Morgan Stanley's Zentner Says Fed Will Hike in September

TL;DR

Morgan Stanley predicts two Fed rate hikes, starting in September.

Transcript

I loved your note on the FED at a consensus you see the first hike coming in September and only two this year why yeah so we're not necessarily at a consensus on the number of rate hikes we expect to this year but the timing is quite out of consensus if I'm looking at the world through a monetary policy lens and I know that I've undershot my price ... Read More

Key Insights

• Ellen Zentner from Morgan Stanley predicts the Federal Reserve will implement two rate hikes this year, with the first occurring in September, which deviates from the consensus on timing.
• The rationale behind delaying rate hikes is to allow inflationary pressures to build, given that the Fed has undershot its 2% price stability goal for eight consecutive years.
• There is uncertainty surrounding fiscal policy, with about half of monetary policymakers incorporating it into their forecasts. This uncertainty contributes to the cautious approach regarding rate hikes.
• Fed Chair Janet Yellen's recent testimony to Congress was perceived as hawkish, yet Zentner suggests that policymakers, including Yellen, remain cautiously optimistic about the economic outlook.
• Zentner believes that the Fed should remain cautious and allow inflationary pressures to build, as core PCE prices are unlikely to rise significantly in the first half of the year due to tough year-on-year comparisons.
• There is speculation about whether Fed Chair Yellen still has a strong influence over the committee, especially with potential changes in the Fed board under the Trump administration.
• Some clients speculate that the Fed might avoid rate hikes around significant geopolitical events, such as the French election, but Zentner argues that prudent monetary policymaking should not be influenced by such factors.
• Zentner emphasizes the importance of a cautious approach to monetary policy, suggesting that premature rate hikes could be detrimental, especially given the current economic uncertainties.

Questions & Answers

Q: Why does Ellen Zentner predict a rate hike in September?

Ellen Zentner predicts a rate hike in September because she believes that the Federal Reserve needs to allow inflationary pressures to build, given that it has undershot its 2% price stability goal for eight consecutive years. The timing also reflects the need for more certainty regarding the economic outlook, particularly in light of uncertainties surrounding fiscal policy.

Q: How does fiscal policy uncertainty affect the Fed's rate hike decisions?

Fiscal policy uncertainty affects the Fed's rate hike decisions because about half of monetary policymakers have not yet incorporated fiscal policy into their forecasts. This lack of certainty contributes to a cautious approach, as policymakers want a clearer understanding of the economic landscape in the second half of the year before making decisions on rate hikes.

Q: What was the perception of Janet Yellen's recent testimony to Congress?

Janet Yellen's recent testimony to Congress was perceived as hawkish, suggesting that the bar for inflation to move higher and for unemployment to decrease was not very high. However, Ellen Zentner interprets this as policymakers, including Yellen, being cautiously optimistic about the economic outlook, warranting gradual increases in the federal funds rate.

Q: Why does Zentner believe the Fed should remain cautious with rate hikes?

Zentner believes the Fed should remain cautious with rate hikes because core PCE prices are unlikely to rise significantly in the first half of the year due to challenging year-on-year comparisons. Additionally, previous increases in the dollar have yet to fully impact the economy, necessitating a cautious approach to avoid premature rate hikes.

Q: Is there speculation about Janet Yellen's influence over the Fed committee?

Yes, there is speculation about Janet Yellen's influence over the Fed committee, particularly with potential changes in the Fed board under the Trump administration. Ellen Zentner suggests that while Yellen has a strong following within the committee, there are questions about whether she still leads the committee or if the committee will lead her throughout 2017.

Q: How might geopolitical events influence the Fed's rate hike decisions?

Some clients speculate that the Fed might avoid rate hikes around significant geopolitical events, such as the French election. However, Ellen Zentner argues that prudent monetary policymaking should not be influenced by such factors, as decisions should be based on economic conditions rather than external geopolitical events.

Q: What is Zentner's view on the pace of rate hikes this year?

Zentner's view on the pace of rate hikes this year is that the Federal Reserve should implement two hikes instead of one, as seen in each of the past two years. This reflects a more optimistic outlook on the economy, but Zentner emphasizes that the timing should remain cautious to allow inflationary pressures to build.

Q: How does Zentner describe the current economic uncertainties?

Zentner describes the current economic uncertainties as significant, particularly concerning fiscal policy and the potential impact of previous dollar increases. These uncertainties necessitate a cautious approach to monetary policy, avoiding premature rate hikes that could disrupt the economic recovery and stability.

Summary & Key Takeaways

• Ellen Zentner, chief U.S. economist at Morgan Stanley, suggests the Federal Reserve will implement two rate hikes this year, starting in September. This prediction is based on the need to allow inflationary pressures to build, as the Fed has consistently undershot its 2% price stability goal.

• Zentner notes the uncertainty surrounding fiscal policy, with only about half of policymakers incorporating it into their forecasts. This uncertainty contributes to the cautious approach regarding the timing of rate hikes, despite Fed Chair Yellen's recent hawkish testimony to Congress.

• There is speculation about Fed Chair Yellen's influence over the committee, especially with potential changes under the Trump administration. Zentner argues for a cautious approach to monetary policy, avoiding premature rate hikes that could be influenced by geopolitical events or changes in the Fed board.