Morgan Stanley’s Position on Federal Reserve Rate Cut

Morgan Stanley reiterated its expectation for a 25 basis point rate cut by the Federal Reserve in September. This stance remains consistent despite a global market downturn.

Economic Context

Economists from the bank highlight that the market’s strong reactions to the Bank of Japan (BoJ) decisions and weaker U.S. payrolls data do not indicate a fundamental economic shift.

The focus has shifted towards central bank actions, especially the BoJ’s recent decision to raise its short-term policy target to 0.25%, its highest in 15 years. This unexpected announcement created a perception of increased risk regarding U.S. economic growth.

Fed’s Dual Mandate

Morgan Stanley believes that the Fed’s dual mandate of balancing inflation with growth is now more crucial, as inflation pressures ease. This has led markets to anticipate a growth-sensitive approach from the Fed, strengthening the case for a rate cut.

Despite recent market volatility, the economists maintained their forecast. The U.S. economy shows resilience, with Q2 2024 GDP growth at 2.6% and consumer spending up by 2.3%. Although the unemployment rate rose to 4.3%, it still marks a relatively healthy labor market.

Soft Landing Ahead

Morgan Stanley anticipates a soft landing for the U.S. economy rather than a recession, though they caution that the market remains alert for signs of deterioration.

Looking forward, they argue that the interaction between potential Fed cuts and BoJ hikes might strengthen the Japanese yen. However, they predict that the BoJ will likely hike rates again in January, with real rates remaining negative until the end of 2025.