Economists at Morgan Stanley talked about the latest economic data and what it means for a potential Federal Reserve rate cut.
While market prices have shifted in favor of two rate cuts this year, the July Federal Open Market Committee (FOMC) meeting is now viewed as a “plausible live meeting,” Morgan Stanley said in a note to clients on Friday.
Accordingly, “the market is still underestimating the amount of movement this year.” However, the brokerage firm added that the Fed would need more evidence to begin cutting rates.
The change in expectations followed a series of economic reports, including April jobs and retail sales data, that signaled a shift from previous growth surprises to contraction surprises.
It is noteworthy that the consumer price index (CPI) data for April did not significantly exceed expectations, but rather coincided with them, which brought relief to financial markets.
Morgan Stanley anticipated this change in trend, expecting a return to deflation, but predicting that the Federal Reserve will keep rates on hold through September due to data volatility.
Inflation indicators, judging by April data, are on a downward trajectory. Core personal consumption expenditure (PCE) inflation, which rose to 4.4% year-on-year in March from 1.6% in December 2023, is forecast to slow, with April core PCE at 0.26% month-on-month compared to 0.32%. in March.
Morgan Stanley forecasts the three-month annual rate will fall to 2.7% by June.
While a July rate cut may be premature, three cuts over the course of the year may be appropriate, economists concluded.
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