Tags: Morgan Stanley | Fed | rates | oil

Morgan Stanley: Fed Won't Raise Rates Until March 2016

By    |   Tuesday, 27 January 2015 01:48 PM

Morgan Stanley's economic team can't be called a bunch of followers.

While the consensus view is that the Federal Reserve will begin raising interest rates around mid-year, Morgan Stanley analysts don't expect a move until March 2016. They just extended that timeline from a previous forecast of January 2016.

The reason? A downward revision in the economists' forecast for oil prices, they write in a commentary obtained by Business Insider. They now forecast Brent crude will average $52 a barrel this year, down from their December prediction of $88.

While every 10 percent drop in oil prices lifts GDP growth by 0.1 percentage point, it trims inflation by 0.5 point, the economists say.

The Fed has an inflation target of 2 percent, and its favored inflation measure totaled only
1.4 percent in November.

"Moderating growth beyond Q1, and more importantly, falling core inflation and tenuous inflation expectations, alongside little sign of building wage pressures present a strong case for patience" by the Fed, the economists write.

"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."

Former Treasury Secretary Larry Summers says the Fed would do well to remain cautious about raising rates. A premature tightening could put the economy into a real pickle, he said at the World Economic Forum in Davos, Switzerland, Ambrose Evans-Pritchard, international business editor of The Daily Telegraph, reports.

"Deflation and secular stagnation are the threats of our time. The risks are enormously asymmetric," the Harvard professor said. "There is no confident basis for tightening. The Fed should not be fighting against inflation until it sees the whites of its eyes. That is a long way off."

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Morgan Stanley's economic team can't be called a bunch of followers.
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Tuesday, 27 January 2015 01:48 PM
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