Morgan Stanley Economists Back Gorman by Shifting Fed Outlook

Morgan Stanley CEO James Gorman
James Gorman, Chief Executive Officer of Morgan Stanley. Photographer: Simon Dawson/Bloomberg

Chalk up a win in this round for Morgan Stanley Chief Executive Officer James Gorman.

Three months ago, Gorman said he would “put good money” on the Federal Reserve raising interest rates this year, only for his own team of economists to take the opposite side of the trade by predicting no increase until March 2016.

Now Morgan Stanley’s analysts have come around to their boss’s view and are predicting Fed action in December.

“The Fed has sent a strong message that it plans to hike rates this year,” Ellen Zentner and colleagues wrote in a report to clients on Sunday. “We take this message to heart.”

Explaining the switch, the economists said officials on the Federal Open Market Committee didn’t shift their projections for the path of rates even when they lowered their predictions last month for economic growth and inflation.

“This sends a strong message of the committee’s intent to hike rates this year, and implies it would take a sizable negative surprise to alter that course,” the economists said.

They had previously argued falling oil and a rising dollar would leave inflation too weak for the Fed to shift this year. By contrast, Gorman cited falling unemployment and improving balance sheets of banks, consumers and companies as reasons to expect the first Fed increase since 2006 in 2015.

Even with the revision, the Morgan Stanley economists are still contrarians. Their forecast of a December rise remains later than the third quarter increase predicted by the median of economists surveyed by Bloomberg News.

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