Fed's decision in line with expectations: Deutsche Bank

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, Peter Hooper, chief economist, Deutsche Bank says, the Fed’s decision was pretty much in line with expectations. “I wasn’t expecting a big boost either to the markets or to growth out of this action,” he adds. Also read: Fed twists again, extending stimulus to weak economy Below is the edited transcript of his interview on CNBC-TV18. Also watch the accompanying video. Q: What has your reaction been to the FOMC’s (Federal Open Market Committee) decision? How will it help to spur risky assets globally? Do you think it will just be a sentiment move or is there more to go? A: I think the Fed’s decision was pretty much in line with expectations, not surprised that we didn’t get a big reaction. If the economy does not improve, if we don’t see a continued downtrend in unemployment, they are prepared to do more. We have a mixed message for the market, macro economy has to get worse for the Fed to do more. We are facing some headwinds, the news out of Europe presumably gets a bit better and risk assets begin to improve. That’s going to support growth going forward. I think the Fed gave us the verbal message. They are prepared to do more that’s important support, if things start to look worse. But I wasn’t expecting a big boost either to the markets or to growth out of this action. The Fed stands ready, if needed. Q: Given the commentary that the Fed has given and added to the fact that there are three more FOMC meetings to go before the presidential elections, do you get the sense that perhaps they are buying time before they announce QE3, there is a further deterioration in the data? A: There is a lot made of this issue of timing because of the elections and the Fed being this way one way or another. These people bend over backwards not to be swayed by the political season. Given the forecast that they give, I don’t think they expect to do more QE. I think if the economy turns out as they are currently projecting, if the unemployment rate, the labor market improves, if this weakness we have seen lately has been weather and seasonality effects and if things begin to pick up then I think they are not planning to do more at this point. But there is no question that there are downside risks. Certainly things could turn around for the worse in Europe and certainly the looming fiscal cliff could have a bigger negative impact on business spending in the US. If that occurred, they would probably have to step in. I think they would do so whatever the election calendar or the political calendar looked like. I think they would act if they felt the economy needs it. You had Fed rate increases the week before presidential election in the past. So, if the economy really needs it, they will act. Q: What you are expecting the ECB to do next because the Fed has reiterated again that the risks out of Europe continue? A: I think the ECB has different challenges. If the ECB recognises fully that if they acted aggressively before important steps were taken at the upcoming summit to lay the ground work for a more sustainable framework for the Euro down the road, it would be counterproductive. Given where the European economy is right now in recession, I do expect further easing action by the ECB. They have said they stand ready to do so, if needed. But for the time being I think there are some very important political decisions that need to be made and unfortunately it helps if the pressure is on from the market to focus opinion to get those made.