Expect 2% growth in US this year: IHS Global Insight

The US Federal Reserve kept rates unchanged, extended Operation Twist and hinted that it is prepared to launch a third round of quantitative easing if required.

In an interview to CNBC-TV18, Paul Edelstein, director-financial economics at IHS Global Insight says, the Fed is trying to keep their powder dry to see if some of the downside risks start to turn up in the jobs numbers and inflation numbers.

He expects a 2% growth in US this year. “The Fed is expecting probably a little bit more, but not that much more, so 2% to 2.25% growth,” he adds.

Below is the edited transcript of his interview on CNBC-TV18. Also watch the accompanying video.

Q: As we went into this policy announcement, there were a wide range of expectations from those believing that the Fed will do nothing to other saying they may extend the twist to yet another group that believed in QE3. Where did you stand? Therefore, are you in a sense disappointed today or did you expect this to turnout?

A: This is exactly what we expected to happen. We said that they were going to extend operation twist to the end of the year and a buyback of USD 300 billion. In speeches and in testimonies, Fed members have been saying that there are growing concerns coming out of Europe and coming out of China and they were spooked a little bit by the jobs numbers for April and May. But they weren’t so concerned that they were going to do another round of quantitative easing. So, it seemed to me that what they wanted to do is take out a little bit of insurance against downside risk and extend this current operation twist programme through the remainder of the year.

Q: Given the context to weak growth and weak data emanating from the US, weak spots around the world in emerging markets like China and India, Europe being in the crisis that it is, why do you think that the Fed focus only on operation twist? What do they hope to achieve via operation twist? What are they waiting to see before they unleash a third round of quantitative easing?

A: They are hoping to remove some long-term treasuries from the hands of the public in order to push down a long-term interest rate. The reason that they didn’t go so far as to expand their balance sheet through another round of quantitative easing is because they still expect economy to grow moderately. So, if they expect growth to persist, they are not going to do something quite as drastic as expand their balance sheet. If they thought that growth was in trouble that what we are seeing now in terms of jobs growth wasn’t going to pick up then they would go and do quantitative easing, but not at this point.

Q: Can you elaborate? We have seen the data soften in the second half of the year, there are expectations that it might soften even further. We are at 8.2% unemployment rate, that rate has picked up in the recent past and GDP growth has come down for Q1 to below 2%. What does moderately mean? What numbers do they need to see both on the domestic economy front and the global situation for them to believe that a QE3 round is needed?

A: We are expecting a 2% growth this year. The Fed is expecting probably a little bit more, but not that much more, so 2% to 2.25% growth. Some of that bad jobs data we got in April and May probably understated some of the momentum in the labour market right now. We think that the economy could increase payroll by 150,000 per month.

Q: Are you saying then that we should not expect any action on the quantitative easing front? That is something the markets have gotten addicted to now. We go from policy announcement to policy announcement with hopes dipping and then rising for a third round of QE3. Are they keeping their powder dry for the next month or do you think that any further quantitative easing will only now come towards the last quarter of the year?

A: They are trying to keep their powder dry to see if some of the downside risks start to turn up in the jobs numbers and inflation numbers. They want to see if what we have started in April and May does represent what is going on with the weakness in the labour market, but it could happen anytime. I would say in the second half of this year, if the outlook does deteriorate.