Another institution warns the Federal Reserve: Without further interest rate cuts, the United States may fall into recession!
Morgan Stanley strategists recently warned the Federal Reserve that the US economy may face a risk of recession if interest rates are not lowered. Based on employment data and consumer confidence, they pointed out that the rise in unemployment is related to consumers' pessimistic assessment of future income. Federal Reserve Chairman Powell hinted at a possible rate cut, which the market reacted positively to. Morgan Stanley's analysis suggests that changes in the unemployment rate and consumer confidence indicators indicate an increased likelihood of an economic downturn
In a report on Wednesday, Morgan Stanley strategists stated that if the Federal Reserve does not cut interest rates, the US economy will face a risk of recession. Their assessment is based on US employment data and consumer confidence.
Morgan Stanley foreign exchange and interest rate strategists Thierry Wizman and Gareth Berry wrote in a report on Wednesday, "We are not saying that a recession is imminent, but if the Federal Reserve does not cut interest rates, the likelihood of a recession will significantly increase."
According to data from the US Bureau of Labor Statistics, the US unemployment rate rose from 4.1% in June to 4.3% in July. Meanwhile, the consumer confidence report released on Tuesday was "mixed."
Dana M. Peterson, Chief Economist at the Conference Board, stated in a press release, "While consumers' assessment of current labor market conditions remains optimistic, it continues to weaken, and their outlook for the future labor market is more pessimistic. This may reflect the recent increase in the unemployment rate."
Peterson added that consumers are also slightly less optimistic about future income.
The Morgan Stanley strategists wrote, "Of concern is that the proportion of respondents indicating that jobs are hard to get has increased slightly, while the proportion indicating that jobs are plentiful has decreased slightly."
According to Morgan Stanley's analysis, the difference between these two indicators is closely related to the unemployment rate.
In the survey conducted in August, this difference reached a new high for the year. It is at its highest level since March 2021 (when the unemployment rate was 6.1%).
The Morgan Stanley strategists wrote, "We believe that with this difference continuing to widen, it is unlikely that the unemployment rate will not rise."
Since Federal Reserve Chairman Powell's speech at the Jackson Hole Symposium last week, the market has been digesting expectations of an imminent rate cut by the Federal Reserve. Powell stated, "Now is the time to adjust policy." This is a clear signal that the Fed is prepared to cut rates.
Morgan Stanley is the latest Wall Street institution to offer views on how the outlook for US employment will impact the Fed's interest rate decisions. The Fed may decide to lower the current target rate of 5.25% to 5.50% in September.
On Tuesday, JPMorgan Chase stated that the Fed may cut rates significantly, as it is "shocked" by the weak labor market.
The Fed Watch Tool at the Chicago Mercantile Exchange shows that investors expect the Fed to cut rates by 25 basis points at the next meeting on September 17-18