Economists at Morgan Stanley say rising oil prices and persistent inflation pressures could delay anticipated interest rate cuts from the Federal Reserve.
Speaking on the firm’s “Thoughts on the Market” podcast, Chief U.S. Economist Michael Gapen says the Fed is likely to proceed cautiously, pushing expected rate cuts further into the year.
“I think the answer is caution and probably rate cuts come later than earlier. So, we’ve changed our view on the back of the FOMC meeting. We previously thought rate cuts would come in June and September. We’ve slid those back to September and December.
The short answer here is I think with the rise in oil prices and at least some renewed upward pressure on headline inflation – it will likely take the Fed longer to conclude that disinflation is occurring. So, I think they need more time, and that obviously means the Fed pushes rate cuts out.”
The latest FOMC meeting underscored a strong institutional focus on inflation risks, with policymakers emphasizing price stability concerns over labor market conditions. While unemployment remains stable, job growth has slowed significantly, pointing to a less dynamic labor market that could still warrant policy support later this year.
According to Matthew Hornbach, Global Head of Macro Strategy at Morgan Stanley, this backdrop could create an opportunity in fixed income markets.
“And I think if that’s what we end up seeing out of the economy and out of the Fed, then the U.S. Treasury market is set up for a decent run into the end of the year. The market today isn’t pricing many rate cuts at all to speak of.
But I think if we get that outcome for the U.S. economy and for Fed policy, I think investors in U.S. treasuries will be rewarded. And even if they’re not rewarded in the way that they might expect or hope – the U.S. Treasury market itself and the correlations that it has delivered vis-a-vis riskier assets like the equity market, suggest that U.S. Treasuries, despite the recent sell off, have been behaving as good hedge securities for broader risky asset portfolios. So, we certainly would expect the U.S. Treasury market to perform quite well in this scenario.”
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