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Morgan Stanley's Chief Fixed Income Strategist Expects Higher Interest Rates Than Markets Anticipate

Morgan Stanley Investment Management's Chief Fixed Income Strategist, Jim Caron, believes that markets need to prepare for the extent to which US central bankers will go to control the current generation's highest inflation rate.

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In a recent Bloomberg TV interview, Caron stated that traders are continuing to underprice the future path of policy tightening, even though Federal Reserve officials are predicting interest rate hikes above 5% next year.

Federal Reserve Officials Emphasize Need for Higher Interest Rates and Tighter Monetary Policy to Address Inflation

Policymakers at the Federal Reserve have repeatedly reinforced their hawkish stance on the need for higher interest rates and tighter monetary policy until Inflation is under control. Last week, several policymakers stressed the central bank's commitment to lowering Inflation back to the target rate of 2% and the necessity for clear evidence of easing price pressures.

In the Fed's final policy meeting of the year, the central bank raised interest rates by a half percentage point, bringing the benchmark to a target range of 4.25% to 4.5%. The dot plot, which shows expected future interest rate changes, predicts rates ending next year at 5.1%, up from 4.6% in the prior round of projections.

Morgan Stanley Chief Fixed Income Strategist Predicts Prolonged Period of 5.25% Interest Rates to Address Inflation

Unless something unexpected occurs, Morgan Stanley Investment Management's Chief Fixed Income Strategist, Jim Caron, expects the Federal Reserve to maintain interest rates at 5.25% for some time to effectively address Inflation.

In a recent Bloomberg TV interview, Caron emphasized the need to listen to what central bankers are saying about their concerns regarding Inflation and their commitment to raising interest rates and implementing tighter monetary policy until the issue is under control. Fed-dated overnight index swaps currently price just over 50 basis points of rate increases by the May meeting, followed by the half-a-percentage point of reductions by the end of 2023.