Morgan Stanley CEO Prefers Higher Interest Rates For ‘Balanced’ Economy

A sign on the Morgan Stanley building in New York on July 16, 2018. Lucas Jackson/Reuters

The Federal Reserve needs to raise interest rates sooner, Morgan Stanley CEO said Monday, adding that a balance must be returned to the economy even if it means upsetting markets in the short run.

“It always surprises me how little the market prices in what is going to be the reality around rates. I mean, rates will rise with absolute certainty … With that will come more pressure on the economy, more pressure on growth, more pressure on credit, and therefore more pressure on equities. That’s a given. But that kind of readjustment back to a more normal environment [is] not necessarily a bad thing,” James Gorman told CNBC in an interview.

Gorman made the comments as the Fed is expected to announce Wednesday a move away from the present monetary policy toward a tighter approach while paving the way for hiking interest rates next year. Markets expect the tapering process to be completed by March-end instead of the earlier scheduled June.

Gorman said that there was growth in economies across the world coupled with low interest rates, which is not typical. As the country gets set for higher interest rates, “the Federal Reserve would be better off storing away some of the rate increases for when the inevitable turndown comes, you’ve got some ammunition to fight with.”

“So, if I were the Fed, I would start moving earlier rather than later, store away some ammunition and accept the reality.”

Regarding the status of the economy when interest rates are increased, Gorman said, “You need balance in the economy. If there’s too much liquidity, too many, too many deals, too many transactions, too much growth happens under false pretenses because the money was too cheap.”

He does not believe the economy will be derailed and that the Fed’s job is not to worry about the market, but to stabilize the economy.

According to recent data from the Labor Department, wholesale prices, jumping by 9.6 percent, have gone up at their fastest pace on record in November. Higher prices for producers will inevitably trickle down to the end user.

Inflation has surged to a 39-year high at 6.8 percent, rising significantly faster than wages and depleting the purchasing power of Americans. If inflation keeps on rising as the Fed maintains its near-zero rates, this could result in an upward wage-price spiral that will be increasingly difficult to get out of.