Morgan Stanley (MS) Revises Forecast of Fed Easing

Morgan Stanley has changed its forecast of further quantitative easing by the Fed to one-in-three from two-in-three. The change came after the release of the minutes from FOMC’s March meeting.

New York, April 5 ( - Morgan Stanley (NYSE : MS) has revised its forecast of further quantitative easing by the Federal Reserve to one-in-three chance from two-in-three.

The investment bank has changed its previous aggressive view regarding the Fed adopting a third round of quantitative easing by buying securities outside of its traditional focus on short-term Treasurys. The change in Morgan Stanley’s viewpoint comes after the release of the minutes from Federal Open Market Committee’s March meeting, Tuesday.

The chief economist of Morgan Stanley said that the FOMC minutes show that the Fed will only act on the basis of incoming data and not pre-emptively. He said that the Fed has marked down its estimate of aggregate supply and marked up its estimate of aggregate demand. As such, the Fed feels that the economy is less slack than thought previously, leading to a greater risk of increase in inflation. In such a situation, the likelihood of the Fed initiating further quantitative easing is lesser than before.

However, Morgan Stanley is still assigning a one-in-three chance of further easing because it feels that there is a fair chance of the economy slowing down. The economist warned that if the Fed is wary of easing, it could fail to react in time to prevent a significant slowdown and the lack of action could indicate that the economy has “broken out above trend in a sustainable manner.”

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