September 13, 2011 / 5:34 PM / in 7 years

Morgan Stanley economist hire may change firm's outlook

(Reuters) - Morgan Stanley’s (MS.N) new choice for chief U.S. economist on Tuesday said lower U.S. growth and higher unemployment could last well into this decade, marking a shift away from the bank’s recent outlooks.

The views of Vincent Reinhart, a former senior U.S. Federal Reserve official under Alan Greenspan, are likely to change the course of the firm’s U.S. forecasts. Morgan Stanley’s recent growth and inflation estimates, for example, have fallen on the high end of Wall Street estimates.

Morgan Stanley said on Tuesday it had chosen Reinhart to lead its U.S. economics team, replacing Richard Berner, who left the firm earlier this year.

“After a severe financial crisis, economies grow more slowly,” Reinhart, currently a resident scholar at the American Enterprise Institute (AEI), a conservative think tank in Washington, told Reuters in an interview on Tuesday.

He said his views on the U.S. economy were best summed up in a paper called “After the Fall,” which he delivered with his wife, Carmen Reinhart, to the Federal Reserve’s annual conference in Jackson Hole in 2010.

“The world is a more uncertain place and investors are more risk-averse now,” said Reinhart.

That’s a change: Expectations for high inflation and stronger economic growth have reigned at Morgan Stanley since the 2008 financial crisis.

In 2009, Morgan Stanley warned that the Fed’s easy monetary policy would create inflation. During the first half of 2010, the firm predicted the benchmark 10-year Treasury yields would hit 5.5 percent within the year, due to a combination of rising credit demand, inflation expectations and increased Treasury supply.

Reinhart sees something of the opposite: tighter capital controls due to more financial regulation. That could keep demand for credit lower.

Still, he expressed confidence in Wall Street.

“I’m basically voting with my feet on the view that Morgan Stanley is undervalued in the market right now,” he said.

Reinhart will begin at Morgan Stanley on Oct 1.

Reinhart’s outlook on the U.S. economy still falls in at least one respect on the brighter end of the spectrum. In a report he wrote in late August for AEI, he put the chances of the U.S. economy falling into another recession within the next year at one in four.

A Reuters poll in September of the 20 primary dealer economists found predictions for the chance of a second recession ranging from 75 percent to 20 percent. <FED/R>.

Reinhart joined AEI in 2008 following a 20-year career at the Federal Reserve. As a former head of the Fed’s Board Division of Monetary Affairs he served as a top lieutenant to Greenspan. He also served as secretary and economist to the Federal Open Market Committee.

“I have not been back in the Board building since I retired,” he said, adding that he approved of efforts by central bankers to become more transparent.

“I’m not the back door to the Fed. I don’t think it’s the right thing to do. You want a level playing field,” he said. “Officials should be talking to reporters.”

At Morgan Stanley, Reinhart will take over for Berner, who became a counselor to Treasury Secretary Timothy Geithner in April. Berner’s longtime colleague at Morgan Stanley, David Greenlaw, will remain at the firm as U.S. fixed income economist.

Additional reporting by Lauren Tara LaCapra in New York; Editing by Andrew Hay

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