Expect More US Rate Hikes, Morgan Stanley Says

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By Rudi Filapek-Vandyck

Morgan Stanley economists Richard Berner and David Greenlaw have revised their US interest rate hike forecasts. They now believe the Federal Reserve Bank is likely to raise US interest rates by 25 basis points again at its next meeting at the end of June with a possibility that interest rates will go up further still in September.

Previously, both economists had penciled in the Fed would go on pause and reassess the need for further tightening at the September meeting of the Federal Open Market Committee.

The main reason for the change in the US official interest rate outlook is the tough stance Fed officials have taken towards taming inflation recently – tougher than the economists would think necessary previously.

Both Morgan Stanley economists note the market is currently priced for a Fed that tightens in June but not in August. As a result, the US bond market will still have to go through some adjustments, they believe.

If this scenario unfolds there lay more challenges ahead for so-called risky assets.

Ironically, both economists comment, "the volatility about policy expectations isn’t helping Fed credibility, but it may be raising risk premiums in a way that makes financial conditions more restrictive and ultimately does help the Fed."

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