Moneycontrol » News » Markets » Expert & FII Outlook

Fed less hawkish; may not cut rates: Andy Xie

Published on Wed, Jun 27, 2007 at 09:26 | Source : Moneycontrol.com

Updated at Thu, Jun 28, 2007 at 10:38

Like this story, share it with millions of investors on M3

Share on Tumblr

Excerpts from Bazaar on CNBC-TV18 Watch the full show »

RELATED NEWS

US sell-off giving Asia the jitters: Kolluri

ALSO READ

Nifty

BSE | NSE 25/05/12

Are Mutual Funds betting on Nifty?

The Fed will meet later tonight to decide on interest rates . The markets expect a status quo on rates. Andy Xie , an independent economist, gives his view on where the interest rate situation is headed.

According to him, the market consensus is that the Fed may stay on hold. The US Fed is likely to be less hawkish than earlier.

He explained that it could be tough for the Fed to cut rates due to the property sector. The Fed is likely to be cautious about its interest rate outlook and likely to stress on the inflation outlook along with a focus on price concerns. He also believes that emerging markets are overheating.

Excerpts from CNBC-TV18's exclusive interview with Andy Xie:

Q: It seems split down the middle opinion on what they might do and what they might say, what are you expecting to hear from the Fed?

A: There is a pretty tight consensus in the market that the Fed will stay on hold. The market is still hopeful that they might be less hawkish than before. The US does have an inflation problem, even though it is a global phenomenon. It is highly unlikely that the inflation in the US would be going down while it is going up in the rest of the world, considering that the dollar hasn't been so strong.

I think the Fed cannot cut interest rates for long. They would have to probably consider raising interest rates again. Accepting this scenario will be the main reason why the markets are not going up any more.

Q: Rising defaults in the US sub-prime mortgage market are leading to concerns that perhaps there could be a slowdown in the economy there. Do you think that the Fed may just tend to look slightly benignly at rates?

A: What we are seeing in this global cycle is that the sector's problems cannot spread out. We saw what happened to property in Australia, which again spread out. This was mainly because of abundance of liquidity. We do not have this multiply effect, like in the past.

The economy is weak, probably going at around 1% right now, mainly due to the property sector. The rest of the economy, in particular the consumer sector, is still okay. I think it is very difficult for the Fed to cut interest rates just because of the property sector. Overall, the rest of the economy is still okay.

I think the Fed will be very cautious about its inflation outlook. It will signal to the market that it will not cut interest rate at all, in the foreseeable future.

Q: What do you expect for the rest of this year, would it be a status quo for the Fed? Are you expecting to see a cut or may be even a hike as some brokerages suggest?

A: I believe that rising interest rates will be back on the table before the end of the year. Emerging markets like India and China are overheating. Asian markets are all very high. The consumption to manage is being pulled up by rising Asian markets. The US economy is the most sensitive towards emerging economies. In the past, the benign inflation trend was due to the inflationary force from emerging economies. Now with emerging economies all inflating, I think there will be an inflation problem in the US. So, rising interest rate could be back on the table again.

Q: Oil prices are looking like they are headed down. Do you think that will kind of keep inflation in check and help the Fed keep rates down as well?

A: We see oil flattening out, but it is still at a very high level. It takes a long time for energy cost to pass through to the final consumers. We cannot look at any particular sector or product. In this cycle, everything seems to be integrated. It is just that liquidity is surging through asset markets into commodity markets and now into consumer markets. Finally, we are seeing inflation. In the end, it is a monetary phenomenon.

If you look at one particular market or industry, you might have been misled. I think the world is experiencing an upward inflation trend. If you look at China, it has come from (1) or (2) deflation and now we are heading for 4 or 5. It has kind of overrun, and that has a huge effect on the rest of the world.