Morgan Stanley: Fed Rate Hike Coming Sooner Than Predicted

In a new report, Morgan Stanley analysts update their U.S. economic outlook for the remainder of 2015. Analysts discuss the labor market, the strong dollar and the Federal Reserve’s first rate hike.

GDP growth forecast
Analysts list bad weather, the West Coast port strikes, aggressive capex cuts in the Energy sector and caution among consumers as reasons why they are scaling back their GDP growth forecasts. “We have taken down our 4Q/4Q growth forecast for 2015 by 0.5 percentage points to 2.3%, the low point of the Fed’s central tendency range,” analysts explain.

Energy sector wasting little time
The deterioration of energy capex that analysts had previously called for in the second half of 2015 has come early and has been more extreme than predicted. However, analysts remain optimistic about business growth outside of the Energy sector.

Labor market
Analysts are now calling for 5.1 percent unemployment by the end of the year. In addition, they forecast wage growth to increase from 1.9 percent in 2014 to 2.5 percent in 2015.

Housing
Analysts admit that the housing recovery is still “sluggish,” but they believe that general improvements to the labor market will likely give the housing market a boost. They are calling for up to a six percent increase in housing prices in 2015.

Strong Dollar
The trade-weighted U.S. dollar (TWDI) gained 8 percent in the second half of 2014, and analysts are now calling for another 13.5 percent gain in 2015 and a 3.7 percent increase in 2016. According to the report, every sustained 10 percent increase in the TWDI reduces GDP growth by 0.5 percent.

Rate Hike
Morgan Stanley analysts shifter their prediction for the Fed’s first rate hike up by one quarter, from March 2016 to December 2015. Analysts believe that language from the March meeting indicated the Fed’s strong intentions to raise rates by year’s end.