Episode summary
Why Central Banks Are Raising Rates Again
Thoughts on the Market (Morgan Stanley)
· · 5 min · Hosts: Seth Carpenter
Summary
Morgan Stanley’s Seth Carpenter says central banks have turned more hawkish because growth has held up better than expected while renewed energy-price pressure has made inflation look stickier. He says Morgan Stanley has revised its outlooks for the Fed, the ECB, and the Bank of Japan to include more rate hikes, even though each economy is facing a different mix of shocks.
For the Fed, Carpenter says the key change is that policy now looks less restrictive than officials want, so Morgan Stanley expects two more hikes in December and March, taking the terminal rate to 4 and a/4 to 4 1/2. He frames that as a recalibration rather than a fundamental policy shift, but says it should still push investors to price tighter policy sooner and support a firmer dollar.
In Europe, he says higher natural gas and energy prices have materially raised inflation forecasts, while resilient activity makes another ECB hike in December more likely. In Japan, he says the BOJ is moving away from decades of deflation-fighting and now faces upside inflation risk, with further hikes expected even as Morgan Stanley thinks markets are too aggressive on the ultimate rate path. The broad implication, he says, is higher policy rates and a stronger dollar than markets expected at the start of the year.
Key takeaways
- Carpenter says Morgan Stanley now expects the Fed to deliver two more hikes, in December and March, lifting the terminal rate to 4 and a/4 to 4 1/2.
- He argues the Fed’s move is a recalibration of policy, not a fundamental shift, but it still leaves markets underpricing how much tightening is left.
- Carpenter says the ECB is likely to add another hike in December because higher energy costs are feeding inflation and euro-area growth has stayed resilient.
- He says the BOJ now faces an inflation overshoot problem and Morgan Stanley expects rates to rise to one and a half percent in December and about 1 and three/4ers percent in March.
- Morgan Stanley’s FX view remains for dollar strength, especially against the yen, while Japanese rates rise only gradually.
Notable quotes
“Over the past two weeks, our economists here at Morgan Stanley have revised their outlooks for the Fed, the ECB, and the Bank of Japan to include more rate hikes”
“we now expect two additional rate hikes in December and in March that'll bring the terminal rate up to 4 and a/4 to 4 1/2”
“the Fed appears to be reassessing not just the inflation outlook, but the amount of restraint that's required to bring inflation sustainably back to target”
“we expect them to raise rates to one and a half percent in December and then further raise rates to about 1 and three/4ers percent in March”
How the episode opens
Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's global chief economist and head of macro research. And today I'm going to talk about what all the movement we've seen in central banks and how it's changing our forecasts.
It's Tuesday, September 22nd at 10 a.m. in New York. Over the past two weeks, our economists here at Morgan Stanley have revised their outlooks for the Fed, the ECB, and the Bank of Japan to include more rate hikes.
Each economy faces different challenges, but all three central banks have arrived at roughly the same conclusion. Growth has remained remarkably resilient despite all of these shocks hitting the global economy, and renewed energy price pressures have increased the risk that inflation proves more persistent than they had previously expected. The clearest example and our biggest revision here is the Fed.
Now, for much of this year, we had actually thought the Fed might avoid hiking interest rates altogether. But in addition to this increase that we just saw at the September FOMC meeting, we now expect two additional rate hikes in December and in March that'll bring the terminal rate up to 4 and a/4 to 4 1/2. While Chair Walsh has highlighted the inflationary implications of higher energy and commodity prices, for me the more important signal was the assessment that policy is not sufficiently restrictive.
So in our view, the Fed appears to be reassessing not just the inflation outlook, but the amount of restraint that's required to bring inflation sustainably back to target. But even with all of that said, we're still looking at this shift as more of a recalibration of policy for the Fed rather than a fundamental shift in policy. And so the market may have just may have overestimated how much hiking is left.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- central bank hawkishness
- fed rate hikes
- ecb policy
- bank of japan rates
- inflation persistence risks
Companies and tickers mentioned
- MS
- Morgan Stanley
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Watch “Why Central Banks Are Raising Rates Again” on YouTube
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