Fed Signals Delayed Rate Cuts Amid Inflation Concerns
Morgan Stanley has revised its interest rate outlook following the Federal Reserve’s unexpectedly hawkish stance during its latest meeting. The investment bank announced that it no longer anticipates a January 2025 rate cut and foresees only two rate reductions next year, in March and June, each by 25 basis points. This shift reflects broader concerns over persistent inflation and the implications of potential changes to trade, immigration, and fiscal policy under the incoming administration.
Morgan Stanley analysts attributed the Fed’s cautious approach to a stronger-than-expected economic outlook and easing risks in the labor market. Federal Reserve Chair Jerome Powell emphasized that the central bank will adopt a slower pace of monetary easing to address firm inflation dynamics, further curbing market expectations for rapid rate cuts in the near term.
Market Sentiment Shifts Towards January Hold
The Federal Reserve’s tone has resonated across financial markets, with traders increasing bets on the likelihood of a January hold. Data from CME FedWatch showed a 91.1% probability of rates remaining steady, up sharply from last week’s 75.4%. Morgan Stanley’s announcement follows a similar adjustment by Goldman Sachs, which also abandoned expectations for a January rate cut earlier this week. Analysts across major institutions have cited sticky inflation and the resilient labor market as key factors driving these recalibrations.
The Fed’s decision to cut rates by 25 basis points on Wednesday was in line with forecasts. However, Powell’s remarks about a more gradual easing cycle left investors grappling with the reality of fewer rate reductions than previously anticipated. The central bank now projects only two cuts in 2025, down from prior expectations of a more aggressive monetary loosening.
Economic and Political Influences on Rate Policy
In their revised forecast, Morgan Stanley predicts a higher terminal rate of 2.6% in 2026, up from 2.4% in earlier estimates. This aligns with the Fed’s outlook, which factors in potential inflationary pressures stemming from the incoming Donald Trump administration’s proposed expansionary and protectionist policies. Analysts have noted that such measures could exacerbate inflation risks, further complicating the central bank’s efforts to balance economic growth with price stability.
Powell highlighted robust economic growth during the second half of 2024 as another driver for the Fed’s cautious stance. The central bank’s approach reflects its dual mandate to maintain price stability and maximize employment, even as it navigates the complexities of evolving fiscal and geopolitical landscapes.
With inflation remaining a persistent concern, the Federal Reserve’s message has set the stage for a more measured monetary policy in the months ahead, prompting financial institutions and markets to recalibrate their expectations accordingly.
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