The US Federal Reserve on Friday announced that its Board of Governors will meet on Monday â€œunder expedited proceduresâ€ for a review and determination of the advance and discount rates.
The US Federal Reserve on Friday announced that its Board of Governors will meet on Monday "under expedited procedures" for a review and determination of the advance and discount rates. Speaking to CNBC-TV18, George Hoguet of State Street Global, says one should not expect any policy changes from this meet.
On emerging markets (EMs), Hoguet says the asset class is already in its bottoming out phase, but he continues to be cautious on it.
While the advisor company believes India's macro performance has improved in the recent past, Hoguet adds it continues to face structural issues like policy implementation and lack of infrastructure.
Below is the verbatim transcript of George Hoguet's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Latha: What do we do with this meeting, it is completely confusing and out of the blue, what should we expect?
A: I think we should expect an increase in the Federal funds rate, the first increase in several years. The US economy relative to other economies is performing quite well. We are close to full employment in the United States and the market anticipates at the 70 percent probability level an increase in rates and that is our view as well.
Latha: You are expecting the rate hike today?
A: No, I am talking about the meeting in December.
Latha: I am asking you about the meeting today, how important is it and what should we expect?
A: I don’t think we should expect any change in current policy at this point.
Sonia: How do you approach emerging markets, since you are a global investment strategist, we have seen some money getting pulled out of emerging markets in the recent past given that the Fed rate hike is on the anvil, do you expect more money to be taken off the table?
A: I do actually. Emerging markets face both, cyclical and secular headwinds. Now, India of course is a stand out in emerging markets in terms of macroeconomic performance but the Chinese economy is larger than India, Russia and Brazil combined. So, we have the normalisation of US interest rates gradually but over several quarters, we have a slowdown in global trade, we have continued weakness in commodity prices and we also have dollar strength. The growth rate between emerging markets and developed market growth rates now, the gap is narrowest it has been in several years. We have more or less reached bottom in terms of outflows but I still think there is some more to come and we continue to be very cautious on emerging markets.
Latha: Let me come back to this unscheduled meeting on Monday by the Fed, we need not worry at all, would there be a hike in discount rate as some blogs seem to be guessing?
A: I don’t believe so, no, I think that there is disagreement as among Fed Governors and I think that any increase in rates will be done in December.
Latha: So, this meeting would be a non-event? It is not something the market should worry about?
A: I would not go that far, but I just do not believe that we are going to see an increase in rates then.
Sonia: Your view on India?
A: As I mentioned, India is, its macro-economic performance has increased substantially over the past 36 months. The current account deficit has come down, India has been a major beneficiary of the oil price decline, inflation is coming down in India, but India continues to face large structural problems, as you know, relating to infrastructure, foreign direct investments and the policy agenda has been set, but investors are looking now more for implementation. But, I would say that India is benefitting from an improved perception among global investors particularly because there is substantial uncertainty as to what the trajectory of the Chinese economy will be in the next 24-36 months.
Latha: If the market is preparing for a 70 percent chance of a rate hike on December 15-December 16, would you expect a lot of volatility in currencies? Would you expect capital flows out of emerging markets in the run-up and thereafter?
A: I think that is pretty well in the price. What really matters is the pace at which subsequent increases come. We actually see four rate hikes next year and the Fed’s funds rate at one and a quarter by the end of next year. But, if we went back for whatever reason, which is not our core scenario, but if we went back to a 1994-1995 type scenario, where the Fed hiked much more rapidly than the market anticipated, then definitely we would see more money coming out of emerging markets. We also have to bear in mind that there are some countries like turkey, the twin deficit countries like Turkey and Brazil, who are potentially vulnerable in this environment and in the case of Turkey, it is obviously compounded but, the ever widening conflict in Syria and the prospective establishment of an independent state. So, there are many factors at play and the situation varies significantly country-by-country.
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