Morgan StanleyThe US economy is expected to fully rebound to pre-pandemic levels by the end of the quarter, a team led by Ellen Zentner, the chief US economist, said in a report on Tuesday. The output gap, a measure of the ratio of real growth to estimates of maximum potential growth, is expected to turn positive, reaching 2.7 per cent by the end of the year, the highest level since the 1970s, according to the bureau of economic analysis.

Morgan Stanley said that the reopening of the economy, faster vaccination and stronger job growth have all prompted it to raise its growth forecast for this year.

The bank expects the unemployment rate to fall further, but it will take longer to reach its pre-outbreak low. The unemployment rate in the United States is expected to average 4.9% in the fourth quarter of this year, down from the previous estimate of 5.1%, and will fall further to 3.9% in the coming year.

However, a faster recovery will come at a price, with Morgan Stanley predicting that rising prices for rents, health care and necessities will push inflation up to 2.6 per cent in April and May and fall back to 2.3 per cent by the end of the year. Inflation will remain high until 2022, reaching the fed's target of more than 2 per cent.

Nonetheless, the bank believes that US monetary policy is unlikely to tighten significantly before 2023. Fed policy makers are likely to reiterate their modest guidance at next week's meeting and keep interest rates near zero until at least 2022. But Morgan Stanley said the economic recovery and its associated impact on inflation and hiring would cause the Fed to start scaling back its asset purchases in January 2022.

The bank added: "We expect that by the middle of this year, novel coronavirus's cloud will weaken, the pace of economic recovery will accelerate significantly, and the Fed will think it is appropriate to start to relax the throttle."