Daily Management Review

Strategist Sri-Kumar Says Even One US Rate Hike Can’t Be Handled By The World Economy


Strategist Sri-Kumar Says Even One US Rate Hike Can’t Be Handled By The World Economy
There could be sweeping impacts on the U.S. as well as the world economics if there is even one small interest rate increase by the Fed, analyst and economists Komal Sri-Kumar said during a TV interview.
"I think they are going to hike" on March 15, Sri-Kumar said during the interview. The words seem to echo a theory that is presumably shared by many analysts.
"But that is going to prompt capital outflows from the euro zone, especially with the political risk. It is going to increase the capital outflow from China, and the U.S. economy will feel the impact," Sri-Kumar said.
Sri-Kumar, who is the president of Sri-Kumar Global Strategies, said that downward pressure on the euro could be put by these moves by the Fed which would have the effect of strengthening the dollar against other currencies and hence the pressure on the euro.
But because European exports would become cheaper to foreign partners, some of that pressure "is probably good for the European economy from a trade perspective", he acknowledged.
"The problem is in terms of capital outflows," he said. However the risk in overseas markets could be raised by divestment in Europe, he further cautioned. "These economies, despite some positive numbers, ... they are not in strong enough shape to take an increase in interest rates on the part of the United States."
According to Sri-Kumar, a long period of liquidity, or market price stability, is the reason for this weakness in global markets.
"We have had too long a period of excessive liquidity," he said. "The markets have been distorted. The bond yields are very, very low, much lower than they would have been in the absence of quantitative easing and zero interest rate policy."
Sri-Kumar said that the United States may have been better off had the Fed started hiking rates as the country emerged from the 2008 financial crisis, and as a result of such policies, small changes in the U.S. economy is seen to reverberate worldwide.
There would have been a more rapid improvement in the economy, equity markets would be rising on the back of fundamentals rather than liquidity creation, and bond yields would be up by this time if rate normalization had started in 2009, the strategist argued.
"I said they should have raised by 1 to 1½ percentage points three years ago. The markets would have taken a hit, but we would be on the way up. But if you do this Chinese water torture in terms of slight increases, you are not going to get sustained economic growth," Sri-Kumar said.
Fed Chair Janet Yellen will become "a once-a-year Yellen in 2017 as well" once the Fed sees the impact of its expected March hike, Sri-Kumar predicted.

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