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Less than 50% chance of Sep Fed hike: CNBC’s Steve Liesman

After talking to the Central Bankers during the Jackson Hole meeting, CNBC’s Steve Liesman thinks it is likely that the US Federal Reserve will hike in December than September.

Steve Liesman is one of the very few journalists allowed to attend the symposium (Jackson Hole).

Below is the transcript of CNBC’s Steve Liesman’s interview with Latha Venkatesh on CNBC-TV18.

Q: Tell us to the extent you can what are the folks in Jackson Hole telling you about when the Fed will move on rate hikes?

A: At best I can figure out here in Jackson Hole that September is very much up in the air. We know the Fed wanted to move in September. We know that was something that was very much on the radar as a possibility. It was never definitive. It was always something they preferred to do, they wanted to get off the zero lower band and raise interest rates. Hoowever, the recent market turmoil along with Chinese economic weakness, the stronger dollar, commodity prices down made the best appropriate phrase which was used by Bill Dudley earlier this week, not in Jackson Hole but in a press conference he gave in New York City which is that it is less compelling.

We have to unpack that phrase, it is not un-compelling, and it is not off the table. He wanted to say between now and when the Fed meets in September 16 and 17, it could become more compelling.

We had Narayana Kocherlakota, the Minneapolis Federal Reserve President. He said that he doesn’t see a reason for an interest rate rise at all in 2015. But Esther George, the Kansas City Federal Reserve President who said that she looks the market volatility and you know where – the US economy is strong, we have had good economic data, it is good enough and sufficient enough for the US to withstand 25 bps increases.

I think we have to point towards the August employment report in early September and the other economic data which certainly has been both stronger for the US and stronger relative to other countries.

Q: You recently authored a poll of Fed Governors and others for their view on when the Fed will hike. The poll said chances of a hike in September have deemed. Now after Jackson Hole, if you were a respondent to this poll, what would you say the odds are for a hike in September?

A: You are the first person to ask me that since I have got here and going into this place, I had at about 60 percent chance of a rate hike. I put it down below 50 percent maybe towards 45 percent for September right now and the reason is because the Fed is afraid of two things. One, is they are afraid of the market volatility and the potential financial instability of that and ultimately, if they are going to make a mistake and they see that as a distinct possibility, they want to make a mistake towards being easier rather than being harder.

When they look at history they believe the mistakes that the Central banks have made in 1937 in the United States, Japan in the 90s was moving too quickly, that is the lesson they take and so if they are going to make a mistake, they are going to wait a little bit.

If you think back to the taper tantrum that happened, it is pretty interesting. What they did is is they came forward, they floated this idea of stopping Quantitative Easing (QE) or winding QE down and the market had a huge fit over that and so they let it sit for a while, things went stable and they came back and did it again. What we are doing now everyday with Federal Reserve policy is absolute history, never been done before. The exit from the zero lower bond, never been done before. I don’t think it is surprising and it is maybe to be expected that there could be a couple of stabs at this, where they come forward, they float an idea of September and maybe get this market volatility, Fed backs off, waits, has its long-run policy in mind and then comes forward with it again.

So that would raise the odds of a December rate hike as well and depending upon the economic data, I still present some chance of September but I would say less than 50 percent.

Q: Does anyone out there fear that asset prices are in bubble terrain in the US or in any major asset market such that major meltdown maybe expected sometime in the near-term or the medium-term?

A: I don’t know about quite that extreme but certainly Martin Feldstein is a person who believes that you can have a pretty big sell-off if the Fed moves the other way.

My point of view on this which is that a lot of people tend to think that what happened before is most likely to happen next and because of that you have this big crash in a way and so everybody thinks that if something goes up, it is a bubble and when it comes down, it is crash or a meltdown. I don’t think that is the normal state of the world, in the normal state of the world things go up and they can become overpriced and then they can go down in value and they can become less valuable. That is a normal state of the world. A meltdown or a crash is a very set of specific circumstances that is needed.

Everybody sits on the edge of their seats these days and their palms are all sweaty about the next meltdown or a bubble because it wasn’t that long ago that we had an actual meltdown or bubble and that is understandable. If you think about it, it was 20 years after the ‘Great Depression’ before Americans, even 30 years before Americans felt comfortable enough to own stocks again. I believe we are living in that wake but I look at it much more calmly. Yes, things get into overpriced territories but that doesn’t mean they crash; it doesn’t mean that there is a major meltdown as a result.

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