Mkts may react negatively if Fed disappoints: Lloyds TSB

Trevor Williams, chief economist, Lloyds TSB, says that with Operation Twist expiring next month the markets look forward to continued support from the Fed. They will continue to accept wide range of collateral from those that want to borrow short term from fed various venues. 

If Fed disappoints then there is a possibility that markets may react negatively. Below is the edited transcript of his interview to CNBC-TV18. Also watch the accompanying video. Q: What do you feel the Fed will deliver?
A: There will be hints that more will be done if necessary. With Operation Twist expiring next month the markets look forward to continued support from the Fed. They will continue to accept wide range of collateral from those that want to borrow short term from fed various venues.
However, I don't think Fed will deliberately try to further lower bond yields and treasury yields in the US, as they are at record lows and I doubt that will make a difference to spark outturn for the US. Fed focus will be to bring down the rate of employment and increase the growth. I don't think that these policies at this point are going to be doing that. Q: What will be the degree of disappointment if Fed does not act now and decide to just wait and watch and take up something in next meeting?
A: There is a possibility that the market will react negatively to it. I don't think the Fed should just dance to the markets tune. The Fed should act according to the decision based on their plan and discussion and not according to the perception of the market. Q: There is some easing on the dollar because of the expectorations that have been built up around what the Fed could come up with or at least partially come up with?
A: The dollar could strengthen on the basis that Fed will not any more ease domestic policy relative to the current position. And if to the extent that the dollar is weakened on the basis of a view that they were going to do this and they don't do it then presumably the dollar should regain that lost ground. I am not sure that one can look at dollar moves quite this way in the short-term.
Sometimes the dollar tends to move on range of news or just the noise around globally that maybe ECB will do something. So, the US strengthens somewhat on the back of that and that view remains remarkably resilient given all of the background news around Spain and Greece being as negative as they currently are. It is amazing that the euro has held up so well.