Morgan Stanley maintained its Fed’s baseline forecast for interest rates to remain unchanged this year, but warned that this view could turn into a hike if unemployment falls below 4% or inflation remains high.
Morgan Stanley analyst Michael Gepen said in a note to clients that data since the June FOMC meeting provides some support for the bank’s baseline scenario of “no rate hikes.” Gapen said oil prices are expected to fall following the memorandum of understanding signed between the United States and Iran, and the inflation pass-through effect of tariffs is expected to peak.
The bank expects headline PCE inflation to be 3.2% and core personal consumption expenditures (PCE) inflation to be 3.0% in the fourth quarter. These estimates are significantly lower than the median forecast of FOMC members.
Regarding the labor market, Morgan Stanley projects that 50,000 to 60,000 new jobs will be created each month over the summer, enough to keep the unemployment rate broadly flat.
However, Gaten said that if the unemployment rate falls below 4.0%, the Fed could view the risk of an overheating labor market as sufficient justification for raising rates. It also noted that Morgan Stanley’s current rating would be reviewed if monthly core inflation remained above 0.3% or if tensions in the Middle East escalated again.
*This is not investment advice.
