Morgan Stanley, a prominent investment firm, has adjusted its forecast regarding the Federal Reserve's monetary policy. The Chief US economists at Morgan Stanley have revised their projections, now anticipating a 25-basis-point increase in interest rates during the upcoming month of July. The economists emphasize that the threshold for such a rate hike is notably lower than their initial expectations.
The reasoning behind this modification stems from the recent testimony of Chair Powell before Congress. In his statements, Chair Powell implied that the Fed is gradually decreasing the pace of its monetary tightening measures, aiming to approach an appropriate level of policy adjustment. The economists at Morgan Stanley highlighted this development in a note, stating, "What prompted this adjustment? Chair Powell's remarks during his Congressional testimony last week provided indications that the Fed is scaling back its pace as it approaches the suitable threshold for monetary tightening."
In light of the updated projection, Morgan Stanley's forecast now suggests that the Fed funds rate will reach 5.375% by the conclusion of 2023, with a further decline to 4.375% anticipated by the end of 2024. The investment firm maintains its belief that a soft landing in the economy will prevent the need for rate cuts until next year.
The economists further elaborated on their revised outlook, explaining, "We now anticipate a rate hike in July. Although our data-based projections remain unchanged, our perception of the Fed's response pattern indicates a considerably lower hurdle for implementing a rate hike. In simpler terms, the Federal Open Market Committee (FOMC) would require exceptionally weak economic indicators to be convinced that their forecasts are erroneous by the time of the July meeting."
Looking beyond the upcoming month, the economists emphasized that future rate increases would be contingent on incoming data. They expressed the view that as new economic indicators become available, the September FOMC projections will likely be revised, ultimately resulting in the Fed maintaining interest rates at a peak of 5.375%.
To summarize their revised forecast, the economists at Morgan Stanley concluded, "We anticipate that forthcoming economic data will necessitate adjustments in the September FOMC projections. Consequently, we expect the Federal Reserve to retain interest rates at their highest point, reaching 5.375%."
