Crashing Consensus, MS Now Sees Fed Hiking 4 More Times On Coming Inflation Surge

Following the Fed's sudden, unexpected dovish reversal in January, few things are as consensus in the market as the narrative that the Fed's rate hikes have ended and Powell's next move will be to cut rates. According to the Fed Funds market, whereas odds of any futures hikes are now 0, the market sees a 25% probability of a rate cut at the Fed's January 2020 meeting.

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Others are even more aggressive and are confident that the Fed's may resume QE as soon as next year, as Bloomberg detailed in "Bond Investors Are Daring to Whisper About a Return to Fed QE. " And while a return to quantitative easing is distinct possibility, especially if foreign buyers accelerate their boycott of Treasury purchases, forcing the Fed to monetize the soaring US budget deficit, one bank has decided to crash the consensus party, and not only expect the Fed to hike at least once more in 2019 (in December), but follow with another 3 hikes in 2020.

In a note released overnight, Morgan Stanley writes that in its 2019 year-ahead outlook it "envisioned a Fed that continues to hike gradually into 2019, but hits a wall by September when financial conditions ratchet tighter and growth sputters at 1.0% in 3Q." Well, as recent events showed, that outlook has unfolded much more quickly than Morgan Stanley had anticipated as financial conditions tightened severely over the turn of the year, GDP growth is tracking just 0.5% in 1Q, and the Fed has moved to the sidelines and set a high bar for resuming its hiking path.

Discounting the recent strong Q4 GDP print, MS then notes that economic activity weakened sharply in the final month of the year, with personal consumption clocking its largest monthly decline (-0.5%) since 2009, and "the utter lack of momentum coming into the year has helped to level set 1Q19 at 0.5%." Additionally, the bank notes various other "transitory factors" which have weighed on growth such as a large inventory drawdown, the 35-day partial government shutdown, the Polar Vortex, and a rattled consumer combined to depress growth at the start of the year, but importantly set up the economy for a strong rebound in the second quarter.

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