Morgan Stanley is predicting that the economy will slow dramatically in early 2012, which it thinks will prompt another round of Fed asset purchases.
The economy has picked up recently, Morgan Stanley says, because energy prices have dropped and the world has unwound negative shocks from the tsunami-nuclear catastrophe in Japan. As this unwind runs out of steam, growth will slow to around 2 percent, Morgan Stanley's chief economist argues.
The Fed, however, will not act quickly or decisively because of internal disputes. We'll see hawks battle doves until, finally, everyone comes around to the idea that the Fed needs another round of quantitative easing sometime between March and June of 2012.
As Business Insider says, that's a "super specific" call. If Morgan Stanley gets it right, that'll be a huge gold star on his CV.
The unwind of the negative shocks from Japan’s earthquake and the run-up in energy prices earlier in the year are responsible for the recent run of strong data in the US economy, argues our Chief US Economist Vincent Reinhart in today’s lead piece. Once these tailwinds have played out and a shallow fiscal pothole emerges, growth should slow to around 2% in early 2012. As a result, the Fed will probably mark down its growth and inflation forecasts. The deceleration will likely be enough to convince the FOMC that the downside risks to its dual objectives of maximum employment and stable prices need to be addressed. However, given the ambiguity in the Federal Reserve Act about how to weigh these objectives against each other, disagreement within the FOMC itself about the relative weights and Bernanke’s efforts to create a more democratic process for decision-making, progress on another QE package is likely to be slow and full of compromise. Eventually though, we believe that a package of Treasury and MBS purchases of US$500-750 billion will arrive some time between March and June.
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