The US economy is likely going to be in the backdrop of a flatter yield curve for quite some time because the Fed is going to be raising rates, but they are going to be telling the markets that their end game is probably much lower than where they thought it was, said Ellen Zentner of Morgan Stanley.
A lot of the activity that is being witnessed up to the rate hike could be the anticipation of higher rates, but rates are not going to rise that much. So, it’s unlikely higher rates would be very restrictive to economic activities overall, certainly not when the balance sheets of households are considered, very little of which is subject to a variable rate.
Morgan Stanley thinks the economy takes higher interest rates and markets very well next year, she noted.
The economy has been consistently adding 200,000 jobs a month and the average hourly earnings have been ticking up a little bit. Asked at what point would it put the economy back in a more traditional, more familiar upward rate-hike path since those numbers at least have been pretty steady and reasonably strong lately, Ellen said the economy is witnessing just enough wage growth to strengthen the fundamental picture, but not so much that makes policy makers nervous.
The biggest risk to the Fed is to abandon that gradual increase and raise rates at a quicker pace. So far, the economy has just witnessed wage gains in the low end of the income scale. It has not seen gains broaden out to higher paying industries, which is what happened in 2005 when wage growth was going nowhere and then it suddenly shot up and the Fed really had heated discussions around a faster rate of hikes, which, incidentally, were led by Janet Yellen.
Similarly, if it turns out now the labor market is stronger than what markets think and if wage growth suddenly picks up, policy makers may have to abandon that gradual promise.
While Morgan Stanley has been watching for such sudden turns, it is yet to see stronger wage growth bleed through into the higher paying industries. So, it’s been just a very slow slog upward, which is just enough to give policy makers comfort, but not make them nervous, she concluded.
You can watch the video here.