Is the market too excited? Morgan Stanley: The Federal Reserve will need to respond to Trump, at the earliest by May next year

The market may have overly high expectations regarding the impact of the new U.S. government's policies, and the Federal Reserve's adjustment of monetary policy will not be as rapid as the market anticipates.

Morgan Stanley's research report released on the 8th stated that although Trump has been re-elected and both houses of Congress may be controlled by the Republican Party, the Federal Reserve is unlikely to respond to the new government's policies before May next year.

Analyst Seth Carpenter believes that although the Trump administration is expected to implement new measures in areas such as tariffs, immigration policy, and fiscal policy, the Federal Reserve will not immediately adjust monetary policy due to the lag in policy implementation.

This week, Powell also stated at the latest press conference that he would "not speculate, not hypothesize, and not assume" about Trump's policies, but would "model and incorporate them into the framework of the dual mandate." This means that the Federal Reserve will decide the pace of interest rate hikes based on changes in economic data, rather than direct influences from market sentiment or politics.

There is still a long way to go before policies take effect, and the Federal Reserve is unlikely to rush to adjust its policies in the short term

Morgan Stanley emphasized that although market sentiment is strongly driven by policy expectations, they need to observe how policies affect the economy before adjusting monetary policy, as the Federal Reserve maintains a wait-and-see stance. These policies may take effect as early as January next year, and with implementation and other changes, the waiting period may be even longer.

Therefore, analysts believe that it is unlikely that the Federal Reserve will adjust its policies at the meetings in January or March next year, with the earliest response window possibly in May next year.

"People must recognize the fact that the Federal Reserve will not react until the impact of policy changes is reflected in the data itself."

Three major policy impacts on interest rate policy paths: tariffs, immigration, and fiscal policy

Morgan Stanley categorizes the Trump administration's macroeconomic policies mainly into three aspects: tariffs, immigration, and fiscal policy. The report predicts that the tariff policy of the Trump administration will be one of the policies implemented earlier. If a 10% tariff is imposed on other countries globally, the core inflation rate in the U.S. economy may rise by about 0.9 percentage points, while GDP growth may decrease by about 1.5 percentage points.

Although the new tariff policy may be implemented in phases, Morgan Stanley believes that the negative impact of tariffs will suppress economic growth to some extent, even though the current U.S. economy is relatively resilient and may not immediately lead to a recession.

Additionally, the report points out that although immigration reform is generally not seen as a focus by the market, reducing immigration will limit the labor supply in the U.S., thereby increasing inflationary pressures.

Regarding fiscal policy, the report states that if the Trump administration successfully promotes the continuation of tax policies, the U.S. economy will not receive significant fiscal stimulus before 2025, and "any changes will only occur in 2026." If there are new fiscal expenditures, they may mainly come from the restoration of state and local tax relief policies, but their overall impact on the economy will be limited