The Chief US Economist of the United States: The Federal Reserve has now completed the rate hike

Ellen Zentner, chief US economist at Morgan Stanley, has this to say about the Fed's move to tame inflation by raising interest rates: "I strongly think they're done here, but they have leeway."

On the What Goes Up podcast, Zentner discussed the Fed's decision last week to leave the federal funds base rate unchanged, as well as her expectations for future monetary policy and the U.S. economy. As inflation cools, she said, the Fed will likely remain on hold until it is ready to cut interest rates next year. In the near term, Zentner said, a Republican-induced government shutdown could deprive policymakers of all the economic data they need to make decisions, supporting Fed officials to maintain the status quo at their November meeting.

Here are some of the topics Ellen Zentner responded to in the interview:

Q: A government shutdown is imminent. Tell us what you think about it?

A. When setting monetary policy, uncertainty often leads to policy paralysis. So when the government shuts down, the extent of the shutdown certainly matters. If it's a partial shutdown, some institutions will continue to operate, and we may continue to have information like payroll data, even if we don't have access to Census Bureau data, etc.

If there is a total government shutdown, then you really don't get any government data. So if we lack data that the Fed can officially use, then this will result in the Fed being unable to make decisions on the path of interest rates. The Fed's perspective becomes blurred. The damage to the economy comes from a total government shutdown, such as the firing of all non-essential workers. We estimate,Each week of shutdown reduces GDP growth by about 0.2 percentage points. Therefore, this is the key to affecting the economic outlook.

Now, we can go back and look at past government shutdowns, which in hindsight were just a blip in the economic outlook because the government would reopen. But there will be some permanent damage - the loss of restaurants, coffee vendors and others cannot be made up without the workers who buy lunch around the establishment. But the workers will go back to work. Congress has always approved back pay for those who were shut down. So, especially for income, it was a blip.

But for now,This is good for the Federal ReserveIn this case, they have a lot of time on their hands - they can wait until the end of the year to decide whether to raise rates further, and they have left the door open for further rate hikes if necessaryIndustrial foreign exchangeStrongly believe that they have now completed the rate hike, but they have also left the door open. therefore,Looking at the data in the coming weeks or a month, the possibility of a rate hike in November is very small. But after that, they still have a December meeting to consider.

Q: What is the reason for the Federal Reserve to raise interest rates again this year? You expect the Federal Reserve to start cutting interest rates in March next year, right?

Answer: Exactly.For them to raise interest rates in November and December, two things must happen.First, they are unhappy with the deepening slack in the labor market and the slowdown in job growth.They pointed this out in their statement. The three-month moving average of new jobs is now around 150,000. Now, the slowdown in job growth doesn't look durable, and we assume job growth starts to pick up again.Second, what really matters is the service industry.Assuming that core services also reaccelerate, to achieve this, core services would have to grow at around 0.6% month-on-month, which would be a considerable deviation from current trends.

When these factors are added together, you find that there is still a good chance of a rate hike in November and a rate hike in December. Based on our projections for the upcoming data, I firmly believe that the data will not meet that standard. But there is always a threshold, we just think they have a higher threshold for further rate hikes this year.

In 2024, we expect to start cutting rates in March. Cut rates quarterly, 25 basis points per quarter.The Fed now expects two rate cuts next year. It may be a bit duplicitous to say that, but the difference between the Fed's expectations and ours is a different view of the outlook.

Therefore,We expect inflation to continue to decelerateThis means that even if the Federal Reserve stabilizes interest rates between 5.25% and 5.5%, if inflation falls, thenReal interest rates will continue to remain at the restrictive level we predict around 2%, which is quite high historically. According to the Federal Reserve's forecast, real interest rates will rise further from around 1.9% at the end of this year to 2.5% next year. Putting this forecast into any macro model doesn't look like a forecast that the Fed really wants to achieve a soft landing for the economy. I think that's the internal consistency problem that can arise when forecasting by the committee. The Fed's median forecast suggests that real interest rates need to rise by a further 0.6 percentage point next year, but they want a soft landing, which is paradoxical. Something is wrong with that.