Morgan Stanley: December Rate Hike Wouldn't Hurt Economy

Will the Federal Reserve raise its benchmark rate in December? According to Ellen Zenter of Morgan Stanley, this is a likely outcome and a rate hike by year end won't hurt the economy. According to Zenter, interest rate sensitive sectors will face headwinds following a rate hike, but the household balance sheet is "little exposed" to variable rates and corporate debt rollover is "largely a 2018 story." At the same time, housing demand is "supported by rising household formation rates" and further home appreciation continues to "whittle away at negative equity and support spending on home improvements." Accordingly, the analyst maintained her 1.8 percent growth forecast for both 2016 and 2017. Zenter also noted that the Fed's 2.0 percent inflation target remains "elusive" as headline inflation remains "largely oil-driven." "Policymakers will try to engineer a December hike that garners the least market reaction, and they have become increasingly confident in their ability to do so," Zenter wrote. "New York Federal Reserve Bank President Dudley expressed it best on November 18th when he said, ‘The good news is that this is probably the most well advertised, discussed, thought about, mused-over prospect of beginning a normalization of monetary policy in history." Finally, Zenter also lowered her NAIRU (non-accelerating inflation rate of unemployment) expectations in 2016 to 4.7 percent from a previous 5.0 percent. The analyst noted that a lack of "broadly accelerating" wage growth drags the Fed's median estimate of NAIRU lower, which "further informs a shallow stance" on monetary policy tightening.