Market hopes to see 25bps hike in Fed rate tomorrow, all eyes on commentary: Ed Yardeni

Market participants are expecting the US Federal Reserve to hike its benchmark overnight interest rate by 25 basis points to the 5.25-5.50 percent range on July 26 after a pause in June. Inflation in the US has eased to below 4 percent level year-on-year, while economic growth has also accelerated considerably in the first quarter. All these have firmed up the possibility for the Fed's rate-setting panel to vote for a quarter percentage-point increase in policy rate.

“Everybody is focusing on the commentary and it will be out immediately after the Fed meeting on Wednesday. Federal Reserve Chairman Jerome Powell is likely to say they might or might not move again. They may very well be at a restrictive level… I think the data is going to show that despite the economy’s resilience, inflation is coming down and the Fed has really achieved what it wanted to,” Ed Yardeni, president of Yardeni Research, told CNBC TV18.

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The well-known economist said that it is important to put India in the context of global economy. And the global economy is not in recession, but it is certainly not in boom. China’s economic growth is turning out to be disappointing. Europe didn’t fall into severe recession last year as a result of their energy crisis but nonetheless it has been in a modest recession in the fourth quarter last year.

“We have seen the commodity prices have not really moved up or down as the oil prices moved sideways. So, I think India is facing the same global situation as all of us are facing. It is not too hot and not too cold as it is somewhere in between and it is a bit disappointing relative to expectations that things will be better,” he added.

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On China, the veteran investor said that Beijing has a serious problem because it has been stimulating the economy for many years with ample supply of credit and it created a real estate boom and now that boom is turning into a burst. And it is not going to be very easy just with policies to resolve that problem.

“It is many ways a speculative bubble that is burst and on top of all that they have a horrible demographic situation… I have often been saying China has become the world’s largest nursing home and the demographic situation is pretty dire as it has a rapidly aging population and the older people do not spend much money and they certainly do not buy additional apartments,” Yardeni said.

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He added that it will be hard for the Chinese government to come up with a policy that stimulates the economy. Good news is that China’s weakness has translated into a falling PPI (Producer Price Index) over there and that, in turn, has an impact on the PPI of the US and probably around the world. So, China’s problems are actually turning out to be a pretty good development for the US in terms of allowing us to have disinflation without a recession.