As markets geared up for the first appearance of Federal Reserve (Fed) chair Janet Yellen on Friday, Morgan Stanley (NYSE:MS) insisted in a report that an imminent rate hike would be a mistake.
The investment bank analyzed the tug of war between the Fed and financial markets that resulted in the current monetary policy requiring pauses between rate hikes.
In general, the Fed tightens and markets reactive negatively, requiring an adjustment period before the tightening cycle can continue.
These experts noted in the report that this negative feedback loop was generally overcome thanks to strong underlying growth.
However, they pointed out that the growth factor was “missing this time around and likely to deep hikes spaced far apart”.
Morgan Stanley recognized the recent hawkish message from both the April meeting minutes as well as Fed officials as an attempt to force markets to price in a more reasonable level of risk around a near-term rate hike and admitted that their call for there to still be only one rate hike this year, in December, was under pressure.
However, they suggested that the “Fed is more vulnerable today to the negative feedback loop than in prior cycles.”
“Slow growth makes it more difficult in this cycle to fight against the negative feedback loop and ultimately leads to a stop-and-go policy with long pauses between hikes,” they explained.
Morgan Stanley further warned that “an imminent hike would be a mistake” as first half growth is averaging well below the Fed’s estimate of economic potential and there are abundant downside risks to the economy.
Regardless, the firm repeated its forecast for only one hike in December but reiterated the risk that it could come sooner than expected.
“At this stage it’s unclear if the Fed is gunning for June or simply gunning for a rate hike soon,” they concluded.
News Source: http://www.investing.com/