Morgan Stanley: High Interest Rates Take Time to Impact the Economy, Full Effects Hard to Assess Immediately
Morgan Stanley's U.S. and Global Economics team, led by Arunima Sinha, noted in the latest "Thoughts on the Market" that the transmission of high interest rates to the economy takes time, and their full impact is difficult to assess immediately.
She stated that the Federal Open Market Committee raised rates in September, but subsequent rate hike expectations have fluctuated significantly. After the latest CPI release, the market briefly pushed the probability of an October rate hike to 50%, before retreating. In Morgan Stanley's baseline scenario, the probability of a rate hike in December is the highest.
If rising yields stem from improved growth prospects and higher expected returns, they may not necessarily contract demand. However, if they arise from overheating inflation, increased fiscal concerns, and rising duration compensation, they are more restrictive. Activities led by innovation, productivity, and strategic investment may reduce overall interest rate sensitivity.
There are signs of restriction in the U.S.: the widening of low-quality credit spreads is most notable, and housing activity is at recession levels. Global financial conditions are posing more challenging questions. Policymakers need to calibrate their path between these opposing forces.
Funds are shifting from interest rate-sensitive sectors to areas related to innovation and strategic investment. High interest rates have not yet fully altered the expansion trajectory, but pressures in credit and housing are beginning to emerge, necessitating a balance between inflation and growth risks in policy.
Source: Public Information
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Arunima Sinha has long covered the U.S. and global economy at Morgan Stanley, analyzing tariffs, Canada's growth transition, and the Federal Reserve's path. This time, she focuses on the lagged transmission of high interest rates and policy calibration. The path involves observing the impact of rate hikes and distinguishing the different drivers of rising yields.
On the capital front, the analysis points to the widening of low-quality credit spreads and constrained housing activity, while innovation and productivity investments may sustain demand. The strategic motive is to assess whether current financial conditions have sufficiently restricted, thereby affecting the pace of future rate hikes and growth trajectory.
A similar case is seen in past rate hike cycles, where policy effects lagged in specific sectors (housing, low-quality credit) rather than causing a broad contraction. Currently, we are in a post-rate hike observation period, with the market pricing in a high likelihood of further action in December.
Essentially, this reflects changes in pricing power and policy transmission mechanisms. Rising interest rates filter through credit and housing gradually, with the mechanism being that the structure of activities (focused on innovation) may reduce overall sensitivity, while low-quality credit and housing are already showing pressure, forcing policy to weigh between inflation control and growth maintenance.
ABAB News · Law of Cognition
- Rates have been raised, effects are still on the way.
- Rising yields may indicate growth or concerns.
- Housing and low-quality credit are the first to feel pain, overall expansion has not yet stopped.