Morgan Stanley economists have revised their rate outlooks for the Federal Reserve, European Central Bank and Bank of Japan, now anticipating additional hikes from all three central banks.
The most substantial revision involves the Federal Reserve. Morgan Stanley previously expected the Fed might pause rate increases. Following the September Federal Open Market Committee meeting's rate hike, the firm now projects two more increases in December and March, elevating the terminal rate to 4.25-4.5 percent.
Seth Carpenter, Morgan Stanley's Global Chief Economist, identified the Fed's assessment that current policy is insufficiently restrictive as the more significant signal. Carpenter said the Fed appears to be reassessing both the inflation outlook and the degree of restraint required to return inflation sustainably to its target.
Morgan Stanley's rate strategists anticipate investors will move forward expectations for additional tightening in the near term, while increasingly questioning how long restrictive policy can persist before economic growth slows.
Renewed energy price pressures have bolstered the case for U.S. dollar strength. In recent months, rising energy prices had supported the euro, as the ECB appeared to respond more aggressively than the Fed. Morgan Stanley's foreign exchange strategists now favor continued dollar strength, particularly against the Japanese yen.
Europe faces comparable inflation pressures through energy markets. The renewed increase in natural gas prices prompted Morgan Stanley to materially revise its inflation forecast for the euro area, leading to a projection of an additional ECB rate hike in December. Economic activity in the euro area has also proven more resilient than Morgan Stanley anticipated.
