Analysts at Morgan Stanley reiterated their forecast that the Fed may tighten monetary policy twice in 2017. However, they noted several factors that may lead to an increase in interest rates in March.
In their message to customers, the Morgan Stanley (NYSE: MS) economists still do not agree with the majority opinion in the Fed about raising interest rates three times this year, pointing to the possibility of an increase only twice – in September and December.
However, financial markets that agree with the two rises in interest rates, are betting on the first increase as early as in June, with a probability of 68.5%.
What could cause the Fed to raise interest rates in March?
The Morgan Stanley explored the question of what can cause the Fed to take strong action in March, when the second meeting of 2017 will be held.
"Values higher than expected for a core price index for personal consumption expenditures in the United States and a significant decrease in the natural rate of unemployment (NAIRU) can change the Fed’s response to prevent the growth of tension until the next interest rate increase."
Analysts pointed out that the Fed doesn’t expect any serious changes in the unemployment and inflation.
As the analysts say: "if we are wrong and the unemployment rate will drop significantly below the NAIRU, then the Fed can increase interest rates sooner than expected."
They believe that such a situation is more likely during a sharp rise in confidence in the business community, when the results of the presidential election may soon translate into a high level of employment in the late phase of the economic cycle and labor market tensions.
The experts recommend to closely monitoring the values of the unemployment rate in the next two reports, which will be released before March 15, when the Fed meeting will take place.
Economists at Morgan Stanley believe that a rapid change in fiscal policy may be a factor which will change the current trends of unemployment and inflation. At the same time, the tone of Trump’s inaugural speech on January 20 will be an indicator of how smoothly the new administration will be able to collaborate with the Congress on the implementation of the key points of his plan.
As of today, the likelihood of the Fed to raise interest rates in March is only 22.9%.