Morgan Stanley continues to project that the Federal Reserve will resume interest rate reductions in June, followed by another cut in September, even as a sharp rise in oil prices has led traders to scale back their bets on the extent of easing this year.
Michael Gapen, Chief U.S. Economist at Morgan Stanley, stated during a roundtable discussion in New York on Monday, "We still anticipate moves in June and September, though there is certainly a risk of delay."
This outlook contrasts with current market pricing. The recent surge in oil prices following conflict in the Middle East could reignite inflationary pressures, potentially limiting the Fed's ability to loosen monetary policy. As a result, markets have quickly pared back expectations for rate cuts.
Futures tied to the Fed’s policy rate currently indicate a 25-basis-point cut by December. The likelihood of a 25-basis-point reduction in September is seen at around 60%. Economists at TD Securities and Barclays also shifted their forecasts last week, pushing back the expected timing of the first Fed cut from June to September.
Gapen noted that there is a possibility the central bank could delay the initial rate cut until September, or even December. In either scenario, he suggested, a subsequent cut might not occur until 2027.
He added, "The main risk to our view is that the longer the Fed waits, the more likely it becomes that an additional rate cut will be needed later."
Comments