Morgan Stanley firmly supports the market's expectation of a rate cut by the Federal Reserve in September, backing the idea of a "soft landing" for the United States

Morgan Stanley reiterated on Monday its expectation that the Federal Reserve will cut interest rates by 25 basis points in September, despite a recent sharp decline in global markets.

The bank's economists pointed out that while the market reacted strongly to the Bank of Japan's latest interest rate decision and weaker U.S. non-farm data, they do not represent a fundamental change in the economic situation.

Specifically, the market is increasingly focused on central bank actions, especially unexpected comments from the Bank of Japan on future rate hikes, exacerbating concerns about U.S. economic growth risks. In an unexpected decision on July 31, the Bank of Japan raised its short-term policy target to 0.25%, the highest level in 15 years, from the previous range of 0% to 0.1%.

Morgan Stanley economists explained, "The initial market reaction to the Bank of Japan's interest rate decision was relatively calm, but Governor Haruhiko Kuroda's comments on future rate hikes at the post-decision press conference caught the market off guard."

This move, combined with the unexpected decline in U.S. non-farm data in July, led to a subsequent market pullback, but Morgan Stanley economists remain firm in their forecast. In a report on Monday, they stated, "We maintain our long-standing expectation that the Federal Reserve will cut interest rates by 25 basis points in September."

Morgan Stanley believes that one of the Fed's dual mandates, namely full employment becoming more prominent as inflation pressures ease. This shift has led the market to expect the Fed to adopt a more growth-oriented strategy, further strengthening the case for rate cuts.

Economists also pointed out that the U.S. economy continues to show resilience, with a GDP growth rate of 2.6% in the second quarter of 2024 and a consumer spending growth rate of 2.3%. Although the unemployment rate has slightly risen to 4.3%, it still reflects a relatively healthy labor market. Morgan Stanley believes that these indicators suggest that the U.S. is moving towards a "soft landing" rather than an economic recession.

The report stated, "We believe the economy is moving towards a soft landing, but the market remains vigilant for any signs of a more significant softening of the economy, as data has not yet shown an acceleration of economic deterioration."

Looking ahead, the bank emphasized that the potential interaction between the Fed's rate cuts and the Bank of Japan's rate hikes could support the yen. However, economists stated that their initial view remains unchanged, expecting the Bank of Japan to raise rates in January next year, "In fact, our forecast implies that Japan's real interest rates will remain negative until the end of 2025."