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US Fed may not hike rates soon

August 30, 2006 16:26 IST

Minutes of the last US Fed meeting, which was released on Tuesday showed that US Federal Reserve officials saw their decision to suspend a two-year run of interest-rate increases as a 'close call'.

Also, they were not entirely sure of the need for further tightening. However, there was an acknowledgement in the minutes that further rate hikes may be needed.

Ram Kolluri, President and CIO of Global Investment Management, says that there is very little chance of Fed hiking rates in the short-term. He adds that there is evidence that the US economy is slowing sharply.

He further adds that an earnings slowdown os likely and he feels that US equities will be volatile.

Excerpts from CNBC-TV18's exclusive interview with Ram Kolluri:

What should be the key takeaways from the minutes of the Fed meeting yesterday?

There is ambivalence in the Fed whether to pause or to continue raising rates, but there is anecdotal evidence that the US economy is really, sharply slowing.

Particularly in the real estate as well as the new housing market, there is a sharp slowdown. So I think right now, the markets are forecasting that there is hardly one-sixth chance that the Fed will raise rates in the September meeting.

Of course there is always ambivalence; there is always concern that inflation could be worst etc, but it is safe to say that there is very little chance of interest rates going up in the very short-term.

How should this be interpreted by global markets because the Fed officials have made the point that concerns of inflation is greater than a slower economy growth for them now?

The concern on equity markets is that one will see a sharp slowdown in earnings. After the Labour day weekend that is coming up soon, markets will start focusing on corporate earnings, so one will see some volatility in equity markets.

Now bond markets are supporting the stock market with lowering interest rates, but the question is how will one see earnings, going forward. So it is good for bonds and questionable for stocks.

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