- From above- to below-trend growth: "We are downgrading our outlook for second-half growth to 2-2.5% from 3-3.5% previously. This downgrade from above-trend to below-trend growth has important implications for forecasts of the unemployment rate, inflation and monetary policy."
- More slack, lower inflation: "Slack in the economy likely will widen slightly in this new outlook, implying a slower rise in inflation. The unemployment and housing vacancy rates may rise. So while core inflation has bottomed, it may linger below the Fed’s comfort zone for longer."
- The Fed shifts to an easing bias: "At Jackson Hole, Fed Chairman Bernanke clearly indicated that the Fed is prepared to ease monetary policy if needed. The odds of such action are considerably less than certain, however; they will hinge on additional weakness in incoming data."
- Sources of weakness: "Difficult diagnosis: We think the main culprit for weakness relative to our forecast is less than expected support from global growth. But other factors — temporary loss of stimulus measures and hesitation resulting from policy uncertainty — likely also played a role."
- Implications for 2011: "We don’t think this slowdown will last beyond H2, much less morph into a downturn. Policymakers may take action, household balance sheets continue to improve, and we still think net exports will add to growth. We see no reason to downgrade 2011 and even possible reasons to upgrade, especially if policy turns more stimulative."
- More slack, lower inflation: "Slack in the economy likely will widen slightly in this new outlook, implying a slower rise in inflation. The unemployment and housing vacancy rates may rise. So while core inflation has bottomed, it may linger below the Fed’s comfort zone for longer."
- The Fed shifts to an easing bias: "At Jackson Hole, Fed Chairman Bernanke clearly indicated that the Fed is prepared to ease monetary policy if needed. The odds of such action are considerably less than certain, however; they will hinge on additional weakness in incoming data."
- Sources of weakness: "Difficult diagnosis: We think the main culprit for weakness relative to our forecast is less than expected support from global growth. But other factors — temporary loss of stimulus measures and hesitation resulting from policy uncertainty — likely also played a role."
- Implications for 2011: "We don’t think this slowdown will last beyond H2, much less morph into a downturn. Policymakers may take action, household balance sheets continue to improve, and we still think net exports will add to growth. We see no reason to downgrade 2011 and even possible reasons to upgrade, especially if policy turns more stimulative."
Morgan Stanley US Economics 20100827
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