Morgan Stanley (NYSE:MS) expects the US Federal Reserve to raise interest
rates six times this year by a total of 150 basis points, a bigger increase
than previously estimated, according to a research report from the bank on
Thursday (17/02).
Big investment banks had been forecasting even stronger rate hikes for 2022
after hotter-than-expected inflation data increased pressure on the Fed to
take a tougher stance on rising prices.
"Following recent changes to our inflation outlook, we now expect the Fed to
deliver a total of six 25bp hikes this year," Morgan Stanley US Chief
Economist Ellen Zentner wrote in a report.
The Fed is likely to raise interest rates by 25 basis points at the end of
its March policy meeting, followed by an additional 25 basis points in May,
June and July, with two hikes in September and December, according to Morgan
Stanley.
Data last week showed US consumer prices had risen the most since the early
1980s, fueling market speculation for a massive 50 basis point hike from the
Fed's March 15-16 meeting.
Morgan Stanley earlier said 125 basis points of policy tightening this year
would be "appropriate".
The Fed's current effective fund target ranges from 0-0.25%.
While the report added, the Federal Reserve needs to move more aggressively
away from accommodation policies than it did in the aftermath of the Great
Recession by raising interest rates more quickly and shrinking the balance
sheet immediately, Cleveland Fed President Loretta Mester stated Thursday
(17/02).
"Unless a fundamental change in the economy, I anticipate that it would be
appropriate to raise funds rates sooner this time and start reducing the
size of the balance sheet and sooner than last time," Mester said during a
virtual event hosted by New University's Center for Global Economics and
Business. York.
Policymakers are expected to start raising interest rates from near-zero
levels when they meet next month and begin reducing the Fed's portfolio
almost $9 trillion soon after.
Top brass debated how quickly to raise interest rates to combat the spike in
inflation seen in decades.
St. Louis Fed President Jim Bullard called for the Fed to raise rates by a
full percentage point in July, while others supported smaller hikes to begin
with.
Mester said he would support removing accommodation at a faster pace in the
second half of the year if inflation does not subside by mid-year, and at a
slower rate if inflation falls faster than expected.
The policymaker said he sees inflation remaining above 2% this year and in
2023, with risks tilted to the upside.
Mester also said he supports selling some of the Fed's mortgage holdings at
some point to accelerate the move to portfolio investment especially in
Treasury securities.
He is one of the officials who see the asset sale as a backup plan for the
central bank as it shrinks a balance sheet that has risen during the
pandemic.
