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Most rate hikes are over: JP Morgan

August 09, 2006 14:37 IST
James Glassman, senior economist at JP Morgan Chase Bank says that most of the rate hikes are over and only modest moves are left.

He adds that there are signs that the economy may slow down in Q3. He also states that the Fed may pause for a while, but uncertainty still lingers.

Excerpts from CNBC-TV18's exclusive interview with James Glassman:

Can you predict what the Fed is about to do next or does uncertainty linger on?

I think that uncertainty lingers on. What we do know is that the Fed seems to be signaling that they will be pausing at least for a while. They acknowledge that inflation had been a little higher, but their belief is that the economy is slowing down and that will contain inflation. So it may take a little while to figure out whether the Fed is right. Many people anticipate that the Fed maybe on pause for the rest of the fall.

What is your own reading of that statement that 'Yes, at the moment atleast the lag effect and the economic slowdown will curtail pressures' and the other faction within the Fed itself saying 'No, we are going to see pressures sustaining'?

Yes, that is right. On the whole what they are saying is, 'We understand that there are pressures, there is a risk that inflation could be worse, but we think that the economy is slowing, we want to watch where it is going.' So it seems to me that the statement has signaled that they want more flexibility and it is going to be difficult for us to know what might change their mind.

Right now, for example, most US economists are anticipating that the third quarter will be slow again and it is not clear how much patience that has, how long they are willing to wait and how much of disappointment on the inflation side they might be willing to tolerate. But for now, since the economy is losing momentum, they don't want to go too far.

Do you think it will be a long summer for financial markets then, they will be keep guessing for the next few months and would not be able to decide in any conclusive manner whether the Fed has paused or not?

This is probably right, but that is always the case. The truth is that Central Banks never stop; life is always in motion for them. New surprises are always coming about, so most people agree that most of the rate hikes are behind us and there is no intention to raise the interest rates so far that they damage the economy.

So if there is a need for more interest rates, it is really only a matter of a few moves here or there and there are enough people who are concerned about the downside risk. But personally, I think that Fed believes that much of the problem they are seeing on the inflation side is related to oil prices and their hope is that this will settle down and then we will get a better sense of where the economy is.

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