Morgan Stanley Says Fed Hikes Will Start to Sound More Dovish

(Bloomberg) -- The Federal Reserve may soon change its communications to ensure future interest rate hikes are accompanied by a more cautious approach toward further increases, according to Morgan Stanley.

Volatile financial markets, the deepening trade war and slowing global growth are among the reasons Chairman Jerome Powell and colleagues may soon switch from raising rates on autopilot to feeling their way depending on the strength of the expansion.

“The U.S. economy has rolled over, but is still growing above potential, suggesting the Fed continuing to hike rates for now,” Morgan Stanley currency strategists led by Hans Redeker told clients in a report on Thursday. “However, what used to be hawkish rate hikes may turn into dovish hikes.”

Rising borrowing costs -- and the impact they have on the economy -- also signal that the Fed needs to be cautious with monetary policy. Yields have needed to climb in order to lure foreign capital to the U.S., and that has filtered through to funding-cost-sensitive parts of the economy, including the housing and car markets, according to the Morgan Stanley strategists.

They see the Fed raising rates just twice next year, half the number anticipated by counterparts at Goldman Sachs Group Inc. and JPMorgan Chase & Co.

With policy makers set to lift their benchmark rate for a fourth time this year at their Dec. 18-19 meeting, investors will get multiple chances in coming weeks to find out what Powell and other Fed officials are thinking as 2019 nears.

Vice Chairman Rich Clarida speaks in New York on Tuesday and Powell addresses the New York Economic Club on Wednesday. Next Thursday sees the release of the minutes from the Federal Open Market Committee’s November meeting, while New York Fed President John Williams speaks on Friday. Powell will testify before Congressional lawmakers on Dec. 5.

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