Ellen Zentner, Morgan Stanley’s chief U.S. economist, said of the Federal Reserve’s policy of raising interest rates to curb inflation: “We strongly believe that the authorities have done their job here, but they don’t want to leave the door open.” ” he pointed out.
Zentner joined the podcast “What Goes Up” to discuss last week’s decision by the Federal Open Market Committee (FOMC) to keep key interest rates unchanged, as well as the outlook for monetary policy and the U.S. economy going forward.
With inflation subdued, the Fed is likely to keep interest rates on hold until it is ready to cut rates next year, he said. In the short term, there is a risk that Congressional budget negotiations will run out, leading to a government shutdown at the start of the new fiscal year in October, and that monetary authorities may not have all the economic data they need to make decisions. This makes it more likely that they will maintain the status quo at their next meeting in November.
The following is part of Mr. Zentner’s remarks.Click here to listen to the full podcastclick。
Q: What do you think about the looming possibility of a government shutdown?
A: In monetary policymaking, uncertainty tends to lead to policy paralysis. Therefore, in the event of a government shutdown, the scope of the shutdown will be important. If there is a partial closure, some institutions will continue to operate, and employment statistics will continue to be available.
If there is a complete shutdown, no government statistics will be available. If the Federal Reserve lacks data to scrutinize, it will be unable to decide on the direction of interest rates, and the agency’s lens will become blurred.
An economic blow would occur, for example, if the government shuts down completely and all but essential workers are furloughed. We estimate that each week of closure reduces gross domestic product (GDP) growth by about 0.2 percentage points.
This time, financial authorities have plenty of time. The Bank will decide whether to raise interest rates further by the end of the year, leaving open the possibility of further hikes if necessary. I strongly believe that the monetary authorities are done here, but they are leaving the door open.
A rate hike in November seems highly unlikely given the data released in the coming weeks and month, but officials still have time to consider it at their December meeting.
Ellen Zentner
Photographer: Christopher Goodney/Bloomberg
Q: Is there a possibility of further interest rate hikes within this year?Are you expecting an interest rate cut from March next year?
A: There are always hurdles, but I think the hurdles for the financial authorities to do something by the end of the year are getting higher.
Next year, we expect a cycle of interest rate cuts starting in March. The rate is 25 basis points (bp, 1bp = 0.01%) per quarter. The financial authorities expect two rate cuts next year. It may seem a little cynical, but the difference between our forecast and ours is due to a difference in opinion regarding the outlook.
We expect inflation to continue to slow. In other words, even if the policy interest rate is maintained at 5.25-5.5%, the real interest rate is expected to remain in a highly economic-suppressive state of around 2%.
The Federal Reserve predicts real interest rates will rise from about 1.9% at the end of this year to 2.5% next year. Applying this to the macro model, it does not appear that the authorities really want a soft landing. It is inconsistent for the monetary authorities to try to achieve a soft landing while suggesting that real interest rates need to rise by another 0.6 points next year. Something doesn’t feel right.
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2023-09-24 17:23:00
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