The Federal Reserve raised its inflation expectations and moved up the timeframe on when it will next hike interest rates. However, the central bank gave no indication as to when it will begin cutting back on its aggressive bond-buying program, though Fed chairman Jerome Powell acknowledged that officials discussed the issue at the meeting.
In an interview with CNBC-TV18, Arvind Sanger, managing partner of Geosphere Capital Management and Rob Subbaraman, head-global macro research at Nomura, discussed at length about what this means for emerging market investors.
First up, Sanger said, “I will be a bit patient but I am not panicking. This is inevitable; at some point, the rates are going to rise and at some point, the 10-year yield is going to go at 2 percent, not in the near term, but it is going to get there as we normalise in the economy. A few days back, I had said that inflation is going to be wrong, but what we saw from the Fed (at policy meet) is some recognition that inflation is there, and they can stay accommodative at the level that they have been during the crisis period of COVID last year.”
Meanwhile, Subbaraman said, “It’s clear from the Federal Open Market Committee (FOMC) meeting that the Fed is starting to turn a bit more hawkish and the risks, going forward, are that tapering and rate hikes could be brought for more, and so the risk is that at some point of time, we could have a snapback higher in US treasury yields.”
He believes that emerging markets need to be cautious as US yields may rise sharply at some point in time. He added further that the risk of a sharp upward move in yields exists if inflation moves higher sharply.
Subbaraman said, “The biggest risk to India is inflation. I expect rate hikes of 75 bps next year in India."
For the entire discussion, watch the video.