'Don't see change in Fed's taper policy, QE to end this yr'

Below is the verbatim transcript of Robert Parker's interview on CNBC-TV18

Q: How is the Fed going to look at this data later this month when it meets to make another decision on monetary policy?

A: Two points, the first is that data that we had announced on non-farm payroll on Friday is obviously inconsistent with all the other economic data that we have had out of the United States over the past month. Ex the non-farm payroll figures have been strong and have been consistent with an upturn in economic activity. Certainly the non-farm payroll figures were out of line with the earlier announced ADP numbers. There is a chance that this figure will be revised up and could infact be revised up quite significantly. Let us not forget that the November number was likewise revised up quite sharply indeed.

The second point is that Fed will treat this number as somewhat of a rogue figure and I think they would want to see a good 2-3 months trend of slowdown which I don't think we are going to get, but they would want 2-3 months data and look at more broad data before they change their current policy on tapering.

Q: Rouge figure is it because they think this could have been because of the big freeze that we have had in United States in December and till now? Today's rally in Indian markets could partly be led by the fact that people think tapering could be put off. Are we celebrating too early?

A: We are celebrating a little bit too early. My view is unchanged which is that tapering will continue and as we go into the second quarter of the year the monetary tapering will be reduced to the order of about USD 50 billion. I also stick to the view that quantitative easing will end by the end of the year.

Having said that the market reaction on Friday and again today has been logical which is that we have seen a decline in US treasury yields, we are down to 2.85 percent on the 10-year US Treasury that compares with the test we had last week of 3 percent. That decline in US Treasury yields one should not forget that there is a very high correlation between the US treasury market, emerging market debt and emerging market debt yields coming down is supportive for equity markets such as India. I would also highlight the recovery that we have seen in the Indian rupee from what was I would argue over the last month quite an oversold condition.

Q: I get that you are not taking this 74000 figure very seriously. You expect upgrades to it but we do have the polar vortex that could have killed some of the first couple of weeks of January data. So, there is the likelihood do you think that we might get a weaker number for January as well and sort of reconcile that for me with the 6.7 percent unemployment figure because that was the figure last year in May when the Fed started communicating about this taper, that was the figure that the Fed said it hoped to be done with most of its taper by then, saying when we hit 6.7 percent we hope to be done with most of our taper. We are already there.

A: First of all on the unemployment figure let us not forget that the figure comes from a different database than non-farm payroll. Obviously the unemployment number is highly influenced by people who are leaving or joining the labour force. The unemployment number only counts those people who are actively looking for work and cannot find it. So, there is a lot of distortion in that unemployment number.

Another point is that the Fed is not stuck with a figure of 6.5 percent in terms of that acting as a trigger for tightening monetary policy. As with a number of central banks and I am thinking also the Bank of England, I think the central banks are quite capable of changing their target. So, my view has always been that unemployment in the United States would reach 6.5 percent in the second quarter of this year. I actually think we will probably reach it before that now. However the Fed could easily turnaround and say let us review monetary policy when unemployment reaches 6 percent.

One actually very positive aspect in the United States is that the headline unemployment number is coming down faster than the Fed or for that matter most analysts expected.

Q: Many are attributing that to a shrinkage in the labour market. I get the point that you make on 6.7 percent or 6.5 percent. You did allude in a previous answer to a USD 50 billion figure in terms of bond buying. Can you give me some more details? If December's data is a one off, if January's data is not very disappointing in terms of the jobs data, do you think we will go from USD 75 billion to USD 65 billion in February and to USD 50 billion by let us say middle of this year?

A: It is very difficult to quantify the impact of this very bad weather on the jobs number but I do think it is fair to say that the very bad weather will have some impact. That probably means after weak employment data come late January and early February we could see employment numbers improve and the trend will be consistent with economic growth in the United States in 2014.

Our house forecast is 3 percent growth and I feel very comfortable with it. On that basis I think that the USD 75 billion that we have in QE for January that could be reduced to USD 55 billion for March and that by the middle of the year we could be down to lets say USD 35-40 billion.

It still means that monetary policy will be easy and as you were discussing earlier the probability of the Fed raising interest rates remains low and certainly low for most of 2014 and the pace of tapering will remain reasonably slow. Fed is very concerned that if they taper too quickly then they could upset what is currently looking as a good economic recovery.\\