After US Federal Reserve chair Janet Yellen once again postponed raising interest rates, Michael Every, head of markets research – Asia-Pacific at Rabobank, feels that the Fed is just looking for excuses to not raise rates. However, he feels the Fed may raise rates in December. But the rhetoric that Yellen spoke about – the global issues, including China – Every fails to see how these issues can be resolved before December. Hence there is a possibility that the Fed may raise rates only in 2016.
Going ahead, he believes emerging market equities may take a hit as investors realise that the benefits are accruing from easy monetary policy and the Fed is keeping interest rates low because growth is not up to the mark.
As far as India is concerned, he feels going by what is happening globally – a weak China, Fed unable to raise rates – one would assume India will look shaky. But the domestic consumption scene seems fine and the oil prices falling are huge positives for India.
Below is the verbatim transcript of Michael Every’s interview with CNBC-TV18’s Reema Tendulkar and Latha Venkatesh.
Reema: The Fed has paused for now, but what is your assessment. When will the next Fed rate hike take place?
A: At the moment our house forecast remains that the Fed will hike in December and they said so themselves if you look into the details of the statement and the dot plot that they released yesterday but at the same time if you listen to the rhetoric that Janet Yellen came about talking about concerns over China, worries about emerging markets and the global economy I fail to see how that situation will have resolved itself by December which is what they are implying in terms of their interest rate forecast. So, for now they are still saying December, but as we edge nearer to that date we may well find that we slip into 2016.
Latha: I want your views on emerging market equities. Yellen alluded to slower growth, will that be seen a negative?
A: That is a good question and the answer is actually a yes. Up until now, very easy monetary policy, a very loose monetary policy has been a huge support to assets such as equities. But we may actually be pushing the edge of the envelope, because there comes a stage where everyone realises interest rates are low because growth is not good. And when we come to that realisation, then yes, we could see equities dip even though rates are already ultra low. And that would be extremely problematic for central banks who really do not have anything else left to do at that stage other than more quantitative easing (QE).
Reema: Fed up until now has had two mandates to decide when to raise rates. One was job growth and the other one was inflation. Do you think they have added a third mandate because for the first time, Janet Yellen alluded to global economy, the financial developments, so do we now need to start tracking the data from China to find out when the rate hike will take place?
A: Again, that is a very interesting point. I do not think the Fed has actually introduced a third mandate. They are already having difficulty meeting their first two. In fact, to be objective, if we look at the broadest measure of unemployment, you could say the Fed is failing abysmally, both on inflation and on unemployment. So, therefore to add a third pillar or a third mandate that they are also failing at which is to stabilise the global economy makes things even more difficult. But generally speaking, the Fed looks inwards rather than outwards and I think they are actually just reaching excuses at the moment.
Latha: Finally, your view on India?
A: We have a very problematic global backdrop where the Federal Reserve isn’t brave enough to raise interest rates 25 bps coming up for the best part of the decade after the onset of the financial crisis and against that backdrop of course with China also slowing or commodity prices tumbling you would imagine that India would be looking shaky but what we really are seeing is that large economies in the global market that have significant domestic consumption and don’t have to worry about exporters to everybody else are arguably best placed with oil prices falling and commodity prices falling and India still looking stable. That is great, that is a huge gain in terms of real purchasing power for the Indian consumer and that can continue to drive growth going forward.