Morgan Stanley, in its baseline scenario for the Fed, maintains its expectation that interest rates will remain unchanged this year, but warned that this view could shift towards interest rate hikes if the unemployment rate falls below 4 percent or if inflation remains high.
Morgan Stanley analyst Michael Gapen stated in a note to clients that data since the June FOMC meeting has somewhat supported the bank’s baseline scenario of “no rate hike.” Gapen said that oil prices are expected to fall following the memorandum of understanding signed between the US and Iran, and that the pass-through effect of tariffs on inflation is expected to peak.
The bank expects headline PCE inflation to be 3.2 percent and core personal consumption expenditures (PCE) inflation to be 3.0 percent in the fourth quarter. These estimates are significantly below the median expectations of FOMC members.
Regarding the labor market, Morgan Stanley forecasts that between 50,000 and 60,000 new jobs will be created monthly during the summer months, which will be sufficient to keep the unemployment rate generally flat.
However, Gaten stated that if the unemployment rate falls below 4.0 percent, the Fed could consider the risk of overheating in the labor market sufficient justification for raising interest rates. It was also noted that Morgan Stanley’s current assessment would be reviewed if monthly core inflation remains at or above 0.3 percent, or if tensions in the Middle East escalate again.
*This is not investment advice.
