Experts worldwide are keenly waiting for the Fed's announcement as the two-day FOMC meet ends tonight. Will Janet Yellen signal the start of a tighter rate regime? And its impact on global markets is the question on everyone’s mind.
The Fed is widely expected to hike rates for the first time in nine years in September. Ninety-two percent of the participants in CNBC's Fed Survey expect the central bank to begin raising rates this year, and the consensus is for 53 basis points this year, which would be the result of two quarter-point hikes.Jan Dehn of Ashmore Investment Management says the Fed will have to signal in this meeting if it has to hike rates in September and also talk about future hike trajectory.
According to him the emerging markets will stand to benefit from the first rate hike announcement because the uncertainty around the timing of the hike was making EM investors nervous.
Below is the transcript of Jan Dehn's interview with CNBC-TV18's Sonia Shenoy and Nigel D'Souza.Sonia: Generally markets like India go into these events with a positive bias and come out feeling a little more optimistic as well. What is the sense you are getting on how to approach the FOMC event and how should investors sitting here in India look at this trigger?A: The Fed is very keen to hike but not because it wants to stamp out the rampant excess demand in the domestic economy; growth in fact has disappointed so far this year, inflation is not really a big problem, productivity has been falling. So, the reason why Fed wants to hike is not to tighten monetary policy materially and of course it won't, the purpose is really to show progress, to have a milestone on the long road to economic recovery.
This means that the Fed is likely to signal that it is going to hike either in September or December but it will probably could give a very broad reassuring message that signals that it is going to be a very slow and protracted rate hike cycle. That means from an EM perspective that there is absolutely nothing to worry about fundamentally.
In fact i would go as far as to say that emerging markets are likely to benefit from the first rate hike. The uncertainty surrounding the timing of the first rate hike is far more damaging for investors in EM than the rate hike. Once that uncertainty goes away then i think that provides a bit of a green light for investing in EM which after all has been under the cuff a bit for the last couple of years since the taper tantrum in May 2013, which was the sort of first early sign of normalisation of monetary policy.Nigel: This evening when we get those details coming out of that crucial meeting, what are the details you are really looking at, what are the points you are looking at in terms of commentary?A: The Fed will have to signal in this meeting if it intends to raise rates in September. That is going to be the most important thing. Once that signal has been digested the more important question is going to be the trajectory of future hikes; where the FOMC sees the economy, where it sees the inflation and as a consequence of that where it sees the neutral rate over the longer term. Between the neutral rate, the long term and the current stance you can derive the trajectory for interest rate hikes.
My expectation is that the Fed will downgrade its estimates for the economic outlook after very severe disappointment in terms of US growth in the first half of this year so far and that justifies the downgrade in the growth outlook.
transcript to follow soon
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