Morgan Stanley's Take On The Fed Decision

• Morgan Stanley anticipates a 0.25 percent Fed rate hike this week.
• The firm is more interested in the pace of the rate hikes over time than the date of the first move.
• Morgan Stanley projects that rates will reach 1.125 percent by the end of 2016.

All eyes are on the FOMC this week as Wall Street anticipates that the long-awaited first interest rate hike will likely finally come this week. Of course, nothing is certain until Janet Yellen makes it official, but Morgan Stanley is among the crowd that believes the Fed will announce a 0.25 percet rate hike this week.

Uncertainty remains
According to analyst Ellen Zentner, the biggest mystery is not be when the Fed will begin raising rates or by how much, it is the pace of the rate hikes over time.

“We expect the Fed to strengthen its message of gradualism and reconstruct the statement to ring in a change in policy,” Zentner adds.

What to expect
Morgan Stanley predicts that the 0.25 percent rate hike will be accompanied by a reassessment of current U.S. economic conditions that continue to include a combination of domestic strength and international weakness.

Most importantly, Morgan Stanley will be watching for any language from the Fed that suggests the pace of future hikes. Of course, Zentner fully expects that the Fed will stress that any future hike decisions will be data-dependent and not set in stone.

Projections
In terms of the market reaction, Zentner believes that traders should buckle their seatbelts in the short-term. “Whatever the outcome, it is likely to be followed by a period of volatility in rates markets as short-term rates seek out a spot to settle within the Fed’s new range,” she explains.

Related Link: Miners: The Best Way To Play A Rate Hike?

Morgan Stanley predicts year-end rates of 1.125 percent and 2.125 percent in 2016 and 2017, respectively.

Equity markets surged on Tuesday in anticipation of the Fed news. The Select Sector Financial Slct Str SPDR Fd XLF traded up 1.8 percent, the PowerShares DB Com Indx Trckng Fund(ETF) DBC was up 0.6 percent, and the United States Oil Fund LP (ETF) USO traded up 1.8 percent.

Disclosure: the author holds no position in the stocks mentioned.