Ahead of the US Federal Reserve meeting outcome, Steve Brice, chief investment strategist – group wealth management at Standard Chartered Bank says Fed is very cautious of ending the quantitative easing programme. He expects Fed to reaffirm its focus on growth.
He says the US economy is doing well and inflation expectation has moderated. He believes Fed will guide people in the right direction – focus on growth and any movement in interest rates is going to be gradual.
Also Read: See hawkish Fed tone, but nothing that’ll shatter mkts: DB
Below is the verbatim transcript of Steve Brice’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Latha: What are you expecting the Fed to do? Market expectations have now dimed a bit about too much hawkishness?
A: We have seen shifting sentiment within the Fed over recent times. The question is how far they want to go. The one thing they are very cautious about is they want to replicate the uncertainty or the shift in sentiment that they saw. I think we will see some modification of the language but shift some closer towards high but they don’t want to take too big a step at this stage.
Latha: What kind of modification are you penciling in?
A: It’s difficult because connotations or combinations could come through but they are trying to say that we acknowledge that the US economy is doing very well. We are not worried about inflation; in fact inflation expectations have moderated in recent time inline with weaker commodity prices and stronger dollar. So, they probably feel the need at this stage to move too far but they want to avoid to as well. They are going to hike in Q2 as we expect. They don’t want to leave that adjustment until Q1 in terms of market expectations. They just want to guide people in right direction. We are firm they are focused on growth, so inflation is not a concern at this stage and therefore any move in interest rates will be gradual and paced.
Sonia: What about the tools because the central bank has never attempted in the past to hike rates with such a big balance sheet, a USD 4.4 trillion balance sheet. Do you think they will experiment with new tools; some people are talking about the fact that instead of specific rate perhaps the corridor of potential rates could be announced. Is that something that you are watching as well?
A: Yes. As you said we are coming from an unprecedented point in terms of monetary policy, so there are a lot of potential ways they could try and change the way people look at monetary policy. We are cautious about sending the right message that isn’t interpreted incorrectly by the market and that would be their primary focus, but you are right that as we move towards the end of QE, which we are going to see next month, the date is going to be important. We could get certainty after that.
Latha: What are your best guess, tomorrow same time are we going to see markets atwitter, jittery or it would be a minor kneejerk reaction?
A: I don’t think it is actually going to be either. I think markets will get some relief from it. They are also very worried about what is going to come out assuming the Fed doesn’t make a mistake. To be honest, the data coming out is still goldilocks and if you look at fund managers they are still excessively long cash. So we still believe that this melt up scenario is probably the most likely outcome for US stocks in the short-term. Even though in the longer term to be honest the rate hiking cycle is usually seen with a little bit of greater volatility but overall the market ends higher in early stage of rate hiking cycle. So we are not that concerned as we look at things today.