Economists at Morgan Stanley think investors are about to be disappointed in the outcomes of the next two Federal Reserve meetings.
The bank said in a note on Friday that, despite a recent push from President Donald Trump and recent dovish talk from central bankers, the July and September FOMC meetings will result in no change to borrowing costs.
The Fed’s cautious approach this year has sparked backlash from President Trump, who has said he believes interest rates need to be cut “by at least 2-3 points.”
But since the last meeting, other top Fed officials have come out in support of rate cuts in July, with markets cheering the dovish talk.
But Morgan Stanley says don’t count on it. Their thesis centers around two key points.
First, they expect that the economic data released in the short term will remain consistent with the “wait and see approach” displayed by Powell.
While the Fed chairman has reaffirmed a need to further assess the impact of tariffs, he has also recently raised concerns regarding the reliability of economic data.
“We expect firmer inflation prints showing more signs of a tariff push over the summer,” the analysts note, adding that they also expect the coming employment report to be “relatively solid,” both of which are factors unlikely to push the Fed toward rate cuts.
They also highlight that despite the recent push from Fed governors Christopher Waller and Michelle Bowman, the pro-rate-cut camp is relatively small.
“The Summary of Economic Projections (SEP) published last week revealed that there are seven policymakers who expect no cuts this year,” the report states. “In fact, the overall tone of Fed speakers this week was much more aligned with Chair Powell’s.”
San Francisco Fed president Mary Daly and New York Fed president John Williams are examples of Fed officials who have taken a more hawkish approach to interest rates. Both have expressed sentiments similar to Powell’s.
Morgan Stanley added that both Waller and Bowman’s statements raised the probability of rate cuts to 20% in July and 60%-90% in September. The higher odds were cheered by markets during the week, with more dovish forecasts helping propel the S&P 500 to a new all-time high.
While Morgan Stanley’s analysts note uncertainty remains high and that their predictions could be wrong, they maintain that firmer inflation prints will be coming later in the summer and will likely peak in July or August.
They add that their forecast is aligned with Powell’s expectations, which include tariffs pushing prices higher in the coming months.
