(Bloomberg) — Morgan Stanley (NYSE:) abandoned its forecast for the Federal Reserve to raise interest rates once by year-end, and lowered its projection for Treasury yields.
“We and the markets underestimated Chair Powell’s appetite to deliver a preemptive strike against downside risks to the outlook,” Morgan Stanley analysts including Ellen Zentner wrote in a March 31 note. Fed Chairman Jerome Powell and his colleagues on March 20 pledged to end the central bank’s bond-portfolio run-down in coming months, and committed to watch and wait before deciding on any more moves in the policy interest rate.
Morgan Stanley now sees 10-year Treasury yields ending 2019 at 2.25 percent, down from 2.35 percent previously. They were at 2.44 percent as of 9:32 a.m. in London. It sees two-year yields at 2.05 percent, suggesting a modest steepening in the yield curve. It also means the market will — as now — be pricing in rate cuts, which the bank’s economists don’t think will be forthcoming.
“We don’t see an inconsistency,” the analysts wrote. Treasuries traders could simply be pricing in cuts further out in time — as indeed happened in 2006, when the Fed similarly suggested a pause in hiking, they wrote.
Morgan Stanley economists had previously projected a December rate rise.
(Adds reference to current 10-year yield in third paragraph.)
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