Fed chair. It is clear that Larry Summer could not get pass the Senate. I think Janet Yellen is now the favourite but also it looks like we are going to get a continuation of very dovish Fed policy and that is what is moving the market. I think going forward the rally that we are seeing in the emerging market in the last week or two reflects the fact that many markets overreacted to the prospect of Fed tapering. I think they did overreact even though this makes the Fed look a bit dovish going forward, ultimately emerging market economies and emerging market equity markets and currencies will be determined by what is going on in emerging markets. I do not think any end it is going to be about Federal Reserve monetary policy.
Q: On the Federal Open Market Committee (FOMC) policy, what are you expecting to hear on Wednesday night and how much relief do you think it will bring about to the market if that USD 10 billion number is announced?
A: I think the Fed will decide to begin to taper. They will probably indicate the first move of at least USD 10 billion of reduction in the bond buying. So, the buying bonds of USD 85 billion a month, I expect will reduce at least by USD 10 billion. But the more important thing is that if you go back three months ago when Ben Bernanke first outlined this plan to get rid of Fed bond purchase nothing has happened to change that plan; the global economy got stronger, the US’ labour market got tighter.
So, I think the Fed stay on that plan. They will remove bond buying gradually over the next nine months. I do not think it matters much whether it’s 5 billion or 10 billion. I do not think that will matter to the market. Over the next nine months it is all going to go and that will push long-term interest rates somewhat higher but that’s all we have been seeing all year. I think we still get a reduction in bond buying and market maybe a bit disappointed, at least the bond market maybe a bit disappointed to realise that the story hasn’t changed; the economy is strong enough to get rid of bond buying.
Q: Any favourite in the emerging markets at this point in time, within emerging markets?
A: I think you got to look country by country. I think it also matters how well emerging market economies are able to deal with policy issues and I think India has done a bit of a better job in the last few weeks in convincing people that they deal with policy issues.