Morgan Stanley economist takes CEO Gorman's bet on Fed increase

NEW YORK: Morgan Stanley Chief Executive Officer James Gorman found a taker for his bet on the U.S. Federal Reserve raising interest rates this year: his own economics team. Gorman says he'd "put good money" on the Fed's first rate increase since 2006 coming in 2015 as unemployment falls and the balance sheets of banks, consumers and companies all improve.

"In this environment how could we not have a rate increase?" Gorman told Bloomberg Television. Not to Ellen Zentner, a senior U.S. economist for Morgan Stanley in New York. Already predicting the Fed would wait until next January to act, Zentner and colleagues revised their forecast to show Chair Janet Yellen not pulling the trigger until March 2016.

She reckons that falling oil and a rising dollar will weaken inflation, as measured by the core personal consumption expenditures price index, to 1.2 percent this year, compared to 1.4 percent in 2014 and a previous estimate of 1.9 percent.

"Our lowflation expectation presents a persistent downside risk to the U.S. economic outlook," Zentner and her team wrote in a report dated Jan. 26. "If the data evolve in line with our outlook, the Fed will find it difficult to remain anything but patient into year-end."

That view was bolstered today when Singapore unexpectedly eased monetary policy, just days after the European Central Bank introduced quantitative easing. For what it's worth, the consensus is with Gorman. Of 53 forecasters polled by Bloomberg News, 45 percent see a rate increase in June after Fed officials said last month they expect to shift this year. As Yellen convenes Fed policy makers in Washington today, the fact there is a difference of opinion at 1585 Broadway -- Morgan Stanley's headquarters - - let alone the Fed's offices on Constitution Avenue highlights the challenge she faces in both deciding when to raise rates and how to communicate her outlook. The median estimate of Fed officials in their so-called dot plot was for a 1.25 percent benchmark rate by the end of this year. That amounts to at least four rate increases. By contrast, Fed funds futures barely indicate one rise by year-end.