According to Morgan Stanley, the Fed is on hold on until next year.
In a new note to clients, Morgan Stanley economist Ellen Zentner and her team push their forecast for the Federal Reserve’s first interest rate hike out until March 2016.
A main driver of Morgan Stanley’s revised forecast is its downwardly revised outlook for oil prices, which will significantly weigh on inflation.
In 2015, the firm now expects Brent crude prices will average $US52 a barrel, down from expectations for prices to average $US88 a barrel in December.
The firm said that every 10% decline oil prices boosts GDP growth by 0.1%, but takes 0.5% out of headline inflation. For the last few years, the Fed has undershot its 2% inflation target, and with the decline in oil prices, and as a result gas prices, this target is increasingly out of reach for the Fed.
Additionally, the firm expects the dollar will continue appreciating in 2015, pressuring GDP growth and lowering core PCE, the Fed’s preferred measure of inflation.
Morgan Stanley writes:
“Based on our outlook, a rate hike as early as the Fed’s mid-2015 guidance looks increasingly implausible. Furthermore, we are shifting our longstanding out-of-consensus expectation for the first rate hike further out — from January 2016 to March. Moderating growth beyond 1Q, and more importantly, falling core inflation and tenuous inflation expectations, alongside little sign of building wage pressures present a strong case for patience. This would be consistent with rhetoric from several policymakers that the cost of tightening too soon is high compared with tightening too late. As before, we expect that having delayed, the Fed will ned to play catch-up at every meeting. By March 2016, our forecast has both headline and core inflation rising, with wage growth gaining further momentum as the unemployment rate approaches a 4-handle, giving the Fed ample ammunition to justify removing policy accommodation at a steady pace.”
The recent news in central banking has been out of Canada and Europe, but let us not forget that today kicks off the Fed’s latest policy meeting, with a statement — but no press conference from Chair Yellen — expected on Wednesday at 2:00 pm ET.