The FOMC (Federal Open Market Committee) meet is scheduled for June 29. If the US Fed hikes interest rate on June 29, then the hike will be the 17th in a row. The street is quite divided on whether the Fed will raise rates or not.
Chief Economist, Asia Pacific at HSBC, Peter Morgan believes that the Fed is likely to raise rates due to rising inflation. He adds that there is uncertainty over when the Fed will stop raising rates.
He says that the current a/c deficit is a serious problem for India, and that India may need to raise rates further.
Excerpts from CNBC-TV18's exclusive interview with Peter Morgan:
What do you expect to hear at HSBC?
We are looking for them to raise rates. That is fairly certain at this point, given some of the recent inflation data. So I think that the focus will be on the language from there. I am a little bit skeptical that we will get anything terribly definitive. I suspect it will be a bit obscure, exactly as to when the Fed is going to stop tightening.
What is your own feeling because there are apprehensions in many quarters that the Fed might overshoot in its caution and that might be taken quite badly by a lot of markets across the world? Do you think they will?
It is a risk. I have to be concerned about it because the main thing that we have to worry about is that there is some sort of a bubble situation in the housing market and housing is a very interest sensitive sector. Therefore, if you did not get some kind of a significant slowdown in this sector, it has the potential to have a negative impact on consumer spending.
So it is a very delicate operation for the Fed. They are essentially trying to achieve a soft landing in a bubble type of situation and that is quite difficult.
What have you read of the kind of data that has come out so far in the American markets? Does it look like it is rearing towards more inflation concerns or is it largely inconclusive?
We are seeing some leading indicators over the past for a slowdown, most obviously in the housing market. We are certainly seeing the signs of
What do you expect the Central Bank in India to do, and how concerned are you about the current account deficit situation in India?
I think it is a serious concern and they suggest that there is some potential problem with capital flows. So I think they will probably raise rates somewhat further.
What is your own feeling? Would it stop at a 5.25% for the Fed rate, or are you tipping 5.5% in this run?
Our view is 5.5%. We have been suggesting that maybe, they will not be finished with raising rates even then, but for the time being 5.5% is pretty likely.
Is 5.5% priced in by the market on all the equity, currency and bond markets, or is it not quite prepared for 5.5%?
It is certainly much more priced in than it was even a week ago. So I think there has been a change in sentiment and a greater acceptance of the view that they are likely to raise rates again.
Particularly for the currency market what you are expecting from the dollar?
For the time being it should hold up reasonably well. The key question is when will people be convinced that the Fed has stopped tightening and when might they actually start thinking about the possibility of Fed easing. If we were to get some change in sentiment, some feel that the Fed was finished with tightening but is getting ready to shift back for easing and I think that would have a significant negative impact on the dollar.
If on the 29th, the Fed comes out and says, it is 5.25 now and the situation looks like it may get to 5.5 in the next meeting, do you think the markets could sell off?
It could somewhat. I think 5.25% is still not fully discounted by the market. So to that extent, that gets fully priced in at that stage, we do not have any negative impact.
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