Morgan Stanley: The Federal Reserve cut interest rates in September, but will cut three times this year
Morgan Stanley believes that the market has been scared by previous "better-than-expected" results multiple times. The April CPI meeting expectations does not necessarily mean that the Federal Reserve will start cutting interest rates in July
Despite recent economic data showing a slowdown in the US economy, Morgan Stanley believes that the Federal Reserve is still unlikely to cut interest rates in July.
In a report this Friday, Morgan Stanley pointed out:
This week's data has helped the market price in expectations of two rate cuts this year. We believe the market is still underestimating the number of rate cuts this year, but the Fed will need more evidence to start cutting rates.
Morgan Stanley expects that due to data volatility, the Fed will stick to its plan to maintain rates until September:
April economic data has shifted from "positive surprises" to "negative surprises," starting with April employment data, followed by this week's retail report. While CPI inflation data did not see a significant decline, a data that meets expectations is a huge relief for the financial markets given the previous rates exceeding expectations.
After rising in the first quarter, inflation started to decline in April. The 3-month annualized growth rate of core personal consumption expenditures (PCE) inflation surged from 1.6% in December 2023 to 4.4% in March 2024. Based on April CPI, PPI, and import price data, it is expected that core PCE will grow by 0.26% month-on-month in April, compared to 0.32% in March, which will bring the 3-month annualized growth rate down to 2.7% in June.
Furthermore, Morgan Stanley analyst Diego Anzoategui's view on the re-acceleration of first-quarter inflation in 2024 also supports the notion that a rate cut in July is premature, but three rate cuts this year are still appropriate.