Episode summary
One Global Shock, Different Rate Paths
Thoughts on the Market (Morgan Stanley)
· · 12 min · Hosts: Seth Carpenter, Michael Gapen, Yens Eisenmidz, Jathan Aaya
Summary
The discussion centers on how a global energy shock is feeding into monetary policy, but not in the same way everywhere. The host and the economists argue that the Fed is tightening mainly to lean against persistent inflation and possible second-round effects, not to crush demand outright. U.S. financial conditions have already tightened, and the expectation is for only a few more hikes if labor-market overheating does not appear.
In Europe, the ECB and the Bank of England are framed as operating from very different starting points. The ECB had already normalized policy and is now responding to renewed inflation pressure, while the Bank of England faces a similar tradeoff between energy-driven inflation and slower growth. The European view is that markets may be pricing too many rate hikes, even though a further move remains possible if inflation and growth stay firmer than expected.
Asia is presented as less inflationary but still affected by the same external shock. The Bank of Japan is expected to hike only twice, in December and March, because Japanese inflation is seen as driven more by FX weakness and higher commodity prices than by domestic demand. Across emerging and developed Asia, central banks are expected to respond more through modest countercyclical hikes than through aggressive tightening.
Key takeaways
- The Fed is seen as recalibrating policy against persistent inflation, with two more hikes and about 75 basis points of total tightening expected by March next year.
- The ECB is viewed as still having upside inflation risk, but the market is priced for too many hikes; the call is one more move in December, with March only a possibility.
- The Bank of Japan is expected to hike only twice, because inflation is judged to be driven mainly by FX weakness and higher commodity prices, not demand pressure.
- The economists said tighter financial conditions in the U.S. and Europe may already be doing part of the central banks’ work.
- Across Asia, most central banks are expected to respond with smaller countercyclical hikes rather than aggressive inflation-fighting moves.
Notable quotes
“this is a story about persistent inflation. And I would look at it as a recalibration of policy”
“The ECB was the only central bank that got inflation back to target and so was already well advanced in its sort of rate normalization cycle”
“We expect the BOJ to hike its policy rate twice. First in December and then again in March next year”
“Financial conditions have tightened. we would characterize financial conditions as let's call it moderately restrictive”
“the situation in Asia is somewhat different. They don't have a big inflation problem, but we are seeing strength in growth coming in because of exports”
How the episode opens
Welcome to Thoughts in the Market. I'm Seth Carpenter, Morgan Stanley's global chief economist and head of macro research. — I'm Michael Gapen, chief US economist. — I'm Yens Eisenid, chief Europe economist. — And I'm Chanaya, chief Asia economist. — Yesterday we talked about why global growth is continuing to power on, why investment is playing a larger role, and how that investment cycle is spreading across regions. Today, we're going to take a deeper dive and think about monetary policy and what's going on. It's Friday, October 23rd at 10 a.m. in New York,
4 p.m. in Frankfurt, — And 10 p.m. in Hong Kong.
When I look around the world and think about especially developed market central banks, well, they're kind of all tightening at the same time, but maybe for somewhat different reasons. Let's start with just a really broad policy question. Why are the Fed, the ECB, the Bank of England, and the Bank of Japan all tightening policy when their economies look so different?
Mike, I'm going to start with you back here in the US with the Fed. How are you thinking about what the Fed is doing right now? Are they just reccalibrating the stance of policy or is this a fundamental change where they're trying to re in growth in the economy?
The way I look at it is this is a story about persistent inflation. And I would look at it as a recalibration of policy. I think the majority of participants on the FOMC know the Fed can't pump more oil or get, you know, oil through the straight of Hormuz.
So, it's about leaning against second round effects. Inflation is gradually moving lower. They've characterized this as dissatisfaction with the speed of convergence to the target.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- global energy shock
- monetary policy
- interest rate paths
- inflation persistence
- central bank tightening
Companies and tickers mentioned
- MS
- Morgan Stanley
Watch the episode
Watch “One Global Shock, Different Rate Paths” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
More from Thoughts on the Market (Morgan Stanley)
Thoughts on the Market (Morgan Stanley), this episode and its artwork belong to Morgan Stanley. Octagon is not affiliated with the show; this page is an independent summary.
