This follows from the Fed decision yesterday, which reflected a bit of an atypical dissent from a few policymakers. Of note, Hammack, Kashkari and Logan were vocal about not wanting to stick with a more easing bias at this stage. In case you missed it:
Besides that, it is also Powell’s last meeting as Fed chair but markets are not too convinced that Trump can bully his way into rate cuts in the months ahead. That especially since there is still no certainty of when the US-Iran conflict will end. With the Strait of Hormuz still closed, oil prices continue to ramp higher again this week.
Morgan Stanley had previously penciled in two 25 bps rate cuts by the Fed for September and December this year. However, they have now revised that call in expecting no rate changes by the Fed whatsoever until year-end.
The firm cites still-elevated inflation and recent data pointing to economic resilience as their main reason for pivoting.
As things stand, higher inflation is arguably the main issue especially since Middle East tensions are showing no signs of thawing. The longer this keeps up, the worse it will hit on price pressures globally. And even if the war were to end today, the damage has already been done.
The call by Morgan Stanley now fits with the market pricing we’re seeing with Fed funds futures. No rate changes are expected all through the year with just a marginal tilt to hiking rates by the time we get to 2027.
